Final Exam Econ
Assume that an industry that began as a perfectly competitive industry becomes a monopoly. Compared to when the industry was perfectly competitive, the monopolist will
charge a higher price and produce less output.
What is a public franchise? Part 2 A public franchise is
a firm designated by the government as the only legal provider of a good or service.
c. In the six months following Hurricane Katrina, production of oil in the Gulf of Mexico declined by 25 percent.
change in supply
Explain why market power leads to deadweight loss. Part 2 Firms with market power create deadweight loss because they
charge a price that is greater than marginal cost to maximize profits.
The economic penalty is not enough to eliminate discrimination because of the presence of all of the following except:
compensating differentials.
Why wouldn't another entrepreneur have already opened a bookstore in the Bronx before Santos did? It is likely that another entrepreneur did not already open a bookstore in the Bronx due to
competition from online booksellers and bookstores in other New York City boroughs.
If the federal government paid for all medical care, as in the "Medicare for All" proposal, the wages you receive from your employer will likely
rise
Any cost that changes as output changes represents a firm's
variable cost.
Which costs are affected by the level of output produced?
variable costs
In the market for health insurance, asymmetric information problems arise because
buyers of health insurance policies always know more about the state of their health than do the insurance companies.
Match the countries below on the left with the health care system descriptions to their right. Do this by inserting into each country's response box the number associated with the description of its health care system. enter your response here Canada 1. Most people have private health insurance through employers, with the government also providing insurance to the poor, aged, and military veterans. enter your response here Japan 2. Has a system of universal health insurance under which every resident is required to either enroll in a non-profit health insurance society or in a government health insurance program. enter your response here the United Kingdom 3. Has a single-payer health care system where the government provides national health insurance to all residents. enter your response here the United States 4. The government owns most hospitals and employs most doctors, so the health care system is referred to as socialized medicine.
canada #3 japan #2 UK #4 US #1
You observe that when the price of Oscar Mayer hot dogs decreases the demand for Wonder hot dog buns increases. Part 2 Oscar Mayer hot dogs and Wonder hot dog buns are considered to be
complementary
The goal of the Google Books project is to produce a digital version of every book ever written. An academic paper by Abhishek Nagaraj of University of California, Berkeley and Imke Reimers of Northeastern University analyzed the effect of Google Books on the market for print, or physical, books. They concluded that for their sample of books, "Digitization...increased sales of physical editions by about 35%, especially for less popular works." Source: Abhishek Nagaraj and Imke Reimers, "Digitization and the Demand for Physical Works: Evidence from the Google Books Project," February 21, 2019. Does this paper indicate that digital books and print books are substitutes or complements? The findings of Nagaraj and Reimer show that digital and print copies of books are
complements because the decrease in the price of digital books to zero is causing an increase in the quantity demanded for print copies of the same book.
From the list below, select the variable that will cause the demand curve to shift:
consumer income
Complete the following statement: "When there is a shortage .. of a good Part 2
consumers compete against one another by bidding the price upward.
Is the real estate broker's observation that the market for office space was moving in a way that would result in greater opportunities for tenants connected to the fact that there was a glut in the market? The glut in the market will result in the ▼ risedecline in the equilibrium price of office space in this market. This ▼ higherlower rental price of office space will result in ▼ greaterfewer opportunities for office tenants.
decline, lower, greater
Imagine that the table shows the quantity demanded of UGG boots at five different prices in 2020 and in 2021. Which of the following variables could cause the demand for UGG boots to change as indicated from 2020 to 2021? (Check all that apply.)
decrease in substitute increase in price of compliementary goods decrease in number of buyers
An article in the Wall Street Journal on the recreational vehicle (RV) industry listed several factors that led to a larger quantity of RVs sold: a. Increasing confidence among households that their future incomes would rise b. Low-interest loans from banks to finance the purchase of an RV c. Falling gasoline prices d. "The 'glamping' trend that has seen a much younger generation embrace the RV lifestyle" Source: Spencer Jakab, "RV Stocks May Stay in the Wilderness," Wall Street Journal, January 1, 2019. Briefly explain whether the following factor caused a movement along the demand curve for RVs or a shift in the demand curve for RVs. If you believe the demand curve shifted, explain whether the curve shifted to the right or to the left. Low−interest loans from banks to finance the purchase of an RV As a result of the change in the factor above,
downward movement in the RV curve
The widespread acceptance that bacteria causes diseases helped lead to a public health movement in the late nineteenth and early twentieth centuries. This movement eventually brought sewers, clean drinking water, and garbage removal to all U.S. cities. The public health movement in the United States in the late nineteenth and early twentieth centuries was like a technological advance to the country's production possibilities, since both ▼ secured/ expanded the economy's productive capacity, the former by increasing the nation's
expanded effective workforce
improvements in health care can increase a country's total income by
expanding the aviable workforce improving worker morale enabling people to work harder
In a competitive market, firms can dictate what the equilibrium price of a good or a service will be.
false
In terms of comparisons in health care outcomes across countries, the economist's observation
has relevance because health care outcomes are affected by many different factors and can be difficult to measure.
When economists speak of a surplus, they mean a situation in which
he market price is above the equilibrium price. B. firms have unsold goods piling up. C. the quantity supplied exceeds quantity demanded.
Hospitals and doctors sometimes perform tests that may not be of any value to patients because
health care providers are paid for each service they render.
An article in the Economist magazine argues that the real problem with health insurance is as follows: The healthy people who decide not to buy insurance out of rational self-interest, and who turn out to be right. By not buying insurance, those (largely young) healthy people will be failing to subsidize the people insurance is meant for: the ones who end up getting sick. Source: "To Boldly Go Where He Had Already Been Before," Economist, May 13, 2011. Part 2 Why is it rational for healthy people not to buy health insurance? Part 3
hey anticipate having small or negligible medical bills. B. They perceive little risk of becoming sick. C. They anticipate little benefit from purchasing health insurance.
In which of the following ways is the market for health care in the United States different from the markets for other goods and services?
the govenment plays a large role on the market for health care consumer of health typically plays less than full
A news article on production of oil and natural gas in the Permian Basin of western Texas and New Mexico noted the following two facts: i. "Shale drillers in the Permian Basin are producing vast amounts of gas as a byproduct of prospecting for oil." ii. "Gas prices in parts of the prolific region hovered near zero last month and some trades went negative, to as low as a negative 25 cents per million British thermal units...." Source: Rebecca Elliott, "In Booming Oilfield, Natural Gas Can Be Free," Wall Street Journal, December 27, 2018. a. What does it mean for a price to be negative? A negative 25-cent price means that
the seller has to pay the buyer 25 cents so that the buyer agrees to receive the product.
An increase in the price of a product causes a decrease in quantity demanded because of the income and substitution effects. More specifically,
the substitution effect is the decrease in quantity demanded because the product is more expensive relative to other goods and the income effect is the decrease in quantity demanded owing to the decline in consumers' purchasing power.
A student looks at the data in the table to the right and draws this conclusion: "The marginal product of labor is increasing for the first 3 workers hired, and then it declines for the next 3 workers. I guess each of the first 3 workers must have been hard workers. Then Jill must have had to settle for increasingly poor workers." Part 2 Do you agree with the student's analysis? Briefly explain.
. No. Marginal product initially increases due to division of labor and then decreases due to the law of diminishing returns.
Some objections raised by economists to Fogel's analysis of the drivers behind increases in spending on health care cite its
. lack of attention to short-run financing considerations. B. failure to adequately assess the role of distorted price signals for buyers of health care. Your answer is not correct. C. de-emphasis of cost factors, particularly those related to technological change.
Who is in charge of enforcing them?
Both a and b.
What is the price paid by consumers of medical services?
P3
One way for a firm to become a monopoly is by controlling a key resource.
True
The law of demand is the assertion that
the quantity demanded of a product is inversely related to its price.
When output is 10,000, what is the average fixed cost? $
2.00
When output is 10,000, what is the average variable cost?
4.00
Suppose the total cost of producing 10,000 tennis balls is $60,000, and the fixed cost is $20,000. Part 2 What is the variable cost? $enter your response here. (Enter a numeric response using an integer.)
40000
Frank Gunter owns an apple orchard. He employs 84 apple pickers and pays them $7 per hour to pick apples, which he sells for $1.40 per box. If Frank is maximizing profits, what is the marginal revenue productLOADING... of the last worker he hired? What is that worker's marginal productLOADING...? Part 2 Marginal revenue product of the last worker=$enter your response here per hour. (Enter your response as an integer.)
7
According to the graph, what is the equilibrium price of coal? $enter your response here. (Enter a numeric response using an integer.)
70
When introduced in the late 1970s, the videocassette recorder, or VCR, was the first technology that allowed consumers to play recorded movies on their televisions. VCRs eventually declined in popularity following the introduction of DVD and Blu-ray players, and after most people had Internet connections that allowed them to stream movies. A columnist for the Wall Street Journal notes that "the last known manufacturer of [VCRs], ceased production in 2016." Therefore, nothing prevents you from establishing a monopoly in the VCR market. Source: Paul Schrodt, "Why You Might Actually Want a VCR," Wall Street Journal, January 25, 2018. The accompanying graph shows the situation your VCR firm would be in. It includes your demand, marginal revenue, average total cost, and marginal cost curves. Are you likely to make a profit or a loss?
A loss equal to area ABCD because the demand for VCRs is below the average total cost (ATC) at the profit-maximizing quantity, Q1.
Define economic discrimination.
Economic discrimination is paying a person a lower wage or excluding a person from an occupation on the basis of an irrelevant characteristic such as race.
Which of the following is true about economic discrimination?
Economic discrimination is illegal, but it is possible that employers ignore the law.
In June 2018, a federal court judge ruled against the U.S. Department of Justice, which was attempting to block a merger between AT&T and Time Warner. In addition to its wireless business, AT&T owned the DirectTV satellite television service. Time Warner owned HBO, TBS, TNT, and the Warner Brothers film studio. An article in the Wall Street Journal on the judge's ruling noted, "The case marked the first time in 40 years that a court had seen a fully litigated challenge to a so-called vertical merger . . . Such cases are considered more difficult for the government to win than the typical 'horizontal' merger case." Source: Brent Kendall and Drew FitzGerald, "AT&T Beats U.S. in Antitrust Fight over Time Warner," Wall Street Journal, June 12, 2018. a. What is a vertical merger case?
A vertical merger is a merger between firms at different stages in the production of a good.
Suppose that a large oil field is discovered in Michigan. By imposing a tax on the oil, the state government is able to eliminate the state income tax on wages. What is likely to be the effect on the labor supply curve in Michigan?
A. The quantity of labor supplied in Michigan will increase if the substitution effect is larger than the income effect.
Many of the firms that were the first to use fracking techniques to produce oil were small. By 2018, though, many large oil companies, such as Chevron and Exxon-Mobil, had begun using fracking techniques. An article in the Wall Street Journal quotes an industry analyst as arguing that "these bigger companies have the scale to build or finance infrastructure and secure the best equipment and supplies." The article then notes, "The 'bigger is better' mantra has started pushing smaller operators toward a new era of consolidation in fracking." Source: Bradley Olson, "Oil Giants Use Size to Overcome Fracking Challenges," Wall Street Journal, September 20, 2018. Assuming that this analysis is correct, ______ represents the long run average cost curve for a smaller oil firm and ______ represents the long run average cost curve for a larger oil firm.
ATC1.ATC2
In 2019, wireless firms T-Mobile and Sprint proposed merging. They were the third and fourth largest wireless firms in the United States, behind AT&T and Verizon. The companies argued that without a merger, they wouldn't be able to successfully compete because of the high costs of building new 5G networks: "5G services will require heavy investment in cellular spectrum and installing hundreds of thousands of antennas around the country." An industry analyst agreed with the companies, arguing, "You can't win a race by having half the horses." Sources: Drew Fitzgerald, "T-Mobile's Sprint Takeover Comes under New Attack," Wall Street Journal, February 13, 2019; and Drew FitzGerald, Dana Cimilluca, and Dana Mattioli, "T-Mobile Agrees to Buy Sprint in $26 Billion Deal," Wall Street Journal, April 29, 2018. a. Assuming that the analysis of T-Mobile and Sprint executives is correct and that the two firms don't merge, _______ represents the long-run average cost curve for AT&T or Verizon and _______ represents the long-run average cost curve for T-Mobile or Sprint. If the firms do merge, the newly-merged firm _________________________________.
ATC2 ATC1 ; becomes similar in size to AT&T and its long-run average cost would decrease to the level of AT&T's cost.
For Jill Johnson's pizza restaurant, explain whether each of the following is a fixed or variable cost. Part 2 The payment she makes on her fire insurance policy is a ▼ fixedvariable cost. B. The payment she makes to buy pizza dough is a ▼ fixed variable cost. C.The wages she pays her workers is a ▼ variable fixed cost. C. The lease payment she makes to her landlord who owns the building where her store is located is a ▼ fixed variable cost. D.The $300-per-month payment she makes to her local newspaper for running her weekly advertisements is a ▼ variable fixed cost.
Afixed B. variable C.variable D. fixed E.fixed
According to an estimate by the Pew Research Center, the number of people between the ages of 25 and 64 born in the United States from U.S.-born parents will decline by 8.2 million between 2015 and 2035. Source: Eduardo Porter, "Short of Workers, U.S. Builders and Farmers Crave More Immigrants," New York Times, April 3, 2019. a. Holding other factors constant, briefly explain the effect this decline would have on the labor supply curve in the United States.
All else equal, a decrease in the working-age population will cause the labor supply curve to shift to the left.
How are implicit costs different from explicit costs?
An explicit cost is a cost that involves spending money, while an implicit cost is a nonmonetary cost.
In the book publishing industry, how are firms able to price discriminate across time?
An author's most devoted book fans want to buy the author's books as soon as they are published.
Why is the supply curve of labor usually upward sloping?
As the wage increases, the opportunity cost of leisure increases, causing individuals to devote more time to working.
If automation has led to job losses in some occupations and industries, how can it not have resulted in a reduction of the total number of jobs available in the economy?
Automation may be a complement for some occupations. By increasing worker productivity, it raises the demand for these workers. B. Workers who lose their jobs may receive training that allows them to gain the skills needed to shift into other jobs. Your answer is not correct. C. Automation may lead to the creation of new jobs in some occupations.
What is the relationship between a monopolist's demand curve and the market demand curve?
A monopolist's demand curve is the same as the market demand curve.
What is the relationship between a monopolist's demand curve and its marginal revenue curve?
A monopolist's marginal revenue curve has twice the slope of its demand curve, because to sell more output, a monopoly must lower price.
Which area represents the deadweight loss resulting from consumers not paying the full price of medical services?
B
Suppose that GM reduces its production of cars. Compare what happens to GM's average total cost of production in a situation where (i) the company doesn't have this union agreement, and (ii) the company does have this agreement. If GM is initially at point A, then when it reduces its production of cars, it will move to point
B if the company doesn't have this union agreement and point C if the company does have this agreement.
What happens as a firm increases the number of workers that it hires?
Both the marginal product of labor and the marginal revenue product of labor decrease.
An article in the Wall Street Journal discussed the large amounts that music companies are willing to pay in contracts with some hip hop or rap artists. According to the article, these large contracts are "driven almost entirely by the rise of streaming services" such as Spotify and Apple Music. But the article also notes that "for many acts, it's still tough to get a record deal." Source: Neil Shah, "Behind Hip-Hop's Bidding Wars," Wall Street Journal, September 4, 2018. The financial payoff to streaming is concentrated among a relatively few artists. Which of the following is a possible explanation for this trend?
By streaming the most popular artists, it increases the chances that the streaming service will be successful.
b. Although most books were published as scrolls in the first century A.D., by the third century, most were published as codices. Considering only the factors mentioned in this problem, explain why this change may have taken place.
By the third century, enough books were being published such that the average cost of producing a book as a codex was lower than the average cost of producing a book as a scroll.
Why would it be economically efficient to require a natural monopoly... to charge a price equal to marginal cost?
Economic efficiency requires the last unit of a good produced to provide an additional benefit to consumers equal to the additional cost of producing it.
Which of the following is part of the economic analysis of discrimination?
Employers who discriminate pay an economic penalty imposed by market competition.
What is perfect price discrimination?
Charging every consumer a different price equal to their willingness to pay.
Why do you think the same method of pricing isn't used by all cities?
Cities have different marginal costs of providing water. B. Cities are unaware of which pricing system is more likely to result in economic efficiency.
Prior to the early twentieth century, a worker who was injured on the job could collect damages only by suing his employer. To sue successfully, the worker—or his family, if the worker had been killed—had to show that the injury was due to the employer's negligence, that the worker did not know the job was hazardous, and that the worker's own negligence had not contributed to the accident. These lawsuits were difficult for workers to win, and even workers who had been seriously injured on the job often were unable to collect any damages from their employers. Beginning in 1910, most states passed "workers' compensation" laws that required employers to purchase insurance that would compensate workers for injuries suffered on the job. A study by Price Fishback and Shawn Kantor of the University of Arizona shows that after the passage of workers' compensation laws, wages received by workers in the coal and lumber industries fell. Source: Price V. Fishback and Shawn Everett Kantor, "Did Workers Pay for the Passage of Workers' Compensation Laws?" Quarterly Journal of Economics, Vol. 100, No. 3, August 1995, pp. 713-742. Part 2 Passage of workers' compensation laws would lead to a fall in wages in some industries because what had declined?
Compensating differentials.
Is it possible for technological change to be negative? If so, give an example.
It is possible for technological change to be negative. An example is when a firm hires less−skilled workers.
How did De Beers attempt to convince consumers that used diamonds were not good substitutes for new diamonds?
De Beers developed the slogan "a diamond is forever" to increase sentimental value.
Devra Gartenstein, a restaurant owner, made the following observation about preparing food: "Cooks become increasingly less productive as a kitchen becomes increasingly crowded." Source: Devra Gartenstein, "Law of Diminishing Marginal Returns in Restaurant Operations," smallbusiness.chron.com. What do economists call the problem she is describing? What are its implications for the marginal product of labor for cooks?
Diminishing marginal returns, where additional cooks produce less additional output.
Which of the following refers to the principal-agent problem in the market for health care?
Doctors pursuing their own interests rather than the interests of their patients.
The market supply curve of labor is determined by adding up the wages for each worker at each quantity of labor supplied, holding constant all other variables that might affect the willingness of workers to supply labor.
False
When there is a firm with a monopsony in the labor market, which of the following occurs?
Fewer workers will be hired at lower wages.
For which of the following reason(s) may firms experience economies of scale?
Firm's production may increase with a smaller proportional increase in at least one input. B. Large firms may be able to purchase inputs at lower costs than smaller competitors; they can also borrow money at a lower interest rate. C. Both managers and workers may become more specialized and hence more productive as output expands.
If consumers cannot resell products, which of the following is true?
Firms can practice price discrimination.
What is the main reason that firms eventually encounter diseconomies of scale as they keep increasing the size of their store or factory?
Firms have difficulty coordinating production.
In early 2017, a headline in the Wall Street Journal read: "Pricey Virtual-Reality Headsets Slow to Catch On." Source: Sarah E. Needleman, "Pricey Virtual-Reality Headsets Slow to Catch On," Wall Street Journal, February 14, 2017. Is it possible that Sony, Facebook, and the other firms producing virtual-reality headsets were better off keeping prices high when initially offering them for sale even if the result was a smaller quantity sold? Briefly explain.
Firms may have been better off charging a higher price initially if the elasticity of demand was more inelastic.
Suppose that Henry Ford had continued to experience increasing returns to scale, no matter how large an automobile factory he built. Discuss what the implications of this would have been for the automobile industry.
Ford could have profitably sold his cars at a lower price than competitors. B. Ford would have been able to produce his cars at lower long-run average cost than competitors.
Many firms include on their employment applications a box that job seekers are asked to check if they have ever been convicted of a crime. Some firms automatically reject applicants who check the box. As a result, some people with criminal convictions have difficulty finding a job, which may increase the likelihood that they will commit another crime. Some states and cities have enacted "ban the box" legislation that forbids firms from asking about criminal histories on job applications, although typically the firms are allowed to ask such questions in job interviews. A study by Jennifer L. Doleac of Texas A&M and Benjamin Hansen of the University of Oregon found that ban the box legislation significantly reduces the probability of employment among young male African-American job applicants. The economists note that ban the box legislation: "does not address employers' concerns about hiring those with criminal records, and so could increase discrimination against groups that are more likely to include recently-incarcerated ex-offenders..." Source: Jennifer L. Doleac and Benjamin Hansen, "Does 'Ban The Box' Help or Hurt Low-Skilled Workers? Statistical Discrimination and Employment Outcomes When Criminal Histories Are Hidden," National Bureau of Economic Research Working Paper 22469, July 2016. Briefly explain why this result might have occurred. Relate your answer to the reasons firms might be more likely to interview an applicant with a white-sounding name even if the applicant's resume was identical to that of an applicant with a black-sounding name.
Hiring firms may have believed that those with black-sounding names were more likely to have a criminal conviction.
Which type of merger is more likely to increase the market power of a newly merged firm? Part 5 ▼ Horizontal Vertical mergers are more likely to increase market power.
Horizontal
In the ancient world, a book could be produced either on a scroll or as a codex, which was made of folded sheets glued together, something like a modern book. One scholar has estimated the following variable costs (in Greek drachmas) of the two methods: Part 2 Scroll Codex Cost of writing (wage of a scribe) 11.33 drachmas 11.33 drachmas Cost of paper 16.50 drachmas 9.25 drachmas Part 3 Another scholar points out that a significant fixed cost was involved in producing a codex: "In order to copy a codex...the amount of text and the layout of each page had to be carefully calculated in advance to determine the exact number of sheets...needed. No doubt, this is more time-consuming and calls for more experimentation than the production of a scroll would. But for the next copy these calculations would be used again." Source: T. C. Skeat,"The Length of the Standard Papyrus Roll and the Cost-Advantage of the Codex,"Zeitschrift fur Papyrologie and Epigraphik, 1982, p 175; and David Trobisch, The First Edition of the New Testament, New York: Oxford University Press, 2000, p 73. Suppose that the fixed cost of preparing a codex was 58 drachmas and that there was no similar fixed cost for a scroll. Would an ancient book publisher who intended to sell 5 copies of a book be likely to publish it as a scroll or as a codex? What if he intended to sell 10 copies? Briefly explain. Part 5
If a publisher intended to sell 5 copies, he would publish the book as a scroll because the average cost would be lower than as a codex. If he intended to sell 10 copies, he would publish the book as a codex because the average cost would be lower than as a scroll.
According to an article in the Wall Street Journal, "United [Airlines] rolled out a new app to its flight attendants earlier this year with so much information about people, the airline has been reluctant to turn on all the functionality. The tool can show flight attendants information on each frequent flier's five previous flights....But United is worried some customers might consider that stalking." Source: Scott McCartney, "What the Airline Knows about the Guy in Seat 14C," Wall Street Journal, June 20, 2018. Is the app an example of positive technological change? Negative technological change? Does the answer depend on how costumers react to United's use of the app?
If the app allows flight attendants to access information about customers more efficiently and makes them more productive in helping passengers the app is a positive technological change. B. If the app allows flight attendants to know whether a passenger needs a special diet or help getting on and off the plane, the app is a positive technological change. C. If customers dislike the app enough that they switch to another airline or get into lengthy arguments with flight attendants, the app is a negative technological change.
Using the broader definition of monopoly, in which of the following cases could we argue that Microsoft has a monopoly in computer operating systems?
If Apple's computer operating system and the Linux operating system were not considered close substitutes for Windows.
What is the difference between the short run and the long run?
In the short run, at least one of a firm's inputs is fixed, while in the long run, a firm is able to vary all its inputs and adopt new technology.
Which of the following is a provision of the Affordable Care Act?
Insurance companies are required to participate in a high-risk pool that will insure individuals with pre-existing medical conditions. B. Each state will have an Affordable Insurance Exchange. C. Every firm with more than 200 employees is required to offer health insurance to its employees.
A report from an economic policy organization concludes, "Yes, automation has led to job displacements in particular occupations and industries in the past, but there is no basis for claiming that automation has led—or will lead—to increased joblessness, unemployment, or wage stagnation overall." Source: Lawrence Mishel and Josh Bivens, "The Zombie Robot Argument Lurches on," www.epi.org/126750, May 24, 2017. a. What does the report mean by "automation"?
It refers to using machines to carry out tasks that had previously been performed by workers.
When a firm's demand curve slopes downward and the firm decides to cut price, which of the following happens?
It sells more units but receives lower revenue per unit.
Suppose Jill Johnson operates her pizza restaurant in a building she owns in the center of the city. Similar buildings in the neighborhood rent for $4,000 per month. Jill is considering selling her building and renting space in the suburbs for $3,000 per month. Jill decides not to make the move. She reasons, "I would like to have a restaurant in the suburbs, but I pay no rent for my restaurant now, and I don't want to see my costs rise by $3,000 per month." Part 2 What do you think of Jill's reasoning?
Jill is incorrectly ignoring the opportunity cost of using the building she owns.
If Jill expects to produce 1,400 pizzas per week, should she build a smaller restaurant or a larger restaurant? Briefly explain.
Jill should build a larger restaurant because average total costs will be lower than for a smaller restaurant.
Suppose that Jill Johnson has to choose between building a smaller restaurant and a larger restaurant. In the graph, the relationship between costs and output for the smaller restaurant is represented by the curve ATC1, and the relationship between costs and output for the larger restaurant is represented by the curve ATC2. Part 2 If Jill expects to produce 250 pizzas per week, should she build a smaller restaurant or a larger restaurant? Briefly explain. Part 3
Jill should build a smaller restaurant because average total costs will be lower than for a larger restauran
What potential problems do opponents of "Medicare for all" foresee in abolishing private health insurance?
Less medical innovation because the lower prices that the government imposes on pharmaceutical products and manufacturers of medical devices will reduce their incentive to bring new products to market.
After the Sears department store chain emerged from bankruptcy, its CEO Edward Lampert was quoted as saying: "Our goal is to continue to shrink the size of our stores." Source: Suzanne Kapner, "Edward Lampert's Plan for Sears: Smaller Stores, Less Apparel," Wall Street Journal, February 13, 2019. Is Lampert's remark referring to Sears's economic short run or its economic long run? Briefly explain.
Long run, because changing the size of stores takes a significant amount of time.
According to a Congressional Budget Office forecast, less than half of future increases in spending on Medicare and Medicaid as a percentage of GDP will be due to the aging of the population. Which of the following factors explain most of the increase? Part 2
Low rates of productivity in the health care sector. B. The introduction of higher cost drugs and medical equipment. C. Excessive paperwork, duplication, and waste. D. Malpractice lawsuits, including the costs of unnecessary tests and procedures.
Which of the following is not among its major provisions?
Makes all health care professionals employees of the federal government.
A 2019 Wall Street Journal column described the changes in how airlines have priced tickets over time: "Airline pricing executives would come to work Monday, tally up weekend sales and launch a sale with newspaper ads on Tuesday. Now pricing is largely a computer-controlled, 24/7 business." Source: Scott McCartney, "Before You Buy Plane Tickets, Remember These Four Things," Wall Street Journal, March 6, 2019. Is the airlines' adoption of computer analysis of big data likely to have resulted in fewer or more different ticket prices offered on a given flight? Briefly explain.
More different ticket prices, because computer programs can continually analyze data and adjust prices in response to that data more frequently.
Economic discrimination is paying a person a lower wage or excluding a person from an occupation on the basis of an irrelevant characteristic such as race.
No. Differences in earnings between groups could be due to worker productivity. B. No. Differences in earnings between groups could be due to worker preferences.
Suppose a firm has no fixed costs, so all of its costs are variable, even in the short run. Part 2 If the firm's marginal costs are continually increasing (that is, marginal cost is increasing from the first unit of output produced), will the firm's average total cost curve have a U shape?
No. The average total cost curve will be continually increasing.
or most of the 1800s, the United States did not recognize the copyrights of books written by foreign authors. As a result, many U.S. publishers printed "pirated"—unauthorized—editions of Charles Dickens and other British authors without paying them royalties. A history of book publishing notes that: "[U.S.] publishers claimed that pirating [foreign] works allowed their prices to remain low, which in turn made the works more accessible to the public at large." There were (eventually successful) attempts in Congress to recognize foreign copyrights in exchange for other countries recognizing U.S. copyrights. At the time, one U.S. publisher described these efforts as the "clamor of two hundred authors against the interests of fifty-five million people." Source: J.P. Romney and Rebecca Romney, Printer's Error: Irreverent Stories from Book History, New York: Harper, 2017, pp. 218 and 227. Do copyright laws benefit authors at the expense of readers?
Not necessarily, since fewer books are likley to be written without copyright laws, thus providing readers with more books to read.
Suppose consumers pay less than the true cost of medical services because a third party, such as an insurance company or the government, pays most of the bill. In the graph, D1 represents the demand for medical services if consumers paid the full price of medical services; D2 represents the demand for medical services when consumers pay only a fraction of the true cost of medical services; and S represents the supply of medical services. Use the graph to answer the following questions. Part 2 The equilibrium market price received by doctors and other suppliers of medical services is
P2
In discussing "output-based compensation schemes," such as piece-rate systems, Stanford economist Edward Lazear observed, "One major advantage of this approach is that it accommodates a variety of worker preferences." But he also noted, "A disadvantage is that a pure piece-rate scheme makes the worker bear risk associated with variations in . . . business conditions." Source: Edward P. Lazear, "Compensation and Incentives in the Workplace," Journal of Economic Perspectives, Vol. 32, No. 3, Summer 2018, pp. 195-214. a. What does Lazear mean by the first quote above? How do these compensation schemes accommodate different worker preferences? Preferences for what?
Piece-rate compensation can benefit both workers who have less ability as well as those who have greater ability. B. Piece-rate pay can benefit workers who prefer to earn more income as well as those who prefer more leisure time. Your answer is not correct. C. A piece-rate system can benefit workers who prefer a slower work pace and those who prefer a faster work pace.
Segment.com, based in San Francisco, develops and sells software that allows companies to gather data on customers and manage the companies' social media presence. Segment reorganized its office as part of its "anti-distraction campaign." According to an article in the Wall Street Journal, the company cut back on its internal text messaging service and moved "some of its communication back to email to reduce the number of notifications employees were receiving." Source: Rachel Feintzeig, "How One Firm Lowered Its Open-Office Noise," Wall Street Journal, November 15, 2016. Does this movement from a new technology—text messaging—to an older technology—email—represent positive or negative technological change at Segment? Briefly explain.
Positive technological change, because more output can be produced using the same inputs.
Which of the following are key results of price discrimination?
Profits increase and consumer surplus decreases.
The efficient quantity of medical services is
Q1 because this is the quantity if consumers paid the full price of medical services.
Why do most regulatory agencies require natural monopolies to charge a price equal to average cost instead?
Regulating price instead to equal marginal cost would result in the firm suffering a loss.
Through the 2018 season, Nick Saban's record as the head football coach at the University of Alabama was 146 wins and 21 losses. The $8.3 million salary the university paid him in 2019 was the highest received by any college sports coach, as well as the highest paid to any public employee in the country. Yet a column on forbes.com has the headline "Nick Saban Gets Another Pay Raise from Alabama and the Numbers Show He Deserves It." Source: Kristi Dosh, "Nick Saban Gets Another Pay Raise from Alabama and the Numbers Show He Deserves It," forbes.com, July 28, 2018. Part 2 In what sense might a college football coach "deserve" such a high salary?
Saban's marginal product might not be greater than other successful football coaches, but Saban's marginal revenue product is substantially higher because revenue generated from winning at Alabama is much greater.
Some people—usually business travelers—have a very strong desire to fly to a particular city on a particular day, and airlines charge these travelers higher ticket prices than they charge other people, such as families who are planning vacations months in advance. Some people really like Big Macs and other people only rarely eat Big Macs, preferring to eat other food for lunch on most days. Part 2 Consider the following possible explanations of why airlines can charge different people different prices, while McDonald's can't. Which is correct?
Since people can't resell airline tickets, they cannot buy them at a low price and resell them at a high price, whereas people can resell hamburgers.
Which of the following statements is true of health care spending in the United States?
Spending on health care as a percentage of GDP has increased since 1965.
What is the difference between the average cost of production (ATC) and marginal cost of production (MC)?
TC = TC/Q; MC =ΔTC/ΔQ.
What is the difference between technology and technological change?
Technology is the process of using inputs to make output, while technological change is when a firm is able to produce the same output using fewer inputs.
Which of the following is the health care reform legislation passed by Congressed and signed by President Obama in March 2010?
The Affordable Care Act
Harvard Business School started using case studies—descriptions of strategic problems encountered at real companies—in their courses in 1912. Today, Harvard Business Publishing (HBP) sells its case studies to about 4,000 colleges worldwide. HBP is the sole publisher of the Harvard Business School's case studies. Part 2 What criteria would you use to determine whether HBP has a monopoly on the sale of business case studies to be used in college courses?
The ability to ignore the actions of other firms, the persistence of economic profits, and the availability of close substitutes.
Briefly explain whether you agree or disagree with the following argument: Adam Smith's idea of the gains to firms from the division of labor makes a lot of sense when the good being manufactured is something complex like automobiles or computers, but it doesn't apply in the manufacturing of less complex goods or in other sectors of the economy, such as retail sales. Part 2
The argument is incorrect. Gains from division of labor will occur whenever production of a good or provision of a service has multiple tasks.
Older oil wells that produce fewer than 10 barrels of oil a day are called "stripper" wells. Suppose that you and a partner own a stripper well that can produce eight barrels of oil per day and you estimate that the marginal cost of producing another barrel of oil is $80. In making your calculation, you take into account the cost of labor, materials and other inputs that increase when you produce more oil. Your partner looks over your calculation of marginal cost and says: "You forgot about that bank loan we received two years ago. If we take into account the amount we pay on that loan, its adds $10 per barrel to our marginal cost of production." Which of the following statements is most true?
The bank loan should not be included in marginal cost because it cannot be avoided by not producing another barrel.
Which of the following have been offered by economists to explain the rapid increase in health care spending in the United States? (Check all that apply.) Part 2
The development of advanced medical technology and new prescription drugs. This is the correct answer. B. A slow rate of growth of labor productivity in health care. This is the correct answer. C. An aging U.S. population. Your answer is correct. D. Distorted economic incentives for consumers and suppliers of health care.
Which of the statements below best describes the marginal productivity theory of income distribution?
The distribution of income is determined by the marginal productivity of the factors of production that individuals own.
In the United States, how do the average weekly earnings of union workers compare with the earnings of nonunion workers?
The earnings of union workers are higher than the earnings of nonunion workers.
In what sense do employers who discriminate pay an economic penalty?
The employers face higher costs, lower profit and eventual elimination from the market.
A student asks, "If the average cost of producing pizzas is lower in the larger restaurant when Jill produces 1,100 pizzas per week, why isn't it also lower when Jill produces 500 per week?" Give a brief answer to the student's question.
The larger restaurant has higher fixed costs than the smaller restaurant.
Why would modern systems "in which firms produce a greater variety of products to a more demanding quality and delivery standard" than manufacturers used previously result in firms choosing a salary system rather than piece-rate pay to pay their workers?
The manufacturing conditions of modern systems will induce firms to choose a salary system because the quality of output produced is now more important.
What is the difference between the marginal product of labor and the marginal revenue product of labor for a firm in a perfectly competitive market?
The marginal revenue product of labor is equal to the marginal product of labor multiplied by the product price.
In San Francisco, the minimum wage is $15 per hour. Restaurants that have more than 20 employees must also provide them with health insurance, paid sick leave, and paid parental leave. In response, some restaurants hire fewer workers and ask customers to pick up their meals from a counter and bus their own dirty dishes. As a news article put it: "Restaurants haven't developed a way to serve meals with less labor. They've gotten customers to do the labor they had been paying employees to do." One restaurant owner was quoted as saying that to hire workers to perform these tasks, "a $10 hamburger would be a $20 hamburger, and it wouldn't make sense anymore." Source: Emily Badger, "San Francisco Restaurants Can't Afford Waiters. So They're Putting Diners to Work," New York Times, June 25, 2018. a. What does the restaurant owner mean by saying that a $20 hamburger "wouldn't make sense"?
The owner meant that he would have difficulty selling the hamburgers at a price of $20.
When the DuPont chemical company first attempted to enter the paint business, it was not successful. According to a company report, in one year it "lost nearly $500,000 in actual cash in addition to an expected return on investment of nearly $500,000, which made a total loss of income to the company of nearly a million." Why did this report include as part of the company's loss the amount it had expected to earn -- but didn't -- on its investment in manufacturing paint? Source: Alfred D. Chandler, Jr., Thomas K. McCraw, and Richard Tedlow, Management Past and Present, Cincinnati: South-Western, 2000, pp. 3-92.
The report sought to include implicit costs because DuPont could have invested its money elsewhere and earned $500,000.
Pew forecasts that the total population of the United States between the ages of 25 and 64 will increase by 13.6 million between 2015 and 2035. Given the information provided in this problem, which of the following best explains the source of this increase?
The source would have to be immigrants or children of immigrants.
If students don't increase their earnings later in life by attending a highly selective college rather than a less selective college, why do they (and their parents) make so much effort to be admitted to a highly selective college? (Check all that apply.)
They believe that students who attend an elite college will learn more and become more successful later in life. Your answer is correct. C. Students and parents may value the prestige of attending a highly selective college. Your answer is correct. D. They may not be aware of research such as the study by Stacy Dale and Alan Kreuger on this topic.
Why would supporters of market-based reforms to health care propose to make the tax treatment of employer-provided health insurance the same as the tax treatment of individually-purchased health insurance?
This change would result in an increase in employees' out-of-pocket spending on health care. B. This change would result in a reduction in health insurance premiums.
Is Jill Johnson correct when she says the following: "I am currently producing 20,000 pizzas per month at a total cost of $70,000. If I produce 20,001 pizzas, my total cost will rise to $70,003. Therefore, my marginal cost of producing pizzas must be increasing." Part 2
Though Jill's average total cost of production is decreasing, her marginal cost of producing pizzas could be increasing or decreasing.
The marginal social benefit from vaccinations is greater than the marginal private benefit to people being vaccinated.
True
An article in the New York Times observes, "At the heart of the 'Medicare for all' proposals championed by Senator Bernie Sanders and many Democrats is a revolutionary idea: Abolish private health insurance." Source: Reed Abelson and Margot Sanger-Katz, "Medicare for All Would Abolish Private Insurance. 'There's No Precedent in American History,'" New York Times, March 23, 2019. What potential benefits do supporters of "Medicare for all" expect from abolishing private health insurance?
Universal coverage because everyone will be insured.
Why might it be more difficult under the federal antitrust laws for the government to persuade the courts to stop a vertical merger than to persuade the courts to stop a horizontal merger?
Vertical mergers do not as clearly reduce competition in a way that is likely to increase market power, leading to higher prices and a reduction in consumer surplus.
WeWork buys or rents office space and converts it to shared space that it then rents to individuals and firms. According to an article in the Wall Street Journal, until it agreed to stop doing so as part of a court settlement, WeWork "required 'nearly all' employees, including baristas and receptionists, to sign agreements barring them from working at similar businesses for a year after leaving WeWork." Source: Eliot Brown, "WeWork Reaches Settlement on Noncompete Pacts," Wall Street Journal, September 18, 2018. a. What benefit did WeWork receive from requiring its employees to sign such agreements?
WeWork was able to limit the ability of other firms to hire its workers by offering them higher wages.
Let MRP equal the marginal revenue product of labor and W equal the wage rate. When should a firm hire more workers to increase profit?
When MRP > W
Jason Furman and Tim Simcoe, who served on President Barack Obama's Council of Economic Advisors, wrote, "Economists have studied [price discrimination] for many years, and while big data seems poised to revolutionize pricing practice, it has not altered the underlying principles...Those principles suggest that [price discrimination] is often good for both firms and their customers." Furman and Simcoe describe "need-based financial aid for college students" as an example of price discrimination that is good for consumers. Source: Jason Furman and Tim Simcoe, "The Economics of Big Data and Differential Pricing," www.whitehouse.gov/blog/2015/02/06/economics-big-data-and-differential-pricing, February 6, 2015. Part 2 What do Furman and Simcoe mean by "underlying principles"?
When prices reflect a buyer's ability to pay, sellers can serve customers who would otherwise get priced out of the market.
column on barrons.com discussing General Motors (GM) made the following observation: "Even the seemingly 'variable' costs of hourly workers were made burdensome by union agreements whereby 95% of hourly workers' salaries were paid when they were laid off, turning variable labor compensation into a fixed cost." Source: Christine Jurzensk, "Why GM Shares Have a 58% Upside: Hedge Funder," barrons.com, April 3, 2019. a. Aren't workers' salaries always a variable cost and not a fixed cost?
While workers' salaries are typically a variable cost, because of this union agreement, 95 percent of GM's production workers' salaries were a fixed cost to the firm, with only 5 percent being a variable cost.
b. What are the advantages and disadvantages to Frito-Lay from the change in its compensation scheme?
With the new pay scheme, Frito-Lay can control costs better, thus increasing its revenue, but it may also reduce the incentives for drivers to work hard.
In 2018, Frito-Lay changed the compensation of drivers of trucks delivering Doritos, Cheetos, and other snacks to convenience stores and supermarkets. Previously, drivers' compensation depended primarily on commissions tied to the revenue from the snacks they delivered. Frito-Lay shifted to drivers receiving a straight salary with few opportunities to earn commissions. Some drivers in New York and other cities had their compensation cut by as much as 30 percent. A significant number of drivers quit, leading to temporary shortages of Doritos in some stores. A Frito-Lay spokesman was quoted as saying, "This is a national initiative with the aim of aligning all sales associates. Participating sales representatives have on average seen an increase in overall compensation." Source: Josh Kosman, "There Is a Massive Frito-Lay Shortage in NYC Bodegas," nypost.com, March 19, 2018; and Clark Wolf, "A Dearth of Doritos Results from a Frito-Lay-Off," forbes.com, March 19, 2018. a. What are the advantages and disadvantages to drivers from the change in Frito-Lay's compensation scheme?
With the new pay scheme, drivers' incomes will not exhibit large variations, but more productive workers will see a decline in their total earnings.
If so, why does the U.S. Constitution give Congress the right to enact copyright laws?
Without copyedit laws, individuals may be less likely to invest in creating new books, films, and software.
Is it possible for average total cost to be decreasing over a range of output where marginal cost is increasing? Briefly explain.
Yes. If marginal cost is less than average total cost, then average total cost will be decreasing.
If you own the only hardware store in a small town, do you have a monopoly?
Yes. You would have a monopoly if your profits are not competed away in the long run.
Which of the following factors shifts the labor supply curve?
a change in demographics B. a change in alternatives available in other labor markets C. a change in population
Which of the factors listed below does not cause the demand curve for labor to shift?
a change in the wage
When an employer pays higher wages to compensate workers for unpleasant aspects of their jobs, which of the following is the employer offering?
a compensating differential
Quora.com is a website where people post questions and users suggest answers. One user posted the following question: "If monopolies are price makers, why don't they charge an infinite price?" a. What does the person posting the question mean by a "price maker"? By a "price maker," the person posting the question means
a firm that has some control over its price—that is, if it raises its price, it will lose some, but not all, of its customers.
What is a monopoly? Part 2 A monopoly is Part 3
a firm that is the only seller of a good or service that does not have a close substitute.
What is a merger between firms in the same industry called?
a horizontal merger
What are implicit costs? Part 2 An implicit cost is
a nonmonetary opportunity cost.
A monopoly is a market structure that is characterized by
a single seller of a good or service that does not have a close substitute.
What is the definition of market power? Market power is the
ability of a firm to charge a price greater than marginal cost.
The Department of Justice and the FTC consider markets as highly concentrated if the postmerger HHI for a proposed horizontal merger is
above 2,500.
Current trends in U.S. health care spending, if not altered, will cause the growth of federal government spending in the United States to
accelerate
What is the law of diminishing returns? Part 2 The law of diminishing returns states that part b: Does it apply in the long run?
adding more of a variable input to the same amount of a fixed input will eventually cause the marginal product of the variable input to decline. Part B;No
Which of the following is one of the major reasons for rapid increases in health care spending in the United States?
advances in medical technology and new prescription drugs that have higher costs
Which of the following industries uses sophisticated methods to calculate the price of each unit sold each day?
airlines
What term describes laws aimed at promoting competition among firms?
antitrust laws
Are all public franchises natural monopolies? Part 5 All public franchises ▼ are notare natural monopolies, and all natural monopolies ▼ are notare public franchises.
are not, are not
All of the following cost measures reach their minimum points when they are equal to the value of marginal cost, except one. Which cost measure is the exception?
average fixed cost
What cost measure is equal to AFC +AVC?
average total cost
Employees in most circumstances do not pay taxes on the value of the health insurance provided by their employers. Part 2 If the federal government started taxing employees on the value of the employer-provided health insurance, the value of the employer-provided health care benefit would
become less valuable, and firms would need to raise wages to compensate for this lost value to keep total compensation the same.
What is the difference between a horizontal merger and a vertical merger? Part 2 A horizontal merger is a merger
between firms in the same industry, while a vertical merger is a merger between firms at different stages of the production of a good.
Related to Making the Connection] When the contact lens firm changed the compensation plan for its salespeople from salary plus quota-based commission to straight commission on sales, who benefited from the change?
both the salespeople and the company
Most cities own the water system that provides water to homes and businesses. Some cities charge a flat monthly fee, while other cities charge by the gallon. Which method of pricing is more likely to result in economic efficiency in the water market? Part 2 Economic efficiency is more likely to result in the water market if cities charge
by the gallon because homes and businesses will not consume gallons of water for which marginal benefit is less than price.
Sean Astin, who played Sam in the Lord of the Rings movies, wrote the following about an earlier film he had appeared in: "Now I was in a movie I didn't respect, making obscene amounts of money (five times what a teacher makes, and teachers do infinitely more important work) ..." Source: Sean Astin, with Joe Layden, There and Back Again: An Actor's Tale, New York: St. Martin's, 2004, p. 35. Part 2 Are salaries determined by the importance of the work being done? If not, what are they determined by? Part 3 Salaries are determined
by the marginal revenue product of the last worker hired and the supply of labor.
The substitution effect of a wage increase
causes a worker to supply a larger quantity of labor, and the income effect causes a worker to supply a smaller quantity of labor.
Consider the following chart: Source: U.S. Department of Health and Human Services, Centers for Medicare & Medicaid Services. Part 2 From the figure we can conclude that
consumers of health care have been directly paying for only a small fraction of the true cost of providing health care.
By shifting the costs of Medicare to beneficiaries, the growth of Medicare spending may be restrained since
consumers will demand fewer health care services than they would if a third party pays most of the bill. B. health care consumers will become more knowledable about the effectiveness and value of health care services. Your answer is not correct. C. beneficiaries will be more prudent when it comes to choosing which health care services to acquire
Which of the following is most likely to a variable cost for a business firm?
cost of shipping products
Assuming that the cost curves have the usual shape, the dollar difference between average total costs and average variable costs ▼ decreases increases remains constant as output increases.
decreases
Economies of scale happen when the firm's long run average total cost ________ as output increases.
decreases
As the level of output increases, what happens to the difference between the value of average total cost and average variable cost? Part 2 As the level of output increases, the difference between the value of average total cost and average variable cost Part 3
decreases because average fixed cost decreases as output increases.
The demand for labor is called a derived demand, because
demand for labor is derived from the firm's output choice.
What is "natural" about a natural monopoly? Part 2 A natural monopoly
develops automatically due to economies of scale.
Most economists believe that only part of the gap between the wages of white males and the wages of other groups is due to discrimination. Economists believe that some of the gap is explained by which of the following factors?
differences in education B. differences in experience C. differing preferences for types of jobs
In his autobiography, T. Boone Pickens, a geologist, entrepreneur, and oil company executive, wrote: It's unusual to find a large corporation that's efficient ... When you get an inside look, it's easy to see how inefficient big business really is. Most corporate bureaucracies have more people than they have work. Source: T. Boone Pickens, The Luckiest Man in the World, Washington, DC: Beard Books, 2000, p. 275. Pickens was describing
diseconomies of scale, because he is referring to the inefficieny of a large scale business operation.
Some economists and policymakers have argued that one way to control federal government spending on Medicare would be to have a board of experts decide whether new medical technologies are worth their higher costs. If the board decided that they are not worth the costs, Medicare would not pay for them. Other economists and policymakers argue that the costs to beneficiaries should more closely reflect the costs of providing medical services. This result might be attained by raising premiums, deductibles, and co-payments, or by "means testing," which would limit the Medicare benefits high-income individuals receive. Political columnist David Brooks has summarized these two ways to restrain the growth of spending on Medicare: "From the top, a body of experts can be empowered to make rationing decisions.... Alternatively, at the bottom, costs can be shifted to beneficiaries with premium supports to help them handle the burden." Source: David Brooks, "The Missing Fifth," New York Times, May 9, 2011. Part 2 "Rationing decisions" are decisions aimed at controlling the
distribution of scarce resources
Does a monopolist have a supply curve? Briefly explain. (Hint: Look again at the definition of a supply curve in Chapter 3 and consider whether this applies to a monopolist.) Part 2 A monopolist
does not have a supply curve because it is a price maker with one profit-maximizing price-quantity combination.
Why are there superstar basketball players but no superstar plumbers? Part 2 There are superstar basketball players but not superstar plumbers Part 3
due to technological advances that have increased the number of viewers for basketball games.
Why is the demand curve for labor downward sloping? Part 2 The demand curve is downward sloping
due to the law of diminishing returns.
Consider the market for a natural resource such as coal. Assume the supply curve for coal is a vertical line, indicating that the quantity supplied does not respond to changes in prices, as illustrated in the graph. Part 2 The price of a factor of production that is in fixed supply is called
economic rent. B. pure rent.
A natural monopoly occurs when
economies of scale are large enough so that one firm can supply the entire market at a lower average total cost than can two or more firms.
Is perfect price discrimination economically efficient? Part 6 Perfect price discrimination is
efficient because it converts into producer surplus what had been consumer surplus and deadweight loss.
A task force established by the Trump administration to evaluate the USPS recommended that Congress consider making the USPS a private firm, although the Postal Rate Commission might keep the authority to regulate the prices the new firm would charge. The administration noted that the "USPS is caught between a mandate to operate like a business but with the expenses and the political oversight of a public agency." Source: Jennifer Smith, "Trump's Fix for Postal Service: Privatize It," New York Times, June 22, 2018; and Task Force on the United States Postal System, "United States Postal Service: A Sustainable Path Forward," December 2018. a. Suppose that Congress allowed the USPS to retain its monopoly on deliveries to residential mailboxes but also allowed it to operate as a private business without needing to have its prices approved by the Postal Rate Commission and without having to meet the universal service obligation that Congress requires of it. What changes might the USPS make in how it operates? If Congress allowed the USPS to operate as a private firm, the USPS would be likely to
eliminate some services that under the universal service obligation it is obligated to provide. raise the rates of some services if it were allowed to do so.
In equilibrium, what determines the price of capital? Part 2 The price of capital is determined by
equilibrium in the market for capital, where the marginal revenue product of capital equals the marginal cost of capital.
It might be possible to distinguish between the effects of these different developments on the labor market by
examining the evidence about robotic and technological job replacement on jobs that have been offshored and that support the manufacture of goods imported into the U.S., and comparing those trends to similar U.S.-based occupations.
Spending on health care has been growing faster than the economy as a whole for at least the past several decades. What has caused this trend? Part 2 Health care as a proportion of GDP has been increasing because
expense medical equipment has been invented
n 2019, the Alliance of American Football (AAF), a professional football league, went out of business. The AAF played its games in the spring, while the National Football League (NFL) plays its games in the fall. In discussing the failure of the AAF, a columnist for the San Antonio Express-News asks the question, "Can any upstart football league take on the NFL monopoly, and win?" The NFL has 32 teams located in cities around the United States. Source: Michael Taylor, "The NFL Monopoly Rolls On,"expressnews.com, April 3, 2019. In what sense can the NFL be considered a monopoly? The NFL can be considered a monopoly because
few football fans have found the games offered by new leagues to be close substitutes to those offered by the NFL.
Prior to the early 1920s, there were ▼ few many restrictions on immigration into the United States. Congressional legislation ▼ increased limited immigration from the 1920s through the mid-1960s, until Congress ▼ tightened eased restrictions with passage of the Immigration Act of 1965. A ▼ decline surge in immigration followed the passage of the Immigration Act of 1990.
few,limited, eased,surge
Most labor economists believe that many adult males are on the vertical section of their labor supply curves. Explain when and why someone's supply of labor curve would be vertical, using the concepts of income and substitution effects. Source: Robert Whaples, "Is There Consensus among American Labor Economists? Survey Results on Forty Propositions," Journal of Labor Research, Vol. 17, No. 4, Fall 1996. Part 2 Suppose an adult male is on the vertical section of their labor supply curve. Part 3 If the wage decreases, then the substitution effect would prompt the individual to work ▼ morethe same number offewer hours and the income effect would prompt the individual to work ▼ fewerthe same number ofmore hours, with the size of the substitution effect being ▼ smaller thanequal tolarger than the size of the income effect (in absolute value).
fewer,more,equal to
By "premium supports" Brooks alludes to some form of ▼ financial assistance moral support to beneficiaries as they cope with the burden of higher costs.
financial assistance
What is price discrimination? Part 2 Price discrimination is when
firms charge a higher price to customers who are less sensitive to price and a lower price to consumers who are more sensitive to price. B. firms charge a higher price for a product when it is first introduced and a lower price later. Your answer is not correct. C. firms charge each consumer a different price equal to that consumer's willingness to pay.
A book providing advice to entrepreneurs describes some business costs as being "the amount of money that will go out even if none at all comes in." Source: Tom Hodgkinson, Business for Bohemians: Live Well, Make Money, New York: The Overlook Press, 2018, p. 40. a. The author isdescribing a business's ▼ fixedvariable cost. b. Which of the following is an example of this type of cost?
fixed rent for a store or warehouse
Any cost that remains unchanged as output changes represents a firm's
fixed cost.
An article on bloomberg.com discussed the situation at the mining firm BHP Billiton Ltd., which is headquartered in Australia: "The fixed element of mining costs doesn't change much, regardless of how many tons are being produced, so the declines in output...pushed up the average [cost per ton]." Source: David Fickling, "BHP's Costs Crash Diet Is Running Out of Steam," bloomberg.com, August 20, 2018. a. What does the article mean by the "fixed element of mining cost"? Give an example. The "fixed element of mining cost" refers to the
fixed costs in mining. An example is the cost of mining equipment.
According to an article in the Wall Street Journal, Parsley Energy has been very active in drilling oil wells in the Permian Basin of Texas and New Mexico. In 2019, the company decided to cut back spending on exploring for new oil deposits. Source: Clifford Krauss, "How a 'Monster' Texas Oil Field Made the U.S. a Star in the World Market," Wall Street Journal, February 3, 2019. Briefly explain how Parsley's decision will affect the firm's marginal cost of producing oil. Since costs incurred from exploring for new oil fields are part of Parsley Energy's
fixed costs, if they cut back on oil exploration, their marginal cost of producing oil won't change.
Financial aid is
good for both colleges and students because students get an education and colleges get paying students.
The government can block the entry to a market through
granting a copyright. B. granting a public franchise. C. granting a patent. Your answer is not correct.
As a percentage of GDP, health care spending in the United States has been
growing rapidly
How were De Beers' profits affected? Part 8 De Beers ▼ has remainedis no longer profitable.
has remained
In a competitive labor market, imposing a minimum wage should reduce the equilibrium level of employment. Will this also be true if the labor market is a monopsonyLOADING...? Briefly explain. Part 2 Imposing a minimum wage will ▼ increasedecreasenot affect employment because a firm with a monopsony otherwise will ▼ hire morehire fewer workers to pay ▼ higherlower wages.
increase,hire fewer,lower
Airlines are likely to have particularly ▼ high low fixed costs relative to their variable costs compared with an Old Navy clothing store or a Panera Bread restaurant
high
During the 1970s, many women changed their minds about whether they would leave the labor force after marrying and having children or whether they would be in the labor force most of their adult lives. In 1968, the National Longitudinal Survey asked a representative sample of women aged 14 to 24 whether they expected to be in the labor force at age 35. Twenty-nine percent of white women and 59 percent of black women responded that they expected to be in the labor force at that age. In fact, when these women were 35, 60 percent of those who were married and 80 percent of those who were unmarried were in the labor force. In other words, many more women ended up being in the labor force than expected to be when they were of high school and college age. Source: Claudia Goldin, Explaining the Gender Gap: An Economic History of American Women, New York: Oxford University Press, 1990, p. 155. Part 2 What impact did this fact have on the earnings of these women? Briefly explain. Part 3 Had they known they would be in the labor force, then the earnings of these women would have been
higher because they would have sought more training.
The Creator restaurant has replaced cooks and food preparers with a robot. On its website, the company describes the people who work there as "a motley crew of engineers, culinary scientists, human-centered designers, machinists, and tested fabricators." Source: creator.rest. a. The average wage of people who work at Creator is likely to be ▼ higher thanlower thanthe same as the average wage at typical fast-food restaurants such as McDonald's.
higher than
A baseball columnist calculated that during the 2016 and 2017 baseball seasons, outfielder Jason Hayward of the Chicago Cubs had a value of −$25.8 million to the team. Source: Zachary D. Rymer, "Metrics 101: Exposing MLB's Worst Contracts Entering 2018 Season," bleacherreport.com, March 28, 2018. Part 2 How could a baseball player have negative value to a baseball team? Part 3 Jason Hayward would have negative value to the Chicago Cubs if Part 4
his salary is greater than his marginal revenue product.
If the firm's marginal costs are $5 at every level of output, what shape will the firm's average total cost have? Part 5 The firm's average total cost curve will be ▼ verticalhorizontalU shaped.
horizontal
Which of the following is most likely to increase market power?
horizontal mergers
What are the five most important variables that cause the market demand curve for labor to shift? Part 2 The demand curve for labor shifts with changes in
human capital, technology, the price of the product, the quantity of other inputs, and the number of firms in the market.
What is a production function? A firm's production function is best described as
illustrating the relationship between inputs and the maximum amounts of output that the firm can produce with these inputs.
The short-run average cost can never be less the long-run average costs because
in the long run, all inputs are adjusted including the ones that are fixed in the short run.
The law of diminishing returns applies
in the short run.
What is the marginal productivity theory of income distribution? The marginal productivity theory of income distribution suggests that
income is determined by the marginal productivity of the factors of production that individuals own.
When a firm moves from straight-time pay to commission or piece-rate pay, the productivity of a firm's employees may
increase as less productive employees leave and those who remain have an incentive to sell more.
Improvements in technology usually result in lower costs of production or new and improved consumer goods and services. Part 2 Assume that an improvement in medical technology results in an increase in life expectancy for people 65 years of age and older. This technological advance is likely to
increase expenditures on health care because aging people require increasing levels of health care.
Suppose that Congress decides to end the USPS's monopoly on making deliveries to residential mailboxes. Part 2 Consumer surplus and economic efficiency wll
increase so long as residential mail delivery is not a natural monopoly.
Explain how the listed events would affect the following at Southwest Airlines: i. Marginal cost ii. Average variable cost iii. Average fixed cost iv. Average total cost Part 2 Southwest signs a new contract with the Transport Workers Union that requires the airline to increase wages for its flight attendants. Part 3 Marginal cost would ▼ decreaseremain unchangedincrease, average variable cost would ▼ increasedecreaseremain unchanged, average fixed cost would ▼ decreaseremain unchangedincrease, and average total cost would ▼
increase,increase, remains unchanged, increase
The federal government starts to levy a $20 per passenger carbon emissions tax on all commerical air travel. Part 5 Marginal cost would ▼ increasedecreaseremain unchanged, average variable cost would ▼ remain unchangedincreasedecrease, average fixed cost would ▼ decreaseincreaseremain unchanged, and average total cost would ▼ decreaseremain unchangedincrease.
increase,increase, remains unchanged, increase
When the marginal product of labor is greater than the average product of labor, then the average product of labor must be
increasing
Which of the following is most likely to be a fixed cost for a farmer?
insurance premiums on property
A firm cuts its workforce and is able to maintain its initial level of output. Part 9 This ▼ is notis an example of positive technological change.
is
An exercise program makes a firm's workers more healthy and productive. Part 7 This ▼ is notis an example of positive technological change.
is
training program makes a firm's workers more productive. Part 5 This ▼ is notis an example of positive technological change.
is
The Affordable Care Act (ACA)
is health care legislation passed by Congress and signed into law by President Barack Obama in 2010.
Which of the following are examples of a firm experiencing positive technological change? Part 2 a. A firm is able to cut each worker's wage rate by 10 percent and still produce the same level of output. Part 3 This ▼ isis not an example of positive technological change.
is not
firm rearranges the layout of its factory and finds that by using its initial set of inputs, it can produce exactly as much as before. Part 11 This ▼ isis not an example of positive technological change.
is not
Will it be maximizing production? Briefly explain. Part 5 A monopoly that maximizes profit
is not also maximizing production because price must be reduced to sell additional output.
Will a monopoly that maximizes profit also be maximizing revenue? Briefly explain. Part 2 A monopoly that maximizes profit
is not also maximizing revenue because revenue is highest when marginal revenue equals zero.
Provide an answer to this person's question. A monopolist cannot charge an infinite price because
it faces a downward-sloping demand curve, so to sell more units of the product, it must lower its price.
If piece-rate or commission systems of compensating workers have important advantages for firms, why don't more firms use them? Some firms don't use piece-rate or commission systems of compensation because
it is difficult to attribute output to any particular worker.
Need-based financial aid is an example of price discrimination because those with the
least ability to pay receive the most aid.
The consumers who are likely to pay the highest prices for similar items in the Shanghai market are those who are (select all that apply)
least willing to haggle. unfamiliar with the product.
n 2019, Disney offered a complex variety of ticket options for admission to Walt Disney World. Source: Bob Sehlinger and Len Testa, The Unofficial Guide to Walt Disney World, 2019, Birmingham, AL: AdventureKEEN, 2019, p. 63. Disney charged different prices for 1-day tickets to its Disney World parks, depending on the time of the year. Summer and the winter holiday season had the highest ticket prices, while most weeks in the winter and spring had the lowest. But people buying tickets that could be used for more than 1 day paid the same price whatever time of the year they attended. Briefly explain what assumptions Disney must be making for this pricing strategy to increase its profit. Disney must believe demand during the summer and winter seasons is ▼ lessmore elastic than during other times of the year.
less
Daniel had been earning $73 per hour and working 45 hours per week. Then Daniel's wage changes to $58 per hour, and as a result, he now works 40 hours per week. What can we conclude from this information about the income effect and the substitution effect of a wage change for Daniel? Part 2 The substitution effect causes Daniel to devote less time to working, the income effect causes Daniel to devote ▼ lessmorethe same amount of time to working and the substitution effect is ▼ the same size as larger than smaller than the income effect.
less more larger than
A news article described the situation at Weifield Group Contracting, a firm based in Centennial, Colorado, that installs electrical systems. Because the firm was having trouble hiring enough new workers, managers asked many existing workers to work overtime—which means working more than 40 hours per week. Federal law requires firms to pay wages for overtime work that are at least 50 percent more than the regular hourly wage rate. The firm's CEO was quoted as saying, "There are some guys that will not work overtime. You can't pay 'em enough to work overtime." Source: Rachel Feintzeig and Lauren Weber, "Companies Pressured to Pay More in Overtime Wonder if It's Worth It," Wall Street Journal, April 13, 2018. For these workers, what can we say about the size of the income effect of a wage change relative to the size of the substitution effect? The income effect resulting from the higher wage must have been ▼ equal togreater thanless than the substitution effect.
less than
From the information given, what can we conclude about the marginal revenue product of the servers in these restaurants relative to the compensation—wage plus health insurance plus paid sick and parental leave—they would receive? The servers' marginal revenue product was ▼ greater thanequal toless than the compensation they would receive.
less than
b. What does Lazear mean by the second quote above? What are "business conditions"? How do they affect worker compensation when a firm is using a piece-rate scheme? When business conditions are poor, workers will produce ▼ moreless output. If they are paid a straight salary, their income will ▼ increasenot changedecrease, but if they are on a piece-rate system, their incomes will likely ▼ not changeincreasedecrease. As a result, piece-rate workers often bear ▼ lessmore risk and their incomes are ▼ moreless stable than workers who are paid a straight salary.
less,not change,decrease,more,less
Which of the following is an example of a way in which health insurance companies have dealt with the problem of adverse selection?
limiting insurance coverage on pre-existing conditions
What information would you need in order to determine whether consumers would be better off if Google and Facebook were broken up or regulated as public utilities rather than being allowed to continue operating as they do now? In order to determine if consumers would be better off breaking up Google or Facebook, we would need to
look at the consumer benefits provided by these services and how they might be reduced if the firms were broken up. look at the services that each one offers and the price that consumers pay for these services.
A columnist for the Boston Globe observes, "Google is a 'monopoly' only in its corner of the Internet playing field: search engine advertising. That is certainly an important corner, but it isn't the whole digital universe. It isn't even the whole search universe. . . For the soaring population of online shoppers, Google is no longer the leading search destination. Amazon is." Source: Jeff Jacoby, "Don't Break Up Google—The Market Will Sort Everything Out," Boston Globe, June 14, 2018. a. How do the Department of Justice and the Federal Trade Commission determine the extent of the market a firm competes in? These agencies usually identify the industry that the firm is in by
looking for other firms that sell close substitutes to the good or service that the firm is selling.
From an economic perspective,
losing the trademark on its Monopoly game would have cost Hasbro millions of dollars per year as other companies could have begun to market similar games using the same title.
These decisions would restrain the growth of Medicare spending by denying payments for technologies with ▼ low high benefit-to-cost ratios.
low
In 2007, the European airplane manufacturer Airbus began selling its "super jumbo" jet, the A380. By 2019, smaller jets using carbon fiber parts and more efficient engines were also on the market. According to an article in the Wall Street Journal, "Airlines, it turns out, preferred [the smaller jets] to the A380 and Boeing's own humpbacked giant, the 747. The smaller jets were easier to fill and could fly direct to more places around the world without funneling through hubs." Source: Robert Wall, "Airports Worried the A380 Was Too Big. Turns Out, That Wasn't the Problem," Wall Street Journal, February 14, 2019. a. What does the observation that the smaller jets were easier to fill with passengers imply about the average cost of flying a passenger in a smaller jet and in an A380? The implication is that the average cost of flying a passenger on a smaller jet is ▼ higher thanthe same aslower than the cost of flying a passenger on a larger jet.
lower than
What is the purpose of the antitrust laws? Part 2 Antitrust laws are intended to
make illegal any attempts to form a monopoly or to collude.
Because the word discrimination has unfavorable connotations, many firms call their pricing strategies
management
How is the rental price of capital determined? Part 2 The rental price of capital is the price where the
marginal revenue product of capital equals the supply of capital.
Why was De Beers worried that people might resell their old diamonds? If people resell their old diamonds, then
market competition would increase, decreasing market prices.
The marginal cost curve intersects both the average variable cost and the average total cost curves at their ▼ maximum minimum points.
minimum
Which of the following terms refers to the problem in which one person with no deductible on his or her health insurance policy tends to engage in a less healthy lifestyle than another person with a high insurance deductible?
moral hazard
When a positive technological change occurs,
more output can be produced from the same inputs. B. the same output can be produced with fewer inputs.
Compared to the increases in health care spending per person in other high-income countries, the increases in health care spending per person in the United States have grown
more rapidly
If discrimination makes it difficult for a member of a group to find employment in a particular occupation, his or her incentive to be trained to enter that occupation is reduced. Which of the terms below is most closely associated with this situation?
negative feedback loop
The more cell phones in use, the more valuable they become to consumers. This is an example of
network externalities.
Is the amount of time that separates the short run from the long run the same for every firm?
no
According to a columnist in the Wall Street Journal, "The fact that smart, ambitious children who attend elite colleges also do well in life doesn't mean the first caused the second." Briefly discuss what evidence there is for this statement. Source: Greg Ip, "Is Elite College Worth It? Maybe Not," Wall Street Journal, March 20, 2019. Research shows that, holding constant students' characteristics, the earnings of people who graduate from elite colleges are ▼ no higher thanmuch higher thanlower than the earnings of people who graduate from less selective colleges.
no higher than
Because public goods must be both ▼ rival nonrival and ▼ excludable nonexcludable , health care ▼ does does not qualify as a public good under the usual definition.
nonrival nonexcludable does not
A column on bloomberg.com argues that natural gas pipelines "are a natural monopoly. Almost all of the costs are the fixed ones involved in building them; as long as there's spare capacity, the incremental expense of moving an extra cubic meter of gas down the line is infinitesimal." Source: David Fickling, "China's Pipeline Champion Misses an Opportunity," bloomberg.com, June 12, 2018. Briefly explain why the cost structure of pipelines as the columnist describes it makes pipelines a natural monopoly. Be sure to define "natural monopoly" in your answer. A natural monopoly arises when
one firm can supply the entire market at a lower average total cost than can two or more firms.
Research by economists Susan Helper, Morris Kleiner, and Yingchun Wang has found that the use of pay-for-performance, or piece-rate pay, has declined in manufacturing industries in recent decades. In a summary of this research, Lester Picker writes: "...this change has come about with the adoption of modern manufacturing systems in which firms produce a greater variety of products to a more demanding quality and delivery standard." What characteristics determine whether a salary system is likely to be more profitable for a manufacturing firm? Source: Lester Picker, "The Decline of 'Piece Rate' Compensation in Manufacturing," The Digest, National Bureau of Economic Research http://www.nber.org/digest/may11/w16540.html. Manufacturing firms are likely to consider a salary system to be more profitable if
output is difficult to measure and attribute to individual workers.
Which of the following terms refers to what occurs when a person gets a vaccination against a disease and that action reduces the chances that other people will contract that disease?
positive externality
While in Shanghai, China to teach an MBA course, Craig Richardson, an economics professor from Winston-Salem State University, asked his American students to haggle with sellers in a market where prices for the same items can vary widely. Professor Richardson explained that the same item with the same sticker price at different market stalls can have a final price that varies "by 1,500% or more, depending on the negotiating skills of the buyer." Source: Craig J. Richardson, "An Econ Lesson in a Shanghai Market," Wall Street Journal, July 6, 2015. Part 2 Shanghai merchants
practice price discrimination because they charge different prices for the same good.
When employers interview a job applicant with a white-sounding name and not an applicant with an African-American-sounding name, they are actually
practicing racial discrimination.
Price discrimination might be legally acceptable but ethically unacceptable when
price discrimination seems unfair.
The relationship between the inputs employed by a firm and the maximum output it can produce with those inputs is called the
production function.
Criticisms of the ACA made by economists and policymakers who believe that the federal government should have a larger role in the health care system include all of the following except
rationing will be required under ACA unless government has total control of the system.
ow did De Beers' strategy affect the demand curve for new diamonds? Part 6 The demand for new diamonds has ▼ remained unchanged.decreased.
remained unchanged.
Southwest decides to cut its television advertising budget. Part 9 Marginal cost would ▼ increaseremain unchangeddecrease, average variable cost would ▼ decreaseremain unchangedincrease, average fixed cost would ▼ increasedecreaseremain unchanged, and average total cost would
remains unchanged, remains unchanged, decrease, decrease
Southwest decides on an across-the-board 10 percent increase in executive salaries. Part 7 Marginal cost would ▼ remain unchangedincreasedecrease, average variable cost would ▼ increasedecreaseremain unchanged, average fixed cost would ▼ increasedecreaseremain unchanged, and average total cost would ▼ remain unchangeddecreaseincrease.
remains unchanged, remains unchanged, increases, increase
b. Which of the following is an example of this type of cost?
rent for a store or warehouse
Refer to the graph. Suppose initially one firm supplies 30 billion kilowatt-hours of electricity. If a second firm enters the market and each firm now supplies 15 billion kilowatt-hours of electricity, then the average total cost of electricity
rises from $0.04 to $0.06.
For years, the Goodyear Tire & Rubber Company compensated its sales force by paying a salesperson a salary plus a bonus based on the number of tires he or she sold. In early 2002, Goodyear made two changes to this policy: (1) The basis for the bonus was changed from the quantity of tires sold to the revenue from tires sold, and (2) salespeople were required to get approval from corporate headquarters in Akron, Ohio, before offering to sell tires to customers at reduced prices. Source: Timothy Aeppel, "Amid Weak Inflation, Firms Turn Creative to Boost Prices," Wall Street Journal, September 18, 2002. Part 2 Explain why these changes were likely to increase Goodyear's profits. Part 3 These changes were likely to increase Goodyear's profits because previously
salespeople had an incentive to sell more tires by reducing tire prices.
A study analyzed the costs to a pharmaceutical firm of developing a prescription drug and receiving government approval. An article in the Wall Street Journal noted that included in the firm's costs was "the return that could be gained if the money [used to develop the drug] were invested elsewhere." Briefly explain whether you agree that this return should be included in the firm's costs. Source: Ed Silverman, "Can It Really Cost $2.6 Billion to Develop a Drug?," Wall Street Journal, November 21, 2014. This return
should be included in the firm's costs because the opportunity cost of the firm's investment is one of the firm's implicit production costs.
Nobel Laureate Robert Fogel of the University of Chicago has argued: "Expenditures on healthcare are driven by demand, which is spurred by income and by advances in biotechnology that make health interventions increasingly effective." Source: Robert Fogel, "Forecasting the Cost of U.S. Healthcare," The American, September 3, 2009. Part 2 If Fogel is correct, projected increases in health care spending as a percentage of GDP ▼ shouldshould not be of concern to policymakers.
should not
In the United States, the loss in economic efficiency due to market power is
small
The total deadweight loss from market power for the economy is
small
Does your answer to part (a) mean that there are no economies of scale with respect to jets? The implication is that because technological change has made it possible for firms manufacturing jets to use carbon fiber parts and more efficient engines, the minimum efficient size of jets is ▼ largersmaller than it had been. In these circumstances, building larger jets may lead to ▼ economies of scalediseconomies of scaleeconomies of scope.
smaller , diseconomies of scale
Under what circumstances can a firm successfully practice price discrimination? Part 5 To successfully practice price discrimination,
some consumers must have greater willingness to pay for the product than others and a firm must know consumer willingness to pay for the product.
In what other ways could the Department of Justice and the Federal Trade Commission evaluate Google's situation in the context of the antitrust laws? The DOJ and the FTC could
study the advertising market to see if firms will be able to find more alternatives to Google in the future. B. calculate the cross-price elasticity of demand to determine how close substitutes two services are. Your answer is not correct. C. look at whether Google is suppressing competition by, for instance, buying other potential competitors. D. Only A and C are correct.
According to Joseph Schumpeter, what does economic progress depend on?
technological change in the form of new products
Why might it be difficult for new leagues to enter the market for professional football in the United States? It might be difficult for new entrants to compete with the NFL because
the NFL has control over a key resource-ownership or long-term leases on large stadiums in major cities.
Which of the following laws was the first to make monopolization illegal?
the Sherman Act
Airlines have begun selling more "basic economy" tickets. According to a columnist in the Wall Street Journal, these tickets are usually the lowest-priced seats available on a flight, but the tickets "lack advance seat assignments, typically board in the last group, often prohibit carry-on bags in overhead bins and aren't eligible for upgrades or any kind of changes." Many corporate travel officers block employees from buying these tickets: "Whatever savings come from paying $50 to $100 less each way could be obliterated by a business traveler missing one flight and having to buy a new ticket that costs more than $1,000." The columnist concludes that basic economy tickets are a new means for airlines to practice price discrimination. Source: Scott McCartney, "The Secret Other Reason Basic Economy Is Everywhere," Wall Street Journal, April 4, 2018. Briefly explain his reasoning. Selling basic economy tickets is a way for airlines to price discriminate because
the airlines can charge lower prices to travelers who have a more elastic demand for airline travel.
What does the short-run production function hold constant? A short-run production function holds constant
the amount of capital.
What is personnel economics? Personnel economics is
the application of economic analysis to human resource issues such as the link between differences among jobs and differences in the way workers are paid. Your answer is not correct. B. the application of economic analysis to human resource issues such as training.
Natural gas pipelines are a natural monopoly because
the average total cost curve for moving natural gas through a pipeline is still falling at the point where it crosses the demand curve.
A Federal Reserve publication notes "Airlines have high fixed costs." Source: Scott A. Wolla and Carolyn Backus, "The Economics of Flying: How Competitive Are the Friendly Skies?" Federal Reserve Bank of St Louis, Page One Economics, November 2018. Which of the following is likely to be one of the most important fixed costs for an airline?
the cost of its planes
As the wage increases,
the demand for labor curve does not shift, but the quantity demanded of labor decreases.
What determines the price of natural resources? Part 5 The economic rent or pure rent of natural resources is determined by
the demand for the natural resource, which is the marginal revenue product of the natural resource.
Which of the following rights is given to the holder of a patent?
the exclusive right to a new product for a limited period
Refer to the table below. Which of the following costs are implicit costs? Type of Cost Amount Paper $20,000 Wages 48,000 Lease payment for copy machines 10,000 Electricity 6,000 Lease payment for store 24,000 Foregone salary 30,000 Foregone interest 3,000 Total 141,000 Part B: Which of the following are sometimes called accounting costs?
the forgone salary and interest Part B: explicit costs
What are the four most important ways a firm becomes a monopoly? Part 2 The four main reasons a firm becomes a monopoly are:
the government blocks entry, control of a key resource, network externalities, and economies of scale.
Why are the analysts quoted in the article using "monopoly" in this context? In this sense, the analysts mean that
the iOS operating system is a significant barrier to other firms competing with Apple in the smartphone industry.
What is minimum efficient scale? Part 2 Minimum efficient scale is Part 3
the level of output at which the long−run average cost of production no longer decreases with output.
In this case,
the losers would be those salespeople who have poor sales skills and had previously relied on their salary.
If the marginal product of labor is rising, is the marginal cost of production rising or falling? Briefly explain. Part 2 If the additional output from each new worker is rising, Part 3
the marginal cost of that output is falling because the only additional cost to producing more output is the additional wages paid to hire more workers.
At the equilibrium, the price of capital is equal to
the marginal revenue product of capital.
Why are major league baseball players on average paid substantially more than college professors? Explain. Part 2 Major league baseball players are paid more than college professors because
the marginal revenue product of major league baseball players is high relative to college professors.
What is a monopsony? A monopsony is
the only buyer of a factor of production.
If the federal government were to require that employer health care plans have deductibles that were no greater than $200 per year, the employees in these plans would be better off if
the premiums did not increase to offset the lower deductible.
What is the definition of economic rent?
the price of a factor of production that is in fixed supply
What is economic rent? Economic rent is
the price of a factor of production that is in fixed supply.
As output increases, the vertical distance between average total cost and average variable cost curves gets _______ and equals _______.
smaller; average fixed cost
What is the difference between total cost and variable cost in the long run? Part 2 In the long run, Part 3
the total cost of production equals the variable cost of production.
How can we measure the opportunity cost of leisure? The opportunity cost of leisure is Part 2
the wage rate.
It is difficult to estimate how much of the gap between what men and women are paid is due to discrimination because
there are many other factors that influence wage differences.
In what ways are Google and Facebook different from public utilities? Google and Facebook are different from public utilities because
they do not charge consumers a fee to use their services.
In discussing Senator Elizabeth Warren's proposal to treat technology firms like Google and Facebook as public utilities, an article on bloomberg.com observes, "Public utility regulation is usually an acknowledgement that monopolies occur naturally in some markets and the best thing to do is to come up with a way to live with them." Source: Joshua Brustein, "Elizabeth Warren Imagines Big Tech After the Breakup," bloomberg.com, March 8, 2019. a. In what ways are Google and Facebook like public utilities? Google and Facebook are like public utilities because
they have grown large enough to have economies of scale that allow them to monopolize the industry they are in.
These individual choices can result in differences between how much men and women are paid because
they will result in differences in experience and skill over time.
Which Congressional Act was passed in 1936 to outlaw price discrimination that reduces competition?
the Robinson-Patman Act
Which of the following terms refers to the lowest cost at which a firm is able to produce a given level of output in the long run, when no inputs are fixed?
the long-run average cost curve
What are the three most important variables that cause the market supply curve for labor to shift? Part 2 The supply curve for labor shifts with changes in
the population, demographics, and opportunities in other labor markets.
If patents reduce competition, why does the federal government grant them? Part 2 The federal government grants patents
to encourage firms to spend money on research to create new products.
The market demand curve for labor is determined by adding up the wages for each worker at each quantity of labor demanded, holding constant all other variables that might affect the willingness of firms to hire workers.
true
Perfect price discrimination is
unlikely to occur because firms typically do not know how much each consumer is willing to pay.
b. The president of a foundation connected with the technology industry argued against Warren's proposal, noting, "The proposal ignores the fact that many of the services big tech companies now provide free used to cost consumers money." What services do Google and Facebook provide now for free that consumers had to pay for prior to the development of the Internet? Examples of services that Google and Facebook provide for free that were not free before include
video chat. B. messaging. C. navigation services.
The following problem is somewhat advanced. Using symbols, we can write that the marginal product of labor is equal to ΔQ/ΔL. Marginal cost is equal to ΔTC/ΔQ. Because fixed costs by definition don't change, marginal cost is also equal to ΔVC/ΔQ. If Jill Johnson's only variable cost is labor cost, then her variable cost is just the wage times the quantity of workers hired, or w×L. Part 2 If the wage Jill pays is constant, then what is ΔVC in terms of w and L? partB: Use your answer above and the expressions given for the marginal product of labor and the marginal cost of output to find an expression for marginal cost, ΔTC/ΔQ, in terms of the wage, w, and the marginal product of labor, ΔQ/ΔL. Part 4 Marginal cost equal Part c:Use your answer above to determine Jill's marginal cost of producing pizzas if the wage is $1000 per week and the marginal product of labor is 100. The marginal cost of production is $enter your response here. (Enter your response rounded to two decimal places.) Part D; If the wage falls to $900 per week and the marginal product of labor is unchanged, then Jill's marginal cost ▼ part E;If instead the wage is unchanged at $1000 per week and the marginal product rises to 150, then Jill's marginal cost
w x change in(triangle) L part b: w/(traingle q/ traignle L) partc; $10 partD; decrease Part E; decreases
The great baseball player Ty Cobb was known for being very thrifty. Near the end of his life he was interviewed by a reporter who was surprised to find that Cobb used candles, rather than electricity, to light his home. From Ty Cobb's point of view, was the local electric company a monopoly? Part 2 For Cobb, the local electric company
was not a monopoly because candles were a good substitute for electricity.
A monopolist is a price maker because
when a monpolist raises its prices, it loses some but not all customers.
Economies of scale occur
when a firm's long-run average costs decrease with output.
What are diseconomies of scale? Part 2 Diseconomies of scale is Part 3
when a firm's long-run average costs increase with output.
What is a compensating differential? Give an example. A compensating differential is
when higher wages are paid to compensate a worker for unpleasant aspects of a job, such as when workers are paid higher wages for dangerous work.
Explain why the marginal cost curve intersects the average total cost curve at the level of output where average total cost is at a minimum. Part 2 The marginal cost curve intersects the average total cost curve at the level of output where average total cost is at a minimum because Part 3
when the marginal cost of the last unit produced is below the average, it pulls the average down, and when the marginal cost is above the averge, it pulls the average up.
Refer to the table below. When do diminishing returns in the production of pizzas start?
when the third worker is hired
Suppose that last semester your semester GPA was 1.60 and your resulting cumulative GPA was 2.75. Part 2 Next, suppose that this semester your semester GPA will be 2.40. Part 3 If so, then your cumulative GPA
will decrease because your "marginal" GPA will be below your cumulative GPA.
Leaving aside legal penalties, the employers who follow this practice
will also incur an economic penalty that is imposed on them by the market.
Some firms offer their employees a health care plan with high deductibles, sometimes as much as $4,500 per year. Part 2 With high-deductible plans, people
will hesitate to go to a doctor to avoid the cost outlay.
What is likely to happen in the long run to firms that do not reach minimum efficient scale? Part 5 A firm that does not reach its minimum efficient scale
will lose money if it remains in business.
A columnist on forbes.com offers the following advice to retailers practicing price discrimination: "Consumers don't much like the idea of other people getting better deals than are offered to them, and retailers need to be careful not to turn differentiated pricing into discriminatory pricing. There has to be a legal and ethical rationale for offering different prices to different customers." Source: Nikki Baird, "Dynamic Pricing: When Should Retailers Bother?" forbes.com, April 18, 2017. What would be a legally acceptable reason for offering different prices to different customers? What would be a legally unacceptable reason? A legally acceptable reason for offering different prices to different customers would be differences in ▼ costwillingness to payracegender, and a legally unacceptable reason for offering different prices would be differences in ▼
willingness to pay race
Lawrence Katz, an economist at Harvard, was quoted in a newspaper article as arguing that differences between the incomes of male physicians and female physicians "are largely explained by individual choices." He also noted that discrimination could account for part of the gap "though it isn't clear how much." Source: Josh Mitchell, "Women Notch Progress," New York Times, December 4, 2012. When Katz used the phrase "individual choices," he meant that female physicians may
work fewer hours or take time off for child care.
Which of the following is a reason for choosing a salary system rather than the more profitable commission, or piece-rate system, of compensation?
worker dislike of risk B. difficulty in measuring output C. concerns about quality
According to an Associated Press news article, 1,400 newspapers closed between 2004 and 2019. The same article quotes an estimate by the Pew Research Center that employment at newspapers declined by 45 percent during roughly the same period. Source: David Bauder and David A. Lieb, "Decline in Readers, Ads Leads Hundreds of Newspapers to Fold," apnews.com, March 11, 2019. Can we be certain that the wages of journalists have declined since 2004? What other information would we need to be sure? The wages of journalists would have declined since 2004 if
workers left journalism for other occupations, and the leftward shift in the demand curve for journalists was larger than the leftward shift in the supply curve.
If the federal government were to require that employer health care plans have deductibles that were no greater than $200 per year, the employers with these plans would be
worse off because the premium, and their share of the premium, would be higher.
A market initially has 5 firms, each with a 20 percent market share. Of the firms, 3 propose to merge, leaving a total of 3 firms in the industry. Are the Department of Justice and the Federal Trade Commission likely to oppose the merger? Part 5 The Department of Justice and the Federal Trade Commission ▼ would not challengewould not challengemay challengemay challengewould challengewould challenge such a merger.
would challange
Look again at the section "The Department of Justice and the Federal Trade Commission Merger Guidelines" in the textbook. Evaluate the following situations: Part 2 A market initially has 20 firms, each with a 5 percent market share. Of the firms, 3 propose to merge, leaving a total of 18 firms in the industry. Are the Department of Justice and the Federal Trade Commission likely to oppose the merger? Part 3 The Department of Justice and the Federal Trade Commission ▼ would challengewould challengewould not challengewould not challengemay challengemay challenge such a merger.
would not challange
Which of the following is a result of perfect price discrimination?
zero consumer surplus
In the long run, the monopolist can earn
zero or positive economic profit.
What is the value of the Herfindahl-Hirschman Index (HHI) when there are four firms in an industry and each firm has an equal market share?
2,500
Refer to the graph. Which level of output in the graph below represents the minimum efficient scale? Which size bookstore is more likely to experience diseconomies of scale?
20,000 books A bookstore selling 80,000 books per month
Joe Morgan is a sportscaster and former baseball player. After he stated that he thought the salaries of Major League Baseball players were justified, a baseball fan wrote the following to Rob Neyer, a sports columnist: "Mr. Neyer, What are your feelings about Joe Morgan's comment that players are justified in being paid what they're being paid? How is it ok for A-Rod [New York Yankees infielder Alex Rodriguez] to earn $115,000 per GAME while my boss works 80 hour weeks and earns $30,000 per year?" Source: ESPN.com, August 30, 2002. Part 2 How would you answer this fan's questions
A-Rod's marginal revenue product is much higher than the marginal revenue product of the fan's boss.
Why would AT&T buying Time Warner be an example of a vertical merger? It is an example of a vertical merger because
AT&T and Time Warner were operating at different stages in producing and delivering television programs.
In 2019, an article in the Wall Street Journal noted that the federal government's Office of the Comptroller of the Currency had said about Wells Fargo bank, "We continue to be disappointed with...its inability to execute effective corporate governance and a successful risk management program." According to the article, a senior member of Congress "suggested the bank should be downsized because it was too large to manage." Source: Rachel Louise Ensign and Andrew Ackerman, "Regulator Slams Wells Fargo after CEO Testifies to Congress," Wall Street Journal, March 12, 2019. After reading this article, a student remarks: "It seems that Wells Fargo is suffering from diminishing returns." Briefly explain whether you agree with this remark.
Disagree: the student confused diminishing returns, which refers to the behavior of costs in the short run, with diseconomies of scale.
EOG, a Texas-based producer of oil and gas, is called the "Apple of oil" because of the company's history of developing innovative methods to extract energy from shale rock. Using one of EOG's innovations, called iSteer, the company can navigate through thousands of feet of rock with a drill bit that allows for greater recovery of oil and gas than methods the company previously used. Source: Erin Ailworth, "Fracking 2.0: Shale Drillers Pioneer New Ways to Profit in Era of Cheap Oil," Wall Street Journal, March 30, 2017. Briefly explain why economists would consider EOG's use of iSteer an example of technological change.
EOG's use of iSteer enables it to recover more oil and gas with a certain quantity of inputs.
Charles Darrow claimed to have invented and played a game that closely resembles Hasbro's Monopoly game, decades before Hasbro's Monopoly game was introduced. In the legal debate about the right to use the name Monopoly for a game, whether or not Professor Anspach is correct matters because
Hasbro's loss of the trademark on its Monopoly game would have allowed other companies to market similar games using the same title.
Is Jill Johnson correct when she says the following: "I am currently producing 10,000 pizzas per month at a total cost of $40,000. If I produce 10,001 pizzas, my total cost will rise to $40,050. Therefore, my marginal cost of producing pizzas must be increasing."
Jill's average total cost of production is increasing, so her marginal cost of producing pizzas must be increasing.
During the same period that robots and other new technologies have been affecting the labor market, there has been an increase in imports to the United States of manufactured goods—including shoes, clothing, and automobiles—from countries in which workers receive lower wages. In addition, some U.S. firms have engaged in "offshoring" in which they move some operations—such as telephone helplines—to other countries where wages are lower. Part 2 Which workers are most likely to lose their jobs to robots and offshoring?
Middle-skilled workers whose jobs do not involve face-to-face contact.
An article in the Wall Street Journal discussing the smartphone market notes that industry analysts make the following observation: Apple's "biggest advantage has been its role as the only seller of devices featuring its iOS operating system. The iOS monopoly means users who switch to a rival device would have to learn a new system and potentially give up some stored information, analysts say." Source: Tripp Mickle, "Diverging Fortunes: High Prices Propel Apple, Sink Samsung," Wall Street Journal, August 1, 2018. Does Apple have a monopoly on smartphones?
No, Apple is not the only producer of smartphones in the market, so it does not have a monopoly on smartphones.
If a market is a monopoly, will a negative externality in production always lead to production beyond the level of economic efficiency?
No, a monopoly may produce an inefficiently high or low level of output in the presence of a negative externaility.
b. Will a reduction in a firm's output always result in an increase in the firm's average total cost (ATC) of production?
No, a reduction in a firm's output will result in an increase in the firm's average total cost of production only if the quantities are small and the firm is producing at a level of output where its ATC curve is downward sloping.
b. Will this procedure work when applied to Google? Briefly explain.
No, because it will be difficult to determine which other firms are selling close substitutes for Google's service.
in 2019, Noëlle Santos opened The Lit. Bar bookstore in the Bronx borough of New York City. Her bookstore is the only one located in the Bronx, which has a population of about 1.5 million. Source: Ginia Bellafante, "A Bookstore, Finally, Comes to the Bronx,"New York Times, April 25, 2019. Should the only bookstore in the Bronx, or any other city, be considered a monopoly?
No, in the narrow definition of the term, The Lit. Bar bookstore would be considered a monopoly only if it had no close substitutes.
Shouldn't streaming make it easier for all artists to get recording contracts?
No, since less popular acts are unlikely to increase the chances of someone signing up for a streaming service.
b. Were there any benefits to employees as a result of signing the agreements? If not, why would they have signed them?
No, the agreement was a condition for employment, and if applicants didn't sign it, they probably weren't hired.
Suppose that competition for software engineers results in Segment.com having to pay them higher salaries. Would the fact that the firm will now face an increased cost of providing its services be an example of negative technological change? Briefly explain.
No, this would not represent technological change because the same output can be produced using the same inputs.
A technology website estimated that the cost of materials and components in Apple's iPhone XS Max was $453. Apple was selling this phone for $1,249. Source: Daniel Yang and Stacy Wegner, "Apple iPhone XS Max Teardown," techinsights.com, October 3, 2018. Can we conclude from this information that Apple was making a profit of about $796 on each of these iPhones?
No; to calculate economic profit, all implicit and explicit costs relating to the production of the iPhone must be subtracted from the total revenue earned from selling the phones, so Apple made less than $796 on each iPhone.
Sally looks at her college transcript and says to you, "How is this possible? My grade point average (GPA) for this semester's courses is higher than my GPA for last semester's courses, but my cumulative GPA still went down from last semester to this semester." Part 2 Explain to Sally how this is possible.
Sally's GPA for this semester is lower than her cumulative GPA.
Assuming again that the analysis of T-Mobile and Sprint executives is correct, if the federal government decides to stop their merger, what is likely to happen to the firms once the infrastructure for 5G wireless technology has been completed?
T-Mobile and Sprint will have higher costs than AT&T or Verizon and they may be driven out of business.
Daniel Hamermesh, an economist at the University of Texas, has done a great deal of research on labor markets. In a book, Hamermesh wrote that "there is a penalty to earnings for bad looks and a premium for good looks." According to his statistical estimates, "the bottom 15 percent of women by looks...received 4 percent lower pay than average-looking women. The top one-third of women by looks...received 8 percent more than average-lookers. For men, the comparable figures are a 13 percent penalty and a 4 percent premium." Source: Daniel Hamermesh, Beauty Really Pays: Why Attractive People Are More Successfull, Princeton, NJ: Princeton University Press, 2011, p. 45. Is this difference in earnings due to economic discrimination?
Yes, because it is not acceptable to give someone a lower raise just because they are ugly.
In New York City, many people buy their Christmas trees from sidewalk vendors. An article about these vendors in the New York Times has the headline "How Much for That Tree? $35 in Harlem, or $135 in SoHo." Harlem is a lower-income neighborhood, and SoHo is a higher-income neighborhood. Source: Luis Ferré-Sadurni, "How Much for That Tree? $35 in Harlem, or $135 in SoHo," New York Times, December 10, 2017. a. Are the sidewalk Christmas tree vendors in New York City practicing price discrimination? Briefly explain.
Yes, because, all else equal, they are charging different prices to different people for roughly the same product.
A Disney World guidebook notes that families have many different ticket options to choose from and that "adding to the complexity, Disney's reservation agents are trained to avoid answering . . . which ticket option is 'best.' Many families, we suspect, become overwhelmed . . . and simply purchase a more expensive ticket with more features than they'll use." Can the complexity of Disney's ticket options be a form of price discrimination? If so, which people are likely to pay the higher ticket prices and which people the lower ticket prices?
Yes, consumers who are unwilling to spend the time required to determine the pricing option that is "best" for them have a more inelastic demand (and are willing to pay higher prices) than those consumers who spend the time needed to determine their best pricing options.
Do restaurant owners have a solution to this problem in the long run? Briefly explain.
Yes, restaurant owners can vary the size, or number, of kitchens.
The article also notes that the Christmas tree vendors must pay rent to the owners of the buildings that front the sidewalks. According to the article, "The most sought-after spots in high-end neighborhoods have created notorious price wars among vendors plotting to outbid one another. The cutthroat competition has increased rents . . . by as much as 500 percent in eight years." Does this additional information affect your answer to part (a)? Briefly explain.
Yes, since it indicates the price differences may be due to differences in the costs of selling trees in the two neighborhoods.
Should Congress and the president be concerned about the growth of Medicare spending?
Yes, since most observers/analysts see unrestrained growth in spending as having the potential to undermine the financial health and stability of the government.
If labor demand is unchanged, an increase in labor supply will ________ the equilibrium wage and ________ the number of workers employed.
decrease; increase
Labor unions are organizations of __________ that have the legal right to bargain with __________ about __________.
employees; employers; wages and working conditions
If labor supply is unchanged, an increase in labor demand will ________ the equilibrium wage and ________ the number of workers employed.
increase; increase
The GPA you earn in a particular semester is your ________ GPA, and your cumulative GPA for all completed semesters is your ________ GPA.
marginal; average
A column in the Washington Post argues that "network externalities turn market forces on their head." Consider two new products—product A and product B—neither of which receives patent protection. Assume that there are no network externalities when consumers use product A, whereas there are very large network externalities when consumers use product B. Source: Daniel W. Drezner, "The Best Work on Political Economy in 2018," Washington Post, December 31, 2018. Briefly explain how market forces will determine the level of competition in equilibrium in industry A and in industry B. We would expect that, in equilibrium, the market for product A will be _______ competitive than the market for product B. This is because __________.
more; the very large network externalities in market B will make it difficult for new firms to enter the market
b. The success of Apple's iPod leads more firms to begin producing digital music players.
A change in supply
Do you agree that health insurance is meant for people who end up getting sick?
No. While it obviously directly benefits those who do become sick, it indirectly benefits all since everyone faces some risk of sickness. There is a "psychic" benefit to knowing that one is "covered" if sickness should befall them.
Identify whether each of the following statements describes a change in supply or a change in the quantity supplied. Part 2 a. To take advantage of high prices for snow shovels during a very snowy winter, Alexander Shovels, Inc., decides to increase output
A change in quantity supplied
What do economists mean by market equilibrium?
A market outcome where quantity supplied is equal to quantity demanded.
Indicate which of the following could cause a movement from point A to C. (Check all that apply.)
A rise in buyer incomes. This is the correct answer. B. A decline in vegetarianism.
Health insurance companies deal with asymmetric information problems by
A. requiring policy holders to pay deductible conducting their own medical examinations Your answer is not correct. C. limiting the coverage of pre-existing conditions
While teaching the concepts of asymmetric information, a professor asked his students for examples of adverse selection or moral hazard in marriage. Which of the following examples most accurately describes adverse selection and moral hazard in marriage? Part 2
Adverse selection because the husband's secret alcoholism comes out after the wedding. Moral hazard because a spouse lets their appearance go after marriage.
Which of the following illustrates the law of supply?
An increase in price causes an increase in the quantity supplied, and a decrease in price causes a decrease in the quantity supplied.
Briefly discuss what might account for this result and why it differs from the answer you gave to part (a). (Hint: Why was the finding of increased sales of physical books particularly strong for less popular books?)
As more books become available as free downloads, readers of these books recommend them to other readers, causing an increase in the demand for both the print and the digital versions of the book, particularly among readers who prefer to read a physical book.
Which of the following countries operates under a single-payer health insurance system?
Canada
Which of the following is one of the difficulties in making cross-country comparisons in health care outcomes?
Countries do not always collect health care related data in the same way. B. Countries do not deliver health care services in the same way. Your answer is not correct. C. Countries may have different lifestyle choices that affect health care outcomes apart from the effectiveness of the countries' health care system.
c. Briefly explain whether the glut in this market is likely to eventually disappear.
The rental price of offices will eventually fall until the quantity of offices supplied equals the quantity of offices demanded, eliminating the glut.
Briefly explain whether you agree with the following statement: "The reluctance of healthy young adults to buy medical insurance creates a moral hazard problem for insurance companies."
Disagree. Moral hazard becomes a problem after one purchases insurance. In this case, the reluctance of young, healthy adults to purchase insurance in the first place leads to an adverse selection problem.
b. Why would firms drilling in the Permian Basin continue producing natural gas if they receive a zero or negative price for it?
Firms continue to produce natural gas because it is a byproduct of producing oil, so long as oil is profitable enough to cover the price of disposing of the natural gas, the firms will continue to produce it.
b. Which would be better news for firms selling traditional canned tuna: Fact (i) is more important in explaining their declining sales than fact (ii), or the reverse?
Firms would prefer fact (ii) more than fact (i) because it is easier for the traditional canned tuna producers to change their marketing strategy and also offer their tuna in pouches and trendy flavors than it is to change the minds of millennial and generation Z consumers about the desirability of eating tuna.
Given the following statement: "Providing health care is obviously a public good. If one person becomes ill and doesn't receive treatment, that person may infect many other people. If many people become ill, then the output of the economy will be negatively affected. Therefore, providing health care is a public good that should be supplied by the government." Health care, as a good, is best described by:
Health care should be supplied by the government because it generates positive externalities. B. Health care should not be supplied by the government because the private market preserves incentives to improve health care with innovation and medical technology.
b. As an economist, how can you hope that your analysis of the demand for butter is accurate if you neglect thousands and thousands of other variables?
In the model of demand and supply, we focus only on the variables that experience has shown are the most important in determining the demand for a product: income, price of substitutes and complements, taste for the good, population, and the expected future price.
Which of the following are examples of activities that generate externalities in the market for health care? (Check all that apply.)
Individuals engaging in injurious or reckless lifestyle choices. People receiving vaccinations against infectious diseases.
Which of the following statements is true about the health of people in the United States during the past 150 years?
Infant mortality has decreased. B. Life expectancy has more than doubled. C. The average person has become taller.
From 1979 to 2015, China had a policy that allowed couples to have only one child. (Since 2016, couples have been allowed to have two children.) The one-child policy caused a change in the demographics of China. Between 1980 and 2017, the share of the population aged 14 and under decreased from 36 percent to 18 percent. And, as parents attempted to ensure that the lone child was a son, the number of male children relative to female children increased. Sources: World Bank, World Development Indicators, February 2019; and Steven Lee Myers, Jin Wu, and Claire Fu, "China's Looming Crisis: A Shrinking Population," New York Times, January 21, 2019. Part 2 How has the one-child policy changed the relative demand for goods and services in China?
It has undoubtedly shifted away from goods and services appealing to youthful buyers, particularly youthful female buyers.
Under the Social Security retirement system, the federal government collects a tax on most people's wage income and makes payments to retired workers above a certain age who are covered by the system. (The age to receive full Social Security retirement benefits varies with the year the worker was born.) Part 2 What attributes of the Social Security retirement system make it a program of social insurance? (Mark all that apply.)
It is a transfer program. It provides a means of spreading the risk of bad outcomes.
An article in the Economist notes that the National Health Service (NHS) in the United Kingdom "is free at the point of delivery." Source: "The Three Myths of the NHS," Economist, June 18, 2018. What does "free at the point of delivery" mean?
Patients pay virtually nothing when they receive health care services.
The same article suggested that the views of the average person in the United Kingdom "have made it impossible even to think about boosting NHS revenue by charging patients a nominal sum for visiting the doctor." Which of the following statements would be true if the NHS were allowed to charge patients for doctor's visits, as happens in most other countries, including the United States?
Patients would have more incentive to avoid making appointments for conditions, such as colds, where medical treatment is ineffective.
Stuart Butler of the Brookings Institution argues that "there is much more to achieving good health than just spending money on medical care. We could save billions of dollars repairing hip fractures for seniors, for instance, by investing a fraction of that money in such things as safer bathrooms and non-slip carpeting." Source: Stuart M. Butler, "There Are Good Reasons to Be Optimistic about True Health Reform," brookings.edu, August 14, 2018. Would changes of this type be observable in the health outcomes policymakers use to compare the health care systems of different countries? Which of the following statements is true?
The changes Butler proposed might increase well-being for the reasons he states. But, it seems unlikely that the changes would improve the health outcomes that policymakers typically focus on (curing diseases or injuries after people have already experienced them).
From the list below, select the variable that will cause the supply curve to shift:
The cost of raw materials
In The Wealth of Nations, Adam Smith discussed what has come to be known as the "diamond and water paradox": "Nothing is more useful than water: but it will purchase scarce anything; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it." Part 2 LOADING... Click in the icon for a reference diagram. Part 3 It is possible for the price of water to be much lower than the price of diamonds if which of the following is true?
The supply of water is greater than the supply of diamonds.
suppose you see a 2017 Honda Civic hatchback advertised in the campus newspaper for $9,500. If you knew the car was reliable, you would be willing to pay $13,000 for it. If you knew the car was unreliable, you would be willing to pay $6,000 for it. Part 2 You should buy the car if which of the following circumstances is true?
There is a 50-50 chance that it is a lemon.
Which of the following best describes the system of socialized medicine?
a health care system under which the government owns most of the hospitals and employs most of the physicians
In attempting to compare health care outcomes across countries, a problem encountered is
a lack of data consistency. B. getting an accurate measurement of health care delivery. Your answer is not correct. C. distinguishing health care effectiveness from lifestyle choices. D. properly assessing consumer preferences.
Which of the following is one of the major reasons for the improvement in U.S. health in the last two centuries?
better sanitation B. improvements in the distribution of food C. advances in medical equipment and prescription drugs
According to an article in the Wall Street Journal in early 2019, the price of oil produced in the United States had increased by 25 percent since the beginning of the year. At the same time, U.S. oil production was at a record high. Source: Dan Molinsky, "Oil Prices Decline as U.S. Crude Production Hits Record," Wall Street Journal, February 21, 2019. a. Are these two facts alone, holding everything else constant, consistent with a movement along the supply curve for oil?
Yes. A higher price of oil causes an increase in the quantity of oil supplied, which we show by a movement upwards along the supply curve for oil.
Which of the following is the textbook's definition of a supply curve?
a curve that shows the relationship between the price of a product and the quantity of the product supplied
Imagine that the curves shown in the accompanying figure represent two demand curves for traditional wings (basket of six) at Buffalo Wild Wings. Further assume that wings are a normal good. Part 2 The movement from point A to B on D1 is caused by
a decrease in price of traditional wing baskets
Suppose that the curves in the figure to the right represent two supply curves for traditional wings (basket of six) at Buffalo Wild Wings. Part 2 The movement from point A to B on S1 is caused by
a decrease in the price of baskets of traditional wing
Which of the following events would shift the supply of smartphones to the right?
a decrease in the price of inputs used to produce smartphones
In recent years, fewer households have been relying on traditional cable television to provide entertainment. Traditional cable television is sometimes called "pay TV." According to an article in the Wall Street Journal, "The pay-TV decline comes as many U.S. households are turning to the internet for entertainment and canceling their traditional subscriptions, a phenomenon called cordcutting." Source: Drew FitzGerald and Benjamin Mullin, "Outlook for Traditional TV Goes from Bad to Worse," Wall Street Journal, November 19, 2018. Is the decline in the number of cable television subscriptions likely the result of a movement along the demand curve for cable television or a shift in the demand curve? What information would you need to be confident in your answer? The decline in the number of cable television subscriptions is likely the result of
a leftward shift in the demand curve, but you would need to have information on changes (if any) in the price of cable television subscriptions to be sure.
An article in the Wall Street Journal on the market for traditional canned tuna stated the following two facts: i. Firms selling traditional canned tuna are struggling to connect with millennial and generation Z consumers, "who favor fresher, less-processed options" in the food they eat. ii. Firms selling traditional canned tuna are facing competition from firms that offer tuna for sale in "pouches and kits with trendy flavors or as a healthy snack." Source: Jesse Newman and Annie Gasparro, "The Trouble With with Tuna: 'A Lot of Millennials Don't Even Own Can Openers,'" Wall Street Journal, December 2, 2018. a. From this information, can we conclude that falling sales of traditional cans of tuna is likely the result of a movement along the demand curve for traditional cans of tuna or a shift in the demand curve? The falling sales of traditional cans of tuna are the result of
a shift in the demand curve for tuna to the left.
Which of the following is the textbook's definition of a supply schedule?
a table that shows the relationship between the price of a product and the quantity of the product supplied
Compared with those of other high-income countries, health care outcomes in the United States are
better on some indicators, inferior on others.
If a surplus exists in a market, we know that the actual price is
above the equilibrium price, and the quantity supplied is greater than the quantity demanded.
The situation described here (of healthy people not subsidizing sick people through the purchase of insurance) is a problem for a system of health insurance since it
accentuates the adverse selection problem for insurers. B. may impose big losses on insurers. C. makes insurance premiums excessively high.
An article in the Wall Street Journal refers to "the basic principle of insurance—pooling risk in order to minimize liability from unforeseen dangers." Source: Amanda Foreman, "Insuring against Disaster," Wall Street Journal, February 20, 2019. Part 2 The problem of ▼ moral hazard adverse selection perfect information is that it undermines the ability of insurance to provide the benefit of sharing risk.
adverse selection
Which of the following terms refers to the situation in which one party to an economic transaction takes advantage of knowing more than the other party to the transaction?
adverse selection
The "lemons problem" refers to the observation that the presence of asymmetric information in the used car market leads to the problem of ▼ adverse selection moral hazard , causing the cars offered for sale to be predominantly ▼ poor good in quality.
adverse selection poor
Source: Organization for Economic Co-operation and Development, OECD Health Data 2018, March 2019. Part 2 According to the figure, health care is a normal good for
all countries.
What do economists mean when they use the Latin expression ceteris paribus?
all else equal
An article in the Wall Street Journal notes that the average height in the United States has increased slowly in recent years, while the average height in the Netherlands has been increasing more steadily. Although for many years the average person in the United States was taller than the average person in the Netherlands, in 2019, the average person in the Netherlands was 2 inches taller than the average person in the United States. Income per person, or per capita, in the United States is 50 percent higher than income per person in the Netherlands. The article asks, "Why isn't the U.S., with the highest disposable income per capita of any country, the world's tallest nation?" Source: Jo Craven McGinty, "Who's the Tallest of Them All? It's No Longer the Americans," Wall Street Journal, March 22, 2019. Why might we expect a relationship between average income in a country and the average height of its residents? What might explain the difference between the average height in the United States and the average height in the Netherlands? The average height of residents in a country is highly correlated with income because a higher income
allows for the consumption of more—and more nutritious—food.
buffalo wild wings Indicate which of the following would cause a movement from point A to C. (Check all that apply.)
an increase in the prices of substitutes in production. Your answer is correct. C. A decrease in worker productivity.
the phrase "health care outcome" refers to
any indicator of societal health
Should policymakers be concerned about this height issue? To the extent that differences in height
are the result of poorer childhood nutrition, U.S. policymakers should be concerned.
The main sources of health insurance in the United States include all of the following except
household co-operatives, or co-ops.
It's possible to buy many books either as print, or physical, books or as digital books. a. If the price of digital books rises, what would you expect to happen to the demand for print books? If many book readers consider print books and digital books to be substitutes, then an increase in the price of digital books will
increase the demand for print books, shifting the demand curve for print books to the right.
Improvements in the health of the average American caused the U.S. production possibilities frontier to shift out primarily by
increasing the country's effective workforce.
Life expectancy in the United States declined between 1916 and 1918. This decline likely caused the U.S. production possibilities frontier to shift ▼ outward inward because it signified a resource base made smaller by a less effective ▼ workforce capital stock .
inward workforce
According to the textbook, the data on the relationship between health care spending per person and income per person shows that health care
is a normal good.
b. Is it possible that the supply curve for oil also shifted? Suppose you were told that managers at oil firms were convinced that oil prices in the future were going to be significantly lower than they are today. Would this fact help you answer the question? Given that managers at oil firms were convinced that oil prices in the future were going to be significantly lower than they are today,
it is likely that the supply curve for oil shifted to the right because firms will be more likely to increase the supply of oil today when prices are higher.
The success of health care systems of different countries in extending the lives of the very sick
may be measured by examining illness/disease mortality ratios.
An externality
may require government intervention. interferes with the economic efficiency of a market equilibrium . refers to a benefit or cost of an economic activity that affects someone who is not directly associated with it.
If a market is in equilibriumLOADING..., is it necessarily true that all potential buyers and sellers are satisfied with the market price?
no
The overall mortality rate in the United States decreased by more than 25 percent between 1981 and 2015. Which of the following is not a cause of this decline? Part 2 The decline in the mortality rate is due to all of the following except a decline in deaths due to Part 3
obesity
What is the term for the payment that a buyer agrees to make in a health insurance contract in exchange for the provider agreeing to pay some or all of the buyer's medical bills?
premium
In an opinion column in the Washington Post, Daniel Morgan of the University of Maryland's School of Medicine described the result of a study he carried out with colleagues: "We found that nearly 90 percent of the patients received at least one unnecessary [medical] test and that, overall, nearly one-third of all the tests were superfluous." Source: Daniel Morgan, "What the Tests Don't Show," Washington Post, October 5, 2018. Part 2 Are there features of the U.S. health care system that might be encouraging this behavior? The article is referring to the
prevalence of patient health insurance in the United States that results in the principal-agent problem.
The difference between a change in supply and a change in the quantity supplied is that the latter is
produce by a change in the product's own price while the former is caused by a variety of variables other than the product's price.
An article in the Los Angeles Times describes a healthy 23-year old woman who has decided not to buy health insurance as "exactly the type of person insurance plans that states and the federal government are counting on to make health reform work." Source: Anna Gorman, "Affordable Care Act's Challenge: Getting Young Adults Enrolled," Los Angeles Times, June 2, 2013. Young healthy people must be forced to participate in health reform because they are needed to
provide a subsidy to older sicker people.
Two health care analysts argue that in the United States, "we have arrived at a moment where we are making little headway in defeating various kinds of diseases. Instead, our main achievements today consist of devising ways to marginally extend the lives of the very sick." Source: David Brooks, "Death and Budgets," New York Times, July 14, 2011. Part 2 Should "marginally extend[ing] the lives of the very sick" be an important goal of a health care system and, if not, what other goals should have a higher priority? While this normative question has no definite correct or incorrect answer, it seems reasonable to expect that any health care system would, at a minimum and through multiple avenues, Part 3
reduce human suffering.
In the case of health insurance, a lemons problem exists since those more likely to want health insurance are ▼ healthy sick people.
sick
news story about the rental market for office space in big cities described the market as experiencing a "glut" and quoted a real estate broker as stating, "We are moving into greater opportunities for [office] tenants." Source: Keiko Morris, "Growing Glut of Office Supply to Pressure Rents Next Year," Wall Street Journal, December 18, 2018. Part 2 a. What does the article mean by a "glut"? What does a glut imply about the quantity of offices demanded relative to the quantity supplied? A glut is another term for a ▼ shortagesurplus. When a market experiences a glut, the quantity supplied is ▼ less thanequal togreater than the quantity demanded at the current price.
surplus, greater than
Such data can be important in evaluating the effectiveness of a country's health care system because
the benefit may be greater than the cost of gathering the data.
The late Nobel Laureate Gary Becker once described how an economist should analyze the demand for butter: An economist "would want to consider the price of butter and probably the level of income, the price of margarine, and the size of the population as well. But [the economist] would neglect thousands and thousands of other variables...." Source: Gary Becker, Economic Theory, New Brunswick, NJ: Aldine Transaction, 2007, p. 5. a. What approach to analyzing demand curves is Becker describing?
the ceteris paribus condition
Eric Topol, a cardiologist, has written about the potential for using artificial intelligence (AI) in health care. He argues that in the future, many patients will have the option to receive treatment in their own bedrooms, where they can be monitored by AI rather than be admitted to hospitals. Doing so would reduce the costs of delivering health care "because the large staff of doctors and nurses...would not be necessary in the future." Source: Sumathi Reddy, "A Doctor's Prescription for More AI in Medicine," Wall Street Journal, March 4, 2019. If the U.S. health care system makes greater use of AI, what are the implications for the trends shown in the maps in the Apply the ConceptLOADING...? Widely adopting AI in the U.S. health care sector will more likely result in
the employment of fewer workers as some tasks could be automated that are currently carried out by health care workers. If this outcome occurs, the trend highlighted in the maps would reverse.
In an opinion column in the Washington Post, Megan McArdle argued, "In fact, it's debatable whether the other countries' [health care] systems get better outcomes" than the health care system in the United States. Source: Megan McArdle, "What's Really Obstructing Left-Wing Dreams?" Washington Post, May 7, 2018. Part 2 Why is it difficult to measure health outcomes in a way that allows us to determine which country's system provides the best health care? It is difficult to measure outcomes like these because
there is no one statistic that measures outcomes like these.
An article in the Economist on evaluating health care outcomes is subtitled "To Improve Health Care, Governments Need to Use the Right Data." Among the data not currently being collected in most countries, the article mentions "how soon after surgery patients get back to work." Source: "Measuring Health Care," Economist, February 1, 2014. Part 2 Governments do not currently collect such data because
they have no reason to justify the cost of doing so.
Is health care actually free to residents of the United Kingdom? Briefly explain.
No, health care is not free because residents of the United Kingdom pay for it through their income taxes.
According to an article on crainsnewyork.com, in 2018, the Metropolitan Museum of Art (the Met) in New York City had record attendance of 7.36 million, an increase of 5 percent over the previous year. During 2018, the Met had also increased the price of attendance. Source: Miriam Kreinin Sinclair, "Met Museum Attendance, Revenue up a Year After Imposing Fee," crainsnewyork.com, January 4, 2019. a. Can we conclude from this information that the demand curve for visiting the Met is upward sloping?
No, it is much more likely that during 2018 there was an increase in demand for visits to the Met.
A column by Greg David in Crain's New York Business discussed the effect of rising costs on prices charged by New York City restaurants. David argued that higher costs would result in higher prices and, "at some point, higher prices should reduce demand." Source: Greg David, "New York Area Restaurants Are Hiking Prices," crainsnewyork.com, May 2, 2018. Is he correct that if the price of a product increases, the demand for the product is reduced?
No: an increase in the price of a product will cause a decrease in the quantity demanded of that product, not a decrease in demand.
An article in the New York Times observed, "American doctors often rail against the country's medical malpractice system, which they say forces them to order unnecessary tests and procedures to protect themselves if a patient sues them." Source: Margot Sanger-Katz, "A Fear of Lawsuits Really Does Seem to Result in Extra Medical Tests," New York Times, July 23, 2018. Part 2 Is there another economic explanation—apart from fear of lawsuits—for why doctors may end up ordering unnecessary tests and other medical procedures?
Yes, since doctors themselves largely conduct the tests and perform the procedures, they benefit by enhancing the revenue of their practices.
The article also explained that New York City experienced an increase in the number of tourists during 2018 and that during the year, the Met offered several exhibitions that received good reviews. Does this additional information help you answer the question in part (a)?
Yes, this additional information reinforces the increase in demand for visits to the Met in part (a).
Which of the following is the way in which the largest number of people obtain health insurance in the United States?
employer-provided insurance plans
