Eco final

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For each of the following, is the business a price-taking producer? Explain your answers. The makers of Pepsi-Cola

There is only one manufacturer of Pepsi-Cola, and it works hard to differentiate its product from others in the minds of consumers. It is not a price-taking producer.

The Centers for Disease Control and Prevention (CDC) recommended against vaccinating the whole population against the smallpox virus because the vaccination has undesirable, and sometimes fatal, side effects. Suppose the accompanying table gives the data that are available about the effects of a smallpox vaccination program. Calculate the marginal benefit (in terms of lives saved) and the marginal cost (in terms of lives lost) of each 10% increment of smallpox vaccination. Calculate the net increase in human lives for each 10% increment in population vaccinated.

marginal benefit- 20 lives marginal cost- 4 lives net gain- 16

Each of the following firms possesses market power. Explain its source. Waterworks, a provider of piped water

There are increasing returns to scale in the provision of piped water. There is a large fixed cost associated with building a network of water pipes to each house- hold; the more water delivered, the lower its average total cost becomes. This gives WaterWorks a cost advantage over other companies. This cost advantage gives WaterWorks market power.

True or false? Explain your reasoning. the short-run average variable cost can never be less than the long-run average total cost.

False. The long-run average total cost is the lowest average total cost possible. But average variable cost will always be less than average total cost (it is lower than the average total cost by just the amount of the average fixed cost). So short-run average variable cost can be lower than long-run average total cost.

The U.S. government would like to help the American auto industry compete against foreign automakers that sell trucks in the United States. It can do this by imposing an excise tax on each foreign truck sold in the United States. The hypothetical pre-tax demand and supply schedules for imported trucks are given in the accompanying table. Calculate the government revenue raised by the excise tax in part b. Illustrate it on your diagram.

since 200,000 trucks are sold, and gov't earns a tax 3,000 on each truck the total revenue is 200,000 x 3,000= 600 millions. this is shaded area.

Evaluate each of the following statements. If a statement is true, explain why; if it is false, identify the mistake and try to correct it. An increase in fixed cost increases marginal cost.

False. An increase in fixed cost does not change marginal cost. Marginal cost is the additional cost of producing an additional unit of output. Fixed cost does not change as output is increased, and so the additional cost of producing an additional unit of output is independent of the fixed cost.

A new vaccine against a deadly disease has just been discovered. Presently, 55 people die from the disease each year. The new vaccine will save lives, but it is not completely safe. Some recipients of the shots will die from adverse reactions. The projected effects of the inoculation are given in the accompanying table: What is the interpretation of "profit" here? Calculate the profit for all levels of inoculation.

"Profit" is total lives saved minus total lives lost. The profit at each level of inocu- lation in the population is shown in the table. The maximum number of lives saved is 30, which occurs at inoculation levels of both 50% and 60%.

The U.S. government would like to help the American auto industry compete against foreign automakers that sell trucks in the United States. It can do this by imposing an excise tax on each foreign truck sold in the United States. The hypothetical pre-tax demand and supply schedules for imported trucks are given in the accompanying table. Assume that the government imposes an excise tax of $3,000 per imported truck. Illustrate the effect of this excise tax in your diagram from part a. How many imported trucks are now purchased and at what price? How much does the foreign automaker receive per truck?

200,000 trucks are now purchased at 28,000 per unit the foreign auto maker receives 28,000 per truck

Mark and Jeff operate a small company that produces souvenir footballs. Their fixed cost is $2,000 per month. They can hire workers for $1,000 per worker per month. Their monthly production function for footballs is as given in the accompanying table. At what level of output is Mark and Jeff's average total cost minimized?

According to the table, Mark and Jeff's average total cost is minimized at 1,200 footballs per month, where the ATC is $4.17.

Consider again Bob's Blu-ray company described in Problem 4. Over what range of prices will Bob produce no Blu-rays in the short run?

Bob will produce no DVDs if the price falls below $3 because $3 is the lowest point on the average variable cost curve—his shut-down price.

For each of the following, is the business a price-taking producer? Explain your answers. A cappuccino café in a university town where there are dozens of very similar cappuccino cafés

the cappuccino café is probably a price-taking producer, especially if there are a large number of cafés in town, since each will have a small market share and each produces a standardized product.

The accompanying table lists the cross-price elasticities of demand for several goods, where the percent quantity change is measured for the first good of the pair, and the percent price change is measured for the second good. Good Cross-price elasticities of demand Air-conditioning units and kilowatts of electricity −0.34 Coke and Pepsi +0.63 High-fuel-consuming sport-utility vehicles (SUVs) and gasoline −0.28 McDonald's burgers and Burger King burgers +0.82 Butter and margarine +1.54 Use the information in the table to calculate how a 10% decrease in the price of gasoline affects the quantity of SUVs demanded.

10% fall would increase the quantity of SUV's demanded by 10X as much, so 10 x 0.28%= 2.89%

Skyscraper City has a subway system, for which a oneway fare is $1.50. There is pressure on the mayor to reduce the fare by one-third, to $1.00. The mayor is dismayed, thinking that this will mean Skyscraper City is losing one-third of its revenue from sales of subway tickets. The mayor's economic adviser reminds her that she is focusing only on the price effect and ignoring the quantity effect. Explain why the mayor's estimate of a one-third loss of revenue is likely to be an overestimate. Illustrate with a diagram.

A reduction in fares from $1.50 to $1.00 will reduce the revenue on each ticket that is currently sold by one-third; this is the price effect. But a reduction in price will lead to more tickets being sold at the lower price of $1.00, which creates additional revenue; this is the quantity effect. The accompanying diagram illustrates this. GRAPH. The price effect is the loss of revenue on all the currently sold tickets. The quantity effect is the increase in revenue from increased sales as a result of the lower price

You have the information shown in the accompanying table about a firm's costs. Complete the missing data.

ATC AVC $40.00 $20.00 25.00 15.00 22.00 15.33 21.50 16.50 22.00 18.00

Amy, Bill, and Carla all mow lawns for money. Each of them operates a different lawn mower. The accompanying table shows the total cost to Amy, Bill, and Carla of mowing lawns. Calculate Amy's, Bill's, and Carla's marginal costs, and draw each of their marginal cost curves.

Amy-20$ Bill-10$ carla-30$

Bob, Bill, Ben, and Brad Baxter have just made a documentary movie about their basketball team. They are thinking about making the movie available for download on the internet, and they can act as a single-price monopolist if they choose to. Each time the movie is downloaded, their internet service provider charges them a fee of $4. The Baxter brothers are arguing about which price to charge customers per download. The accompanying table shows the demand schedule for their film. Brad wants to charge the efficient price. Which price would he choose? How many downloads would be sold?

Brad would charge $4. A price equal to marginal cost is efficient. At that price, there would be 6 downloads.

Each of the following firms possesses market power. Explain its source. Chiquita, a supplier of bananas and owner of most banana plantations

Chiquita controls most banana plantations. Control over a scarce resource gives Chiquita market power.

In each of the following examples, explain whether the decision is rational or irrational. Describe the type of behavior exhibited. Sahir overpaid when buying a used car that has turned out to be a lemon. He could sell it for parts, but instead he lets it sit in his garage and deteriorate.

Samir is behaving irrationally, engaging in loss aversion

The U.S. government would like to help the American auto industry compete against foreign automakers that sell trucks in the United States. It can do this by imposing an excise tax on each foreign truck sold in the United States. The hypothetical pre-tax demand and supply schedules for imported trucks are given in the accompanying table. In the absence of government interference, what is the equilibrium price of an imported truck? The equilibrium quantity? Illustrate with a diagram.

The equilibrium price without gov't interference is 30,000 and the equilibrium quantity is 300,000 shown by point E

A perfectly competitive firm has the following short-run total cost: Market demand for the firm's product is given by the following market demand schedule: Calculate this firm's marginal cost and, for all output levels except zero, the firm's average variable cost and average total cost.

This frims fixed cost is $5, since even when the firm produces no output, it incurs a total cost of $5. The marginal cost (MC), average variable cost (AVC), and average total cost (ATC) are given in the accompanying table.

Evaluate each of the following statements. If a statement is true, explain why; if it is false, identify the mistake and try to correct it. An increase in fixed cost increases the minimum-cost output.

True. As the fixed cost rises, the average fixed cost also rises; that is, the spreading effect is now larger. It is the spreading effect that causes average total cost to decline. Since this effect is now larger, it dominates the diminishing returns effect over a greater quantity of output; that is, average total cost decreases over a greater quantity of output.

Use the demand schedule for diamonds given in Problem 5. The marginal cost of producing diamonds is constant at $100. There is no fixed cost. Compare your answer to part c to your answer to part a. How large is the deadweight loss associated with monopoly in this case?

Under perfect competition, the sum of consumer and producer surplus is $600 $0 $600. Under monopoly, the sum of consumer and producer surplus is $100 $400 $500. So the loss of surplus to society from monopoly—the deadweight loss—is $600 −$500 $100.

Consider the original market for pizza in Collegetown, illustrated in the accompanying table. Collegetown officials decide to impose an excise tax on pizza of $4 per pizza. What is the quantity of pizza bought and sold after the imposition of the tax? What is the price paid by consumers? What is the price received by producers?

quantity bought and sold will be 1 pizza consumer pay $9 producer receive $5

In 1990, the United States began to levy a tax on sales of luxury cars. For simplicity, assume that the tax was an excise tax of $6,000 per car. The accompanying figure shows hypothetical demand and supply curves for luxury cars. Compare the tax revenue created by the taxes in parts a and b. What accounts for the change in tax revenue from the reduction in the excise tax?

the gov't tax revenue rose as a result of the reduction in the excise tax. the increase in quantity bought and sold more than makes up for the decrease in the tax per car.

The United States imposes an excise tax on the sale of domestic airline tickets. Let's assume that in 2013 the total excise tax was $6.10 per airline ticket (consisting of the $3.60 flight segment tax plus the $2.50 September 11 fee). According to data from the Bureau of Transportation Statistics, in 2013, 643 million passengers traveled on domestic airline trips at an average price of $380 per trip. The accompanying table shows the supply and demand schedules for airline trips. The quantity demanded at the average price of $380 is actual data; the rest is hypothetical. Does this increase in the excise tax increase or decrease government tax revenue?

the increase in the excise tax increases gov't tax revenue.

You have bought a $10 ticket in advance for the college soccer game, a ticket that cannot be resold. You know that going to the soccer game will give you a benefit equal to $20. After you have bought the ticket, you hear that there will be a professional baseball post-season game at the same time. Tickets to the baseball game cost $20, and you know that going to the baseball game will give you a benefit equal to $35. You tell your friends the following: "If I had known about the baseball game before buying the ticket to the soccer game, I would have gone to the baseball game instead. But now that I already have the ticket to the soccer game, it's better for me to just go to the soccer game." Are you making the correct decision? Justify your answer by calculating the benefits and costs of your decision.

yes right design. if you had know about the baseball game before buying soccer tickets it would be 10$ soccer and $15 baseball but since you already have soccer tickets soccer benefit is 20$ and baseball benefit is 15$

Kate's Katering provides catered meals, and the catered meals industry is perfectly competitive. Kate's machinery costs $100 per day and is the only fixed input. Her variable cost consists of the wages paid to the cooks and the food ingredients. The variable cost per day associated with each level of output is given in the accompanying table. What is the breakeven price and quantity? What is the shut-down price and quantity?

Kate's break-even price, the minimum average total cost, is $19.33, at an output quantity of 30 meals. Kate's shut-down price, the minimum average variable cost, is $15, at an output of 20 meals.

Kate's Katering provides catered meals, and the catered meals industry is perfectly competitive. Kate's machinery costs $100 per day and is the only fixed input. Her variable cost consists of the wages paid to the cooks and the food ingredients. The variable cost per day associated with each level of output is given in the accompanying table. Suppose that the price at which Kate can sell catered meals is $17 per meal. In the short run, will Kate earn a profit? In the short run, should she produce or shut down?

When the price is $17, Kate will incur a loss: the price is below her break-even price. But since the price is above her shut-down price, Kate should produce in the short run, not shut down.

For each of the following situations, decide whether Al has diminishing marginal utility. Explain. Al likes loud music. In fact, according to him, "the louder, the better." Each time he turns the volume up a notch, he adds 5 utils to his total utility.

al has constant marginal utility of volume of music

Consider Don's concrete-mixing business described in Problem 12. Assume that Don purchased 3 trucks, expecting to produce 40 orders per week. Suppose that, in the short run, business declines to 20 orders per week. What is Don's average total cost per order in the short run? What will his average total cost per order in the short run be if his business booms to 60 orders per week?

in the short run, producing 20 orders per week with 3 trucks, Don's average total cost per order will be ($7,000 $1,800)/20 $440. If he instead produces 60 orders per week with three trucks, his average total cost per order will be $297.

You are the manager of a gym, and you have to decide how many customers to admit each hour. Assume that each customer stays exactly one hour. Customers are costly to admit because they inflict wear and tear on the exercise equipment. Moreover, each additional customer generates more wear and tear than the customer before. As a result, the gym faces increasing marginal cost. The accompanying table shows the marginal costs associated with each number of customers per hour. You increase the price of a one-hour workout to $16.25. What is the optimal number of customers per hour that you should admit now?

marginal benefit of each consumer is 16.25 you should admit 5 customers but the 6th exceeds 16.25

Each of the following tax proposals has income as the tax base. In each case, calculate the marginal tax rate for each level of income. Then calculate the percentage of income paid in taxes for an individual with a pre-tax income of $5,000 and for an individual with a pre-tax income of $40,000. Classify the tax as being proportional, progressive, or regressive. (Hint: You can calculate the marginal tax rate as the percentage of an additional $1 in income that is taxed away.) All income is taxed at 20%.

marginal tax rate is 20% individual with pre-tax income of 5000 would pay 1000 in taxes individuals with pre-tax income of 40,00 would pay 8000 in taxes tax is proportional

Bruno can spend his income on two different goods: Beyoncé MP3s and notebooks for his class notes. For each of the following three situations, decide if the given consumption bundle is within Bruno's consumption possibilities. Then decide if it lies on the budget line or not. MP3s cost $2 each, and notebooks cost $5 each. Bruno has income of $110. He is considering a consumption bundle containing 20 MP3s and 10 notebooks.

the bundle is within bruno's consumption possibility, it lies below his budget line because he doesn't spend all his money

You produce widgets. Currently you produce four widgets at a total cost of $40. What is your average total cost?

your average total cost is $40/4 $10 per widget.

You work for the Council of Economic Advisers, providing economic advice to the White House. The president wants to overhaul the income tax system and asks your advice. Suppose that the current income tax system consists of a proportional tax of 10% on all income and that there is one person in the country who earns $110 million; everyone else earns less than $100 million. The president proposes a tax cut targeted at the very rich so that the new tax system would consist of a proportional tax of 10% on all income up to $100 million and a marginal tax rate of 0% (no tax) on income above $100 million. You are asked to evaluate this tax proposal. For incomes of $100 million or less, is this proposed tax system progressive, regressive, or proportional? For incomes of more than $100 million? Explain.

100 million or less- proportional more than 100 million- progressive

This diagram illustrates your local electricity company's natural monopoly. It shows the demand curve for kilowatt-hours (kWh) of electricity, the company's marginal revenue (MR) curve, its marginal cost (MC) curve, and its average total cost (ATC) curve. The government wants to regulate the monopolist by imposing a price ceiling. If the government imposes a price ceiling of $0.50, will the monopolist make a profit, lose money, or break even?

If the government imposes a price ceiling of $0.50, the quantity demanded is 8,000. The price equals the monopolist's average total cost, and so the firm will make zero profit.

You produce widgets. Currently you produce four widgets at a total cost of $40. Suppose you could produce one more (the fifth) widget at a marginal cost of $5. If you do produce that fifth widget, what will your average total cost be? Has your average total cost increased or decreased? Why?

If you produce one more widget, you are producing five widgets at a total cost of $40 $5 $45. Your average total cost is therefore $45/5 $9. Your average total cost has decreased because the marginal cost of the additional widget is below the average total cost before you produced the additional widget.

Use the demand schedule for diamonds given in Problem 5. The marginal cost of producing diamonds is constant at $100. There is no fixed cost. What is the perfectly competitive price? What quantity will be sold in this perfectly competitive market?

In a perfectly competitive market, P MC. That is, the perfectly competitive price is $100, and at that price 4 diamonds will be sold—to Raquel, Jackie, Joan, and Mia.

Margo's marginal utility of one dance lesson is 100 utils per lesson. Her marginal utility of a new pair of dance shoes is 300 utils per pair. The price of a dance lesson is $50 per lesson. She currently spends all her income, and she buys her optimal consumption bundle. What is the price of a pair of dance shoes?

Since Margo buys her optimal consumption bundle, the marginal utility per dollar spent on dance lessons must be equal to the marginal utility per dollar spent on dance shoes. Here, the marginal utility per dollar spent on dance lessons is 100 utils per lesson/$50 per lesson 2 utils per dollar. The marginal utility per dollar spent on dance shoes therefore has to equal 2 utils per dollar. Since the marginal utility of a pair of dance shoes is 300 utils per pair, the price of a pair of shoes has to be $150 per pair, so that 300 utils per pair/$150 per pair 2 utils per dollar.

Use the demand schedule for diamonds given in Problem 5. The marginal cost of producing diamonds is constant at $100. There is no fixed cost. If De Beers charges the monopoly price, how large is the individual consumer surplus that each buyer experiences? Calculate total consumer surplus by summing the individual consumer surpluses. How large is producer surplus?

The monopoly price is $300. At that price Raquel and Jackie buy diamonds. Raquel's consumer surplus is $400 −$300 $100; Jackie's is $300 −$300 $0. So total consumer surplus is $100 $0 $100. Producer surplus is $300 −$100 $200 for each diamond sold; 2 $200 $400.

dead weight loss is 2$

Georgia and Lauren are economics students who go to a karate class together. Both have to choose how many classes to go to per week. Each class costs $20. The accompanying table shows Georgia's and Lauren's estimates of the marginal benefit that each of them gets from each class per week. Use marginal analysis to find Georgia's optimal number of karate classes per week. Explain your answer.

george would be better off adding a 2nd class he can afford it.

A profit-maximizing business incurs an economic loss of $10,000 per year. Its fixed cost is $15,000 per year. Should it produce or shut down in the short run? Should it stay in the industry or exit in the long run?

in the short run , the business should produce. If it shuts down, the short-run annual loss will be $15,000, its fixed cost; but if it produces, the loss will be only $10,000. In the long run, the business should exit the industry because it is incurring a loss.

The accompanying table lists the cross-price elasticities of demand for several goods, where the percent quantity change is measured for the first good of the pair, and the percent price change is measured for the second good. Good Cross-price elasticities of demand Air-conditioning units and kilowatts of electricity −0.34 Coke and Pepsi +0.63 High-fuel-consuming sport-utility vehicles (SUVs) and gasoline −0.28 McDonald's burgers and Burger King burgers +0.82 Butter and margarine +1.54 Explain the sign of each of the cross-price elasticities. What does it imply about the relationship between the two goods in question?

negative implies that the two goods are gross complements. positive implies that the two goods are gross substitutes.

Suppose you have just paid a nonrefundable fee of $1,000 for your meal plan for this academic term. This allows you to eat dinner in the cafeteria every evening. You are offered a part-time job in a restaurant where you can eat for free each evening. Your parents say that you should eat dinner in the cafeteria anyway, since you have already paid for those meals. Are your parents right? Explain why or why not.

parents are wrong. they are making mistake of considering sunk cost

What can you conclude about the price elasticity of demand in each of the following statements? I owned both of the two Jerry Garcia autographed lithographs in existence. I sold one on eBay for a high price. But when I sold the second one, the price dropped by 80%."

price drops by 80% in order to sell one more unit.(increase by 67% by midpoint) indicated the demand is inelastic.

Do you think the price elasticity of demand for Ford sport-utility vehicles (SUVs) will increase, decrease, or remain the same when each of the following events occurs? SUVs produced in foreign countries are banned from the American market.

price elasticity of demand for ford SUV's will decrease because fewer substitutes are avaliable

Do you think the price elasticity of demand for Ford sport-utility vehicles (SUVs) will increase, decrease, or remain the same when each of the following events occurs? Due to ad campaigns, Americans believe that SUVs are much safer than ordinary passenger cars.

price elasticity of demand for ford SUV's will decrease because other cars are viewed as less of a subsitute

In 1990, the United States began to levy a tax on sales of luxury cars. For simplicity, assume that the tax was an excise tax of $6,000 per car. The accompanying figure shows hypothetical demand and supply curves for luxury cars. Under the tax, what is the price paid by consumers? What is the price received by producers? What is the government tax revenue from the excise tax? Over time, the tax on luxury automobiles was slowly phased out (and completely eliminated in 2002). Suppose that the excise tax falls from $6,000 per car to $4,500 per car.

price paid by consumer is 54,000. price received by producers is 48,000. the gov't tax revenue is 6000 per car x 40,000 cars= 240 million

Consider again Bob's Blu-ray company described in Problem 4. Draw Bob's individual supply curve. In your graph, plot the price range from $0 to $60 in increments of $10.

the individual supply curve is shown in the accompanying diagram. It is his MC curve above the minimum average variable cost. Graph.

Consider the original market for pizza in Collegetown, illustrated in the accompanying table. Collegetown officials decide to impose an excise tax on pizza of $4 per pizza. How much tax revenue does Collegetown earn from this tax?

total tax revenue is $4

Evaluate each of the following statements. If a statement is true, explain why; if it is false, identify the mistake and try to correct it. A decreasing marginal product tells us that marginal cost must be rising.

true. If each additional unit of the input adds less to output than the previous unit (decreasing marginal product), then in order to produce additional output, the firm needs to use increasingly more of the input; that is, the marginal cost of production increases

In each of the following situations, describe the substitution effect and, if it is significant, the income effect. In which direction does each of these effects move? Why? Homer spends much of his monthly income on home mortgage payments. The interest on his adjustable-rate mortgage falls, lowering his mortgage payments, and Homer decides to move to a larger house.

.) As mortgage payments decrease, large homes become cheaper compared to other goods. So Homer will substitute toward buying a larger home. This is the substitution effect. Since he spends much of his income on mortgage payments, the fall in mortgage rates also increases his income in a real sense: the purchasing power of his income is now higher. This implies that Homer will now buy more of all nor- mal goods. Housing is a normal good, so the income effect will also move in the direction of more housing. The effects reinforce each other

The accompanying table shows the price and yearly quantity sold of souvenir T-shirts in the town of Crystal Lake according to the average income of the tourists visiting. Price of T-shirt $4 5 6 7 Quantity of T-shirts demanded when average tourist income is $20,000 $3000 2400 1600 800 Quantity of T-shirts demanded when average tourist income is $30,000 $5000 4200 3000 1800 Using the midpoint method, calculate the income elasticity of demand when the price of a T-shirt is $4 and the average tourist income increases from $20,000 to $30,000. Also calculate it when the price is $7.

4$ income elasticity of demand is 1.25 7$ income elasticity of demand is 1.9

The production function for Marty's Frozen Yogurt is given in Problem 2. The costs are given in Problem 3. What principle explains why the AFC declines as output increases? What principle explains why the AVC increases as output increases? Explain your answers.

AFC declines as output increases due to the spreading effect. The fixed cost is spread over more and more units of output as output increases. AVC increases as output increases due to the diminishing returns effect. Due to diminishing returns to labor, it costs more to produce each additional unit of output.

The production function for Marty's Frozen Yogurt is given in Problem 2. The costs are given in Problem 3. How many cups of frozen yogurt are produced when average total cost is minimized?

Average total cost is minimized when 270 cups of yogurt are produced. At lower quantities of output, the fall attributable to the spreading effect dominates changes in average total cost. At higher quantities of output, the rise attributable to the diminishing returns effect dominates changes in average total cost.

Damien Matthews is a busy actor. He allocates his free time to watching movies and working out at the gym. The accompanying table shows his utility from the number of times per week he watches a movie or goes to the gym.Damien has 14 hours per week to spend on watching movies and going to the gym. Each movie takes 2 hours and each gym visit takes 2 hours. (Hint: Damien's free time is analogous to income he can spend. The hours needed for each activity are analogous to the price of that activity.) Which bundles of gym visits and movies can Damien consume per week if he spends all his time either going to the gym or watching movies? Draw Damien's budget line in a diagram with gym visits on the horizontal axis and movies on the vertical axis.

Damian can consume the following bundles: gym | movies 0 7 1 6 2 5 3 4 4 3 5 2 6 1 7 0

Anna Jenniferson is an actress who currently spends several hours each week watching movies and going to the gym. On the set of a new movie she meets Damien, the consumer in Problem 7. She tells him that she likes watching movies much more than going to the gym. In fact, she says that if she had to give up seeing 1 movie, she would need to go to the gym twice to make up for the loss in utility from not seeing the movie. A movie takes 2 hours, and a gym visit also lasts 2 hours. Damien tells Anna that she is not watching enough movies. Is he right?

Damienis right. Since Anna's marginal utility for the last movie is twice as large as the marginal utility for a gym visit, but gym visits and movies "cost" the same in terms of hours spent, Anna's marginal utility per hour spent on movies is twice as large as her marginal utility per hour spent on gym visits. So she should spend more of her time going to movies and less going to the gym.

Suppose that De Beers is a single-price monopolist in the diamond market. De Beers has five potential customers: Raquel, Jackie, Joan, Mia, and Sophia. Each of these customers will buy at most one diamond—and only if the price is just equal to, or lower than, her willingness to pay. Raquel's willingness to pay is $400; Jackie's, $300; Joan's, $200; Mia's, $100; and Sophia's, $0. De Beers's marginal cost per diamond is $100. The result is a demand schedule for diamonds as follows: Explain why De Beers faces a downward-sloping demand curve and why the marginal revenue from an additional diamond sale is less than the price of the diamond.

De Beers is the only producer of diamonds, so its demand curve is the market demand curve. And the market demand curve slopes downward: the lower the price, the more customers will buy diamonds.

Evaluate each of the following statements. If a statement is true, explain why; if it is false, identify the mistake and try to correct it. A profit-maximizing firm in a perfectly competitive industry should select the output level at which the difference between the market price and marginal cost is greatest.

False. For a profit-maximizing firm in a perfectly competitive industry, profit is max- imized by producing a quantity at which marginal cost is equal to the market price.

If Staples and Office Depot create a monopoly, they will be able to reduce the quantity of output and raise prices, which would create inefficiency in the form of deadweight loss. Since the FTC is charged with challenging mergers that would like- ly lead to higher prices, you should think that the FTC would not allow this merger. And, in fact, in a court ruling in 1997, the FTC was able to prevent the merger.

Download Records decides to release an album by the group Mary and the Little Lamb. It produces the album with no fixed cost, but the total cost of creating a digital album and paying Mary her royalty is $6 per album. Download Records can act as a single-price monopolist. Its marketing division finds that the demand schedule for the album is as shown in the accompanying table. Mary renegotiates her contract and will be paid a higher royalty per album. So the marginal cost rises to be constant at $14. To maximize profit, what level of output should Download Records now choose, and which price should it charge for each album?

If the marginal cost of each album is $14, Download Records will maximize profit by producing 2,000 albums, and it will charge $18 per album.

The production function for Marty's Frozen Yogurt is given in Problem 2. Marty pays each of his workers $80 per day. The cost of his other variable inputs is $0.50 per cup of yogurt. His fixed cost is $100 per day. What is Marty's variable cost and total cost when he produces 110 cups of yogurt? 200 cups? Calculate variable and total cost for every level of output given in Problem 2.

Marty's variable cost, VC, is his wage cost ($80 per worker per day) and his other input costs ($0.50 per cup). His total cost, TC, is the sum of the variable cost and his fixed cost of $100 per day. The answers are given in the accompanying table.

Don owns a small concrete-mixing company. His fixed cost is the cost of the concrete-batching machinery and his mixer trucks. His variable cost is the cost of the sand, gravel, and other inputs for producing concrete; the gas and maintenance for the machinery and trucks; and his workers. He is trying to decide how many mixer trucks to purchase. He has estimated the costs shown in the accompanying table based on estimates of the number of orders his company will receive per week. For each level of fixed cost, calculate Don's total cost for producing 20, 40, and 60 orders per week.

Quantity of trucks | 20 tc | 40tc | 60tc 2 $8,000 11,000 18,000 3 8,800 10,800 17,800 4 9,200 11,600 16,400

The production of agricultural products like wheat is one of the few examples of a perfectly competitive industry. In this question, we analyze results from a study released by the U.S. Department of Agriculture about wheat production in the United States back in 2013. With a yield of 44 bushels of wheat per acre, the average total cost per farm was $4.80 per bushel. The harvested acreage for rye (a type of wheat) in the United States increased from 242,000 in 2010 to 306,000 in 2013. Using the information on prices and costs here and in parts a and b, explain why this might have happened.

The average farm would have exited the industry in the long run because the price it received per bushel was less than the average total cost of production. The farm was incurring an economic loss by operating. So a decline in the harvested acreage of wheat should have been expected after 1998.

The accompanying table presents prices for washing and ironing a man's shirt taken from a survey of California dry cleaners. What is the average price per shirt washed and ironed in Goleta? In Santa Barbara?

The average price per shirt washed and ironed is $2.25 in Goleta and $2.00 in Santa Barbra.

The accompanying table shows a car manufacturer's total cost of producing cars. What is this manufacturer's fixed cost?

The manufacturers fixed cost is $500,000. Even when no output is produced, the manufacturer has a cost of $500,000.

For each of the following, is the business a price-taking producer? Explain your answers. One of many sellers of zucchini at a local farmers' market

Zucchini sellers at the farmers' market are price-taking producers; there are many of them, none of whom can affect the market price for zucchini, which is a standardized product.

Do you think the price elasticity of demand for Ford sport-utility vehicles (SUVs) will increase, decrease, or remain the same when each of the following events occurs? Other car manufacturers, such as General Motors, decide to make and sell SUVs.

price elasticity of demand for ford SUV's will increase because more substitutes are available

In your economics class, each homework problem set is graded on the basis of a maximum score of 100. You have completed 9 out of 10 of the problem sets for the term, and your current average grade is 88. What range of grades for your 10th problem set will raise your overall average? What range will lower your overall average? Explain your answer.

10th problem set greater than 88 will raise your overall average; any grade lower than 88 will lower it. This is the same principle at work as that for average total cost and marginal cost. If the marginal cost curve (the 10th grade) is above the average total cost curve (the average over the first 9 grades), then the aver- age total cost is rising (that is, the average over the 10 sets is greater than the average over the 9 sets). And if the marginal cost curve (the 10th grade) is below the average total cost curve (the average over the first 9 grades), then the average total cost is falling (that is , the average over the 10 set is lower than the average over the 9 sets). To see this arithmetically, NOTE THAT YOUR CURRENT average, 88, is found by if your 10th grade is 90, then your overall grade is 88.2. which is greater than 88. And if your 10th grade is 86, then your overall grade is 87.8 which is less than 88.

Use the demand schedule for diamonds given in Problem 5. The marginal cost of producing diamonds is constant at $100. There is no fixed cost. At the competitive price and quantity, how large is the consumer surplus that each buyer experiences? How large is total consumer surplus? How large is producer surplus?

At the competitive price, Raquel's consumer surplus is $400 −$100 $300; Jackie's, $300 −$100 $200; Joan's, $200 −$100 $100; and Mia's, $100 −$100 $0. So total consumer surplus is $300 + $200 + $100 + $0 $600. Since the price is equal to marginal cost, there is no producer surplus.

In Transylvania the basic income tax system is fairly simple. The first 40,000 sylvers (the official currency of Transylvania) earned each year are free of income tax. Any additional income is taxed at a rate of 25%. In addition, every individual pays a social security tax, which is calculated as follows: all income up to 80,000 sylvers is taxed at an additional 20%, but there is no additional social security tax on income above 80,000 silvers. Calculate the marginal tax rates (including income tax and social security tax) for Transylvanians with the following levels of income: 20,000 sylvers, 40,000 sylvers, and 80,000 sylvers. (Hint: You can calculate the marginal tax rate as the percentage of an additional 1 sylver in income that is taxed away.)

20,000 sylvers- pay no income tax but pays 20% of income in social security tax so marginal tax is 20% 40,000 sylvers- same has above but an additional silver(above 40,000) they'll pay 45%, marginal tax is 45% 80,000 sylvers- marginal income tax rate of 25% and 20% in S.S tax but on additional sylver, they'll pay only 25% marginal tax is 25%

In the United States, 2013 was a bad year for growing wheat. And as wheat supply decreased, the price of wheat rose dramatically, leading to a lower quantity demanded (a movement along the demand curve). The accompanying table describes what happened to prices and the quantity of wheat demanded. 2012 2013 Quantity demanded (bushels) 2.2 billion 2.0 billion Average price (per bushel) $3.42 $4.26 What is the total revenue for U.S. wheat farmers in 2012 and 2013?

2012- total revenue 7.524 billion 2013- total revenue 8.52 billion

The accompanying table lists the cross-price elasticities of demand for several goods, where the percent quantity change is measured for the first good of the pair, and the percent price change is measured for the second good. Good Cross-price elasticities of demand Air-conditioning units and kilowatts of electricity −0.34 Coke and Pepsi +0.63 High-fuel-consuming sport-utility vehicles (SUVs) and gasoline −0.28 McDonald's burgers and Burger King burgers +0.82 Butter and margarine +1.54 Use the information in the table to calculate how a 5% increase in the price of Pepsi affects the quantity of Coke demanded.

5% increase of pepsi would increase the quantity of coke demanded by 5X as much, so 5 x .63= 3.15%

In each of the following situations, describe the substitution effect and, if it is significant, the income effect. In which direction does each of these effects move? Why? Ed spends a large portion of his income on his children's education. Because tuition fees rise, one of his children has to withdraw from college.

Asuition fees rise, college education becomes relatively more expensive compared to other goods. So Ed decides to substitute away from college education and toward other goods. This is the substitution effect. Since tuition takes up a large portion of his income, the income effect will also be significant. As tuition rises, Ed, in a real sense, becomes poorer: the purchasing power of his income falls. As a result, he will buy less of all normal goods. College education is a normal good, so the income effect also moves in the direction of less college education. The effects reinforce each other.

In each of the following situations, describe the substitution effect and, if it is significant, the income effect. In which direction does each of these effects move? Why? Pam thinks that Spam is an inferior good. Yet as the price of Spam rises, she decides to buy less of it.

As its price rises, Spam becomes relatively more expensive compared to other goods. So Pam will substitute away from Spam and toward other goods. This is the substitution effect. Spam probably does not account for a large portion of Pam's income, so the income effect is likely to be negligible. However, we do know that since Spam is an inferior good, the income effect would make Pam want to con- sume more of it. As the price of Spam rises, Pam is now, in a real sense, poorer: her income buys fewer goods. Since she is now poorer, she will buy more inferior goods—that is, the income effect will lead her to buy more Spam. However, we know that overall she buys less Spam as its price rises, so the substitution effect outweighs the income effect.

Sven is a poor student who covers most of his dietary needs by eating cheap breakfast cereal, since it contains most of the important vitamins. As the price of cereal increases, he decides to buy even less of other foods and even more breakfast cereal to maintain his intake of important nutrients. This makes breakfast cereal a Giffen good for Sven. Describe in words the substitution effect and the income effect from this increase in the price of cereal. In which direction does each effect move, and why? What does this imply for the slope of Sven's demand curve for cereal?

Asitsprice icreases, cereal becomes relatively less attractive compared to other goods: its opportunity cost is now higher. As a result, Sven will tend to substitute away from cereal. This is the substitution effect. But as the price of cereal increases, the purchasing power of Sven's income falls: in a real sense, Sven is now poorer. Since he spends a large fraction of his income on cereal, this effect is large. So Sven buys less of other foods, since they are normal goods. However, he buys more cereal, so cereal must be an inferior good for him. This is the income effect. In fact, this effect is so strong that it outweighs the substitution effect: with both effects taken together, Sven consumes more cereal. For a Giffen good, the income effect works opposite to and is stronger than the substitution effect. Since Sven's consumption of cereal rises as the price of cereal rises, his demand curve slopes upward.

Because unprofitable farms were operating in 1998, when prices were $2.65 per bushel, we would expect that prior to 1998, prices were higher—assuming that production costs were approximately the same. So prior to 1998, farms were at least breaking even. Indeed, the average price of wheat was $4.25 per bushel in 1996 and $3.85 per bushel in 1995.

Bob, Bill, Ben, and Brad Baxter have just made a documentary movie about their basketball team. They are thinking about making the movie available for download on the internet, and they can act as a single-price monopolist if they choose to. Each time the movie is downloaded, their internet service provider charges them a fee of $4. The Baxter brothers are arguing about which price to charge customers per download. The accompanying table shows the demand schedule for their film. Ben wants to maximize profit. Which price would he choose? How many downloads would be sold?

Ben would charge $6. At that price, there would be 3 downloads. For any more downloads, marginal revenue would be below marginal cost, and so further down- loads would lose the Baxters' money.

Bob, Bill, Ben, and Brad Baxter have just made a documentary movie about their basketball team. They are thinking about making the movie available for download on the internet, and they can act as a single-price monopolist if they choose to. Each time the movie is downloaded, their internet service provider charges them a fee of $4. The Baxter brothers are arguing about which price to charge customers per download. The accompanying table shows the demand schedule for their film. Bill wants as much total revenue as possible. Which price would he choose? How many downloads would be sold?

Bill would charge $4. At that price, total revenue is greatest ($24). At that price, there would be 6 downloads.

Bob, Bill, Ben, and Brad Baxter have just made a documentary movie about their basketball team. They are thinking about making the movie available for download on the internet, and they can act as a single-price monopolist if they choose to. Each time the movie is downloaded, their internet service provider charges them a fee of $4. The Baxter brothers are arguing about which price to charge customers per download. The accompanying table shows the demand schedule for their film. Bob is proud of the film and wants as many people as possible to down load it. Which price would he choose? How many downloads would be sold?

Bob would charge $0. At that price, there would be 15 downloads, the largest quantity they can sell.

Bobs break-even price is $13.83 because this is the minimum average total cost. His shut-down price is $3, the minimum average variable cost, because below that price his revenue does not even cover his variable costs.

Don owns a small concrete-mixing company. His fixed cost is the cost of the concrete-batching machinery and his mixer trucks. His variable cost is the cost of the sand, gravel, and other inputs for producing concrete; the gas and maintenance for the machinery and trucks; and his workers. He is trying to decide how many mixer trucks to purchase. He has estimated the costs shown in the accompanying table based on estimates of the number of orders his company will receive per week. If Don is producing 20 orders per week, how many trucks should he purchase and what will his average total cost be? Answer the same questions for 40 and 60 orders per week.

Don should choose the number of trucks that minimizes average total cost for each level of output. Given this, Don should buy two trucks if he is producing 20 orders per week. His average total cost per order will be $400. He should buy three trucks if he is producing 40 orders per week. His average total cost per order will then be $270. He should buy four trucks if he is producing 60 orders per week. His average total cost per order will then be $273

Changes in the price of key commodities have a significant impact on a company's bottom line. For virtually all companies, the price of energy is a substantial portion of their costs. In addition, many industries—such as those that produce beef, chicken, high-fructose corn syrup and ethanol—are highly dependent on the price of corn. In particular, corn has seen a significant increase in price. Explain how the cost of energy can be both a fixed cost and a variable cost for a company.

Energy required to keep a company operating regardless of how much output is produced represents a fixed cost, such as the energy costs of operating office buildings, factories, and stores that must be maintained independent of the amount of output produced. In addition, energy is a variable cost because producing more output almost always requires using more energy.

Evaluate each of the following statements. If a statement is true, explain why; if it is false, identify the mistake and try to correct it. An increase in fixed cost lowers the profit-maximizing quantity of output produced in the short run.

False. Changes in fixed cost do not affect marginal cost and so do not change the profit-maximizing quantity of output produced. Changes in fixed cost do, howev- er, change the amount of profit earned and the firm's break-even price: the higher the fixed cost, the higher the firm's break-even price and the lower its profit.

True or false? Explain your reasoning. In the long run, choosing a higher level of fixed cost shifts the long-run average total cost curve upward.

False. In the long run, choosing a higher level of fixed cost allows you to move along and to the right on the long-run average total cost curve. In the long run, if you want to produce a larger quantity of output, you would optimally increase the level of fixed cost (this will decrease the average variable cost). You will do this in such a way as to spend the lowest possible average total cost; that is, you will be on the long-run average total cost curve but farther to the right (at a larger quantity of output).

Evaluate each of the following statements. If a statement is true, explain why; if it is false, identify the mistake and try to correct it. When marginal cost is above average total cost, average total cost must be falling.

False. When marginal cost is above average total cost, average total cost must be rising. If the additional cost of producing one more unit of output is greater than what it costs to produce each unit of output on average, then producing that one more unit of output must increase the average total cost.

Consider Bob's Blu-ray company described in Problem 4. Assume that Blu-ray production is a perfectly competitive industry. For each of the following questions, explain your answers. Suppose the price of a Blu-ray is $7. What is the profit-maximizing quantity of Blu-rays that Bob should produce? What will his total profit be? Will he produce or shut down in the short run? Will he stay in the industry or exit in the long run?

If DVDs sell for $7, Bob should produce 5,000 DVDs because for any greater quantity his marginal cost exceeds his marginal revenue (the market price). His total profit will be −$35,000, a loss of $35,000. In the short run, he will produce because his short-run loss if he were to shut down would be greater; it would equal his fixed costs of $50,000. In the long run, he will exit the industry because his profit is negative: the price of $7 per DVD is below his break-even price of $13.83.

Consider Bob's Blu-ray company described in Problem 4. Assume that Blu-ray production is a perfectly competitive industry. For each of the following questions, explain your answers. Suppose instead that the price of Blu-rays is $20. Now what is the profit-maximizing quantity of Blu-rays that Bob should produce? What will his total profit be now? Will he produce or shut down in the short run? Will he stay in the industry or exit in the long run?

If DVDs sell instead for $20, Bob should produce 7,000 DVDs because at this quantity his marginal cost approximately equals his marginal revenue (the market price). His total profit will be $41,000. In the short run, he will produce because he is covering his variable cost (the price is above the shut-down price). In the long run, he will stay in the industry because his profit is not negative (the price is above the break-even price).

This diagram illustrates your local electricity company's natural monopoly. It shows the demand curve for kilowatt-hours (kWh) of electricity, the company's marginal revenue (MR) curve, its marginal cost (MC) curve, and its average total cost (ATC) curve. The government wants to regulate the monopolist by imposing a price ceiling. If the government imposes a price ceiling equal to the marginal cost, $0.30, will the monopolist make profits or lose money? Shade the area of profit (or loss) for the monopolist. If the government does impose this price ceiling, do you think the firm will continue to produce in the long run?

If the government imposes a price ceiling of $0.30, the quantity demanded is 10,000. The monopolist will incur a loss equal to the shaded rectangle in the accompanying figure. Since the firm is incurring a loss, in the long run it will exit the market. GRAPH

The Collegetown movie theater serves 900 students and 100 professors in town. Each student's willingness to pay for a movie ticket is $5. Each professor's willingness to pay is $10. Each will buy only one ticket. The movie theater's marginal cost per ticket is constant at $3, and there is no fixed cost. If the movie theater charges $10, who will buy movie tickets and what will the movie theater's profit be? How large is consumer surplus?

If the movie theater charges $10 per ticket, only professors will buy tickets. The movie theater will sell to 100 customers (professors) at a price of $10 each. Since the movie theater's cost per ticket is $3, its profit is $7 per ticket for a total profit of 100 $7 $700. Students experience no consumer surplus since they do not buy any tickets. Each of the 100 professors experiences no consumer surplus since the price is equal to their willingness to pay. So consumer surplus is $0.

The Collegetown movie theater serves 900 students and 100 professors in town. Each student's willingness to pay for a movie ticket is $5. Each professor's willingness to pay is $10. Each will buy only one ticket. The movie theater's marginal cost per ticket is constant at $3, and there is no fixed cost. Assume the movie theater can price-discriminate between students and professors by requiring students to show their student ID, charging students $5 and professors $10, how much profit will the movie theater make? How large is consumer surplus?

If the movie theater charges students a price of $5, it sells 900 tickets at a profit of $5 $3 $2 each for a profit from selling to students of 900 $2 $1,800. Charging professors $10, it sells 100 tickets at a profit of $10 −$3 $7 each for a profit from selling to professors of 100 $7 $700. So the theater's total profit is $1,800 + $700 $2,500. Since each customer is charged exactly his or her willing- ness to pay, there is no consumer surplus.

Suppose that De Beers is a single-price monopolist in the diamond market. De Beers has five potential customers: Raquel, Jackie, Joan, Mia, and Sophia. Each of these customers will buy at most one diamond—and only if the price is just equal to, or lower than, her willingness to pay. Raquel's willingness to pay is $400; Jackie's, $300; Joan's, $200; Mia's, $100; and Sophia's, $0. De Beers's marginal cost per diamond is $100. The result is a demand schedule for diamonds as follows: Suppose De Beers currently charges $200 for its diamonds. If it lowers the price to $100, how large is the price effect? How large is the quantity effect?

If the price is $200, then De Beers sells to Raquel, Jackie, and Joan. If it lowers the price to $100, it will also sell a diamond to Mia. The price effect is that De Beers loses $100 (the amount by which it lowered the price) each from selling to Raquel, Jackie, and Joan. So the price effect lowers De Beers's revenue by 3 $100 $300. The quantity effect is that De Beers sells one more diamond (to Mia), at $100. So the quantity effect is to raise De Beers's revenue by $100.

If the price of DVDs is $2, the price is below Bob's shut-down price of $3. So Bob should shut down in the short run.

In the United States, the Federal Trade Commission (FTC) is charged with promoting competition and challenging mergers that would likely lead to higher prices. Several years ago, Staples and Office Depot, two of the largest office supply superstores, announced their agreement to merge. Staples and Office Depot argued that, while in some parts of the country they might create a monopoly in the office supply superstore market, the FTC should consider the larger market for all office supplies, which includes many smaller stores that sell office supplies (such as grocery stores and other retailers). In that market, Staples and Office Depot would face competition from many other, smaller stores. If the market for all office supplies is the relevant market that the FTC should consider, would it make the FTC more or less likely to allow the merger?

If the relevant market is the market for all office supplies, the merger between Staples and Office Depot would not create a monopoly, and the companies would not be able to raise prices to the same extent. If this were the relevant market, it would make the FTC more likely to allow the merger. This illustrates the importance of what economists call "market definition"—deciding what the correct market is: in this example, the office supply superstore market or the market for all office supplies.

You produce widgets. Currently you produce four widgets at a total cost of $40. Suppose instead that you could produce one more (the fifth) widget at a marginal cost of $20. If you do produce that fifth widget, what will your average total cost be? Has your average total cost increased or decreased? Why?

If you produce one more widget, you are producing five widgets at a total cost of $40 $20 $60. Your average total cost is therefore $60/5 $12. Your average total cost has increased because the marginal cost of the additional widget is above the average total cost before you produced the additional widget.

Suppose instead that this business has a fixed cost of $6,000 per year. Should it produce or shut down in the short run? Should it stay in the industry or exit in the long run?

In the short run, the business should shut down. If it shuts down, the short-run loss will be $6,000, its fixed cost; if it continues to produce, the loss will be $10,000. In the long run, the firm should exit the industry because it is incurring a loss.

Jimmy's profit will be maximized when peeps his marginal revenue exceeds his $0.70 per peep. His total profit is (250 $75.00.

Magnificent Blooms is a florist specializing in floral arrangements for weddings, graduations, and other events. Magnificent Blooms has a fixed cost associated with space and equipment of $100 per day. Each worker is paid $50 per day. The daily production function for Magnificent Blooms is shown in the accompanying table. Calculate the marginal product of each worker. What principle explains why the marginal product per worker declines as the number of workers employed increases?

MPL, shown in the accompanying table for the five workers, is the change in out- put resulting from the employment of one additional worker per day. MPL falls as the quantity of labor increases due to the principle of diminishing returns.

The production function for Marty's Frozen Yogurt is given in Problem 2. Marty pays each of his workers $80 per day. The cost of his other variable inputs is $0.50 per cup of yogurt. His fixed cost is $100 per day. What is the marginal cost per cup for the first 110 cups of yogurt? For the next 90 cups? Calculate the marginal cost for all remaining levels of output.

Marginal cost, MC, per cup of frozen yogurt is shown in the table in part a; it is the change in total cost divided by the change in quantity of output.

Each of the following firms possesses market power. Explain its source. Merck, the producer of the patented cholesterol-lowering drug Zetia

Merck has a patent for Zetia. This is an example of a government-created barrier to entry, which gives Merck market power.

For each of the following, is the industry perfectly competitive? Referring to market share, standardization of the product, and/or free entry and exit, explain your answers. Alicia Keys concerts

No, Alicia Keys concerts are not produced in a perfectly competitive industry. There is not free entry into the industry—there is only one Alicia Keys.

For each of the following, is the industry perfectly competitive? Referring to market share, standardization of the product, and/or free entry and exit, explain your answers. SUVs

No, SUVs are not produced in a perfectly competitive industry. There are only a few manufacturers of SUVs, each holding a large market share, and SUVs are not a standardized product in the minds of consumers.

Patty delivers pizza using her own car, and she is paid according to the number of pizzas she delivers. The accompanying table shows Patty's total benefit and total cost when she works a specific number of hours. Calculate the total profit to Patty from working 0 hours, 1 hour, 2 hours, and so on. Now suppose Patty chooses to work for 1 hour. Compare her total profit from working for 1 hour with her total profit from working the optimal number of hours. How much would she lose by working for only 1 hour?

Patty's loss from working for only 1 hour instead of 3 hours is 44$-20$-$21

A new vaccine against a deadly disease has just been discovered. Presently, 55 people die from the disease each year. The new vaccine will save lives, but it is not completely safe. Some recipients of the shots will die from adverse reactions. The projected effects of the inoculation are given in the accompanying table: What proportion of the population should optimally be inoculated?

People should be inoculated until the marginal cost equals the marginal benefit from the inoculations. This occurs when MB MC 5, at which point 50% or 60% of the population should be inoculated (both result in the greatest number of lives saved).

The accompanying table shows the price and yearly quantity sold of souvenir T-shirts in the town of Crystal Lake according to the average income of the tourists visiting. Price of T-shirt $4 5 6 7 Quantity of T-shirts demanded when average tourist income is $20,000 $3000 2400 1600 800 Quantity of T-shirts demanded when average tourist income is $30,000 $5000 4200 3000 1800 Using the midpoint method, calculate the price elasticity of demand when the price of a T-shirt rises from $5 to $6 and the average tourist income is $20,000. Also calculate it when the average tourist income is $30,000.

Price elasticity of demand is 2.2 for 20,000 price elasticity of demand is 1.8 for 30,000

Labor costs represent a large percentage of total costs for many firms. According to data from the Bureau of Labor Statistics, U.S. labor costs were up 0.8% in 2013, compared to 2012. If labor costs are rising over time on average, why would a company want to adopt equipment and methods that increase labor productivity?

Rising labor costs will shift the average total cost and marginal cost curves upward. Productivity growth will counteract this, shifting the average total cost and marginal cost curves downward.

Scott finds that the higher the price of orange juice, the more money he spends on orange juice. Does that mean that Scott has discovered a Giffen good?

Scott has not necessarily discovered a Giffen good. For a good to be a Giffen good, the quantity demanded of the good has to increase as its price rises. However, Scott has only found that the amount of money he spends on purchases of orange juice has increased as its price rises. For instance, suppose the price of orange juice were to rise from $5 per half-gallon to $10 per half-gallon, and as a result Scott reduces the quantity of orange juice demanded from 3 half-gallons to 2 half-gallons. This means that orange juice is not a Giffen good, since the quantity demanded decreases as the price rises. However, Scott's spending on orange juice would have increased from $5 3 $15 to $10 2 $20. So an increase in spending on a good as its price rises need not necessarily imply that the good is a Giffen good.

The accompanying table presents prices for washing and ironing a man's shirt taken from a survey of California dry cleaners. Assume that California Cleaners now charges the new average price and just breaks even (that is, makes zero economic profit) at this price. Show the likely effect of the entry on your diagram in part b.

Since California Cleaners breaks even at $2.20 a shirt, it must be operating at the minimum of its average total cost curve. The likely effect on the diagram in part b is shown below. GRAPH

Changes in the price of key commodities have a significant impact on a company's bottom line. For virtually all companies, the price of energy is a substantial portion of their costs. In addition, many industries—such as those that produce beef, chicken, high-fructose corn syrup and ethanol—are highly dependent on the price of corn. In particular, corn has seen a significant increase in price. Explain why the cost of corn is a variable cost but not a fixed cost for an ethanol producer.

Since corn is an input into the production of ethanol, producing a larger quantity of ethanol requires a larger quantity of corn, making corn a variable cost.

Use the demand schedule for diamonds given in Problem 5. De Beers is a monopolist, but it can now price-discriminate perfectly among all five of its potential customers. De Beers's marginal cost is constant at $100. There is no fixed cost. How large is each individual consumer surplus? How large is total consumer surplus? Calculate producer surplus by summing the producer surplus generated by each sale.

Since each consumer is charged exactly her willingness to pay, there is no con- summer surplus. De Beers's producer surplus is $400 −$100 $300 from selling to Raquel; $300 −$100 $200 from selling to Jackie; $200 −$100 $100 from selling to Joan; $100 −$100 $0 from selling to Mia. So producer surplus is $300 $200 $100 $0 $600.

The accompanying table presents prices for washing and ironing a man's shirt taken from a survey of California dry cleaners. If the dry cleaning industry is perfectly competitive, what does the average difference in price between Goleta and Santa Barbara imply about costs in the two areas?

Since, in the long run, firms break even in a perfectly competitive industry, costs have to be higher in Goleta than in Santa Barbara

A new vaccine against a deadly disease has just been discovered. Presently, 55 people die from the disease each year. The new vaccine will save lives, but it is not completely safe. Some recipients of the shots will die from adverse reactions. The projected effects of the inoculation are given in the accompanying table: What are the interpretations of "marginal benefit" and "marginal cost" here? Calculate marginal benefit and marginal cost per each 10% increase in the rate of inoculation. Write your answers in the table.

The "marginal benefit" is the additional lives saved due to inoculation. The "marginal cost" is the additional deaths due to inoculation. The values are given in the accompanying table.

Each of the following firms possesses market power. Explain its source. The Walt Disney Company, the creators of Mickey Mouse

The Walt Disney Company has the copyright over animations featuring Mickey Mouse. This is another example of a government-created barrier to entry that gives the Walt Disney Company market power.

The accompanying table shows a car manufacturer's total cost of producing cars. For each level of output, calculate the variable cost (VC). For each level of output except zero output, calculate the average variable cost (AVC), average total cost (ATC), and average fixed cost (AFC). What is the minimum-cost output?

The accompanying table shows VC, calculated as TC −FC; AVC, calculated as VC/Q; ATC, calculated as TC/Q; and AFC, calculated as FC/Q. (Numbers are rounded.) The minimum-cost output is 8 cars, the level at which ATC is minimized. With 100$

Consider Don's concrete-mixing business described in Problem 12. Assume that Don purchased 3 trucks, expecting to produce 40 orders per week. What is Don's long-run average total cost for 20 orders per week? Explain why his short-run average total cost of producing 20 orders per week when the number of trucks is fixed at 3 is greater than his long-run average total cost of producing 20 orders per week.

The long-run average total cost of producing 20 orders per week is $400 because Don would choose the number of trucks (2 trucks) that minimizes the total cost of producing 20 orders. His short-run average total cost is greater than the long- run minimum because, using 3 trucks, the level of the fixed input is greater than he needs to optimally produce 20 orders per week.

Suppose that De Beers is a single-price monopolist in the diamond market. De Beers has five potential customers: Raquel, Jackie, Joan, Mia, and Sophia. Each of these customers will buy at most one diamond—and only if the price is just equal to, or lower than, her willingness to pay. Raquel's willingness to pay is $400; Jackie's, $300; Joan's, $200; Mia's, $100; and Sophia's, $0. De Beers's marginal cost per diamond is $100. The result is a demand schedule for diamonds as follows: Add the marginal cost curve to your diagram from part a and determine which quantity maximizes De Beers's profit and which price De Beers will charge.

The marginal cost (MC) curve is constant at $100, as shown in the diagram. Marginal revenue equals marginal cost at a quantity of 2 diamonds. So De Beers will sell 2 diamonds at a price of $300 each.

The accompanying table presents prices for washing and ironing a man's shirt taken from a survey of California dry cleaners. Draw typical marginal cost and average total cost curves for California Cleaners in Goleta, assuming it is a perfectly competitive firm but is making a profit on each shirt in the short run. Mark the short-run equilibrium point and shade the area that corresponds to the profit made by the dry cleaner.

The marginal cost curve (MC) cuts through the average total cost curve (ATC) at the lowest point of the ATC curve. Since California Cleaners is making a profit, price has to be above the break-even price (the minimum average total cost). Given this, California cleaners maximizes its profit by producing quantity Q1 in the accompanying diagram- the quantity at which its marginal cost equals the market price. GRAPH.

Magnificent Blooms is a florist specializing in floral arrangements for weddings, graduations, and other events. Magnificent Blooms has a fixed cost associated with space and equipment of $100 per day. Each worker is paid $50 per day. The daily production function for Magnificent Blooms is shown in the accompanying table. Calculate the marginal cost of each level of output. What principle explains why the marginal cost per floral arrangement increases as the number of arrangements increases?

The marginal cost, MC, of floral arrangements is the change in total cost divided by the change in output. So, to compute MC, we first need to compute total cost, TC FC + VC, as shown in the table. MC per floral arrangement is also shown in the table. MC increases as output increases due again to the principle of diminishing returns.

Marty's Frozen Yogurt is a small shop that sells cups of frozen yogurt in a university town. Marty owns three frozen-yogurt machines. His other inputs are refrigerators, frozen-yogurt mix, cups, sprinkle toppings, and, of course, workers. He estimates that his daily production function when he varies the number of workers employed (and at the same time, of course, yogurt mix, cups, and so on) is as shown in the accompanying table. What is the marginal product of the first worker? The second worker? The third worker? Why does marginal product decline as the number of workers increases?

The marginal product, MPL, of the first worker is 110 cups. The MPL of the second worker is 90 cups. The MPL of the third worker is 70 cups. The MPL of labor declines as more and more workers are added due to the principle of diminishing returns to labor. Since the number of frozen-yogurt machines is fixed, as workers are added there are fewer and fewer machines for each worker to work with, making each additional worker less and less productive.

Prior to the late 1990s, the same company that generated your electricity also distributed it to you over high-voltage lines. Since then, 16 states and the District of Columbia have begun separating the generation from the distribution of electricity, allowing competition between electricity generators and between electricity distributors. Assume that the market for electricity distribution was and remains a natural monopoly. Use a graph to illustrate the market for electricity distribution if the government sets price equal to average total cost.

The market for electricity distribution is shown in panel (a) of the accompanying diagram. Electricity distribution has the characteristics of a natural monopoly: the large fixed cost of building the electric grid, combined with the low marginal cost of routing electricity over the grid, give this industry increasing returns to scale over the relevant output range. If the government sets the price equal to average total cost, at Pr1, the natural monopolist will produce quantity Qr. In this case, the monopolist will make zero economic profit.

The first sushi restaurant opens in town. Initially people are very cautious about eating tiny portions of raw fish, as this is a town where large portions of grilled meat have always been popular. Soon, however, an influential health report warns consumers against grilled meat and suggests that they increase their consumption of fish, especially raw fish. The sushi restaurant becomes very popular and its profit increases. Local steakhouses suffer from the popularity of sushi and start incurring losses. What will happen to the number of steakhouses in town in the long run? Explain your answer.

The number of steakhouses in town will decrease in the long run, as owners incur losses and exit from the industry.

A monopolist knows that in order to expand the quantity of output it produces from 8 to 9 units it must lower the price of its output from $2 to $1. Calculate the quantity effect and the price effect. Use these results to calculate the monopolist's marginal revenue of producing the 9th unit. The marginal cost of producing the 9th unit is positive. Is it a good idea for the monopolist to produce the 9th unit?

The quantity effect is $1 (the increase in total revenue from selling the 9th unit at $1). The price effect is 8 (−$1) −$8 (the decrease in total revenue from having to lower the price of 8 units by $1 each). So the marginal revenue of producing the 9th unit is $1 −$8 −$7. Since marginal revenue is negative, producing the 9th unit is definitely not a good idea: it lowers revenue (since marginal revenue is negative), and it increases the total cost (since marginal cost is positive). So it will definitely lower profit. Instead, the monopolist should produce less output.

A perfectly competitive firm has the following short-run total cost: Market demand for the firm's product is given by the following market demand schedule: What is the market price, and how much profit will each firm make?

The quantity supplied equals the quantity demanded at a price of $10—the (short- run) market equilibrium price. So the quantity bought and sold in this market is 500 units. Each firm will maximize profit by producing 5 units of output—the greatest quantity at which price equals or exceeds marginal cost. At 5 units of out- put, each firm's revenue is $10 5 $50. Its total cost is $34. So it makes a profit of $16.

The first sushi restaurant opens in town. Initially people are very cautious about eating tiny portions of raw fish, as this is a town where large portions of grilled meat have always been popular. Soon, however, an influential health report warns consumers against grilled meat and suggests that they increase their consumption of fish, especially raw fish. The sushi restaurant becomes very popular and its profit increases. What will happen to the short-run profit of the sushi restaurant? What will happen to the number of sushi restaurants in town in the long run? Will the first sushi restaurant be able to sustain its short-run profit over the long run? Explain your answers.

The short-run profit of the sushi restaurant will rise, inducing others to open sushi restaurants. The number of sushi restaurants in town will increase. Over time, as the supply of sushi restaurants increases, the equilibrium price of sushi will decrease, lowering the short-run profit of the original sushi restaurant.

The accompanying table shows a car manufacturer's total cost of producing cars. For each level of output, calculate this manufacturer's marginal cost (MC).

The table also shows MC, the additional cost per additional car produced. Notice that MC is below ATC for levels of output less than the minimum-cost output and above ATC for levels of output greater than the minimum-cost output.

A perfectly competitive firm has the following short-run total cost: Market demand for the firm's product is given by the following market demand schedule: There are 100 firms in this industry that all have costs identical to those of this firm. Draw the short-run industry supply curve. In the same diagram, draw the market demand curve.

This firm's minimum average variable cost is $4 at 2 units of output. So the firm will produce only if the price is greater than $4, making its individual supply curve the same as its marginal cost curve above the shut-down price of $4. The same is true for all other firms in the industry. That is, if the price is $4, the quantity sup- plied by all 100 firms is 200. The quantity supplied by all 100 firms at a price of $6 is 300, and so on. The accompanying diagram illustrates this principle.

A recent study determined the following elasticities for Volkswagen Beetles: price elasticity of demand=2 income elasticity of demand=1.5 The supply of Beetles is elastic. Based on this information, are the following statements true or false? Explain your reasoning. A 10% increase in the price of a Beetle will reduce the quantity demanded by 20%.

True

Wolfsburg Wagon (WW) is a small automaker. The accompanying table shows WW's long-run average total cost. For which levels of output does WW experience constant returns to scale?

WW's long-run average total cost is constant over the range of output between 4 and 6 cars. So over that range, WW experiences constant returns to scale.

Wolfsburg Wagon (WW) is a small automaker. The accompanying table shows WW's long-run average total cost. For which levels of output does WW experience decreasing returns to scale?

WW's long-run average total cost is increasing over the range of output between 6 and 8 cars. So over that range, WW experiences decreasing returns to scale.

Wolfsburg Wagon (WW) is a small automaker. The accompanying table shows WW's long-run average total cost. For which levels of output does WW experience increasing returns to scale?

WWs long-run average total cost is decreasing over the range of output between 1 and 4 cars. So over that range, WW experiences increasing returns to scale.

The production of agricultural products like wheat is one of the few examples of a perfectly competitive industry. In this question, we analyze results from a study released by the U.S. Department of Agriculture about wheat production in the United States back in 2013. The average price of wheat received by a farmer in 2013 was $7.58 per bushel. Do you think the average farm would have exited the industry in the short run? Explain.

We would not expect the average farm to have exited the industry in the short run because the price it received for wheat, $7.58 per bushel, was greater than the average variable cost of production, $2.88 per bushel.

Jimmy's room overlooks a major league baseball stadium. He decides to rent a telescope for $50.00 a week and charge his friends to use it to peep at the games for 30 seconds. He can act as a single-price monopolist for renting out "peeps." For each person who takes a 30-sec-ond peep, it costs Jimmy $0.20 to clean the eyepiece. This table shows the information Jimmy has gathered about the weekly demand for the service. Jimmy's landlady complains about all visitors and tells him to stop selling peeps. But, if he pays her $0.20 for every peep he sells, she won't complain. What effect does the $0.20-per-peep bribe have on Jimmy's marginal cost per peep? What is the new profit-maximizing quantity of peeps? What effect does the $0.20-per-peep bribe have on Jimmy's total profit?

When Jimmy pays the landlady $0.20 per peep, his marginal cost increases to $0.40 per peep, so the profit-maximizing quantity decreases to 200 and the profit- maximizing price increases to $0.80. His total profit will now be (200 $0.80) −(200 $0.40) −$50.00 $30.00.

Changes in the price of key commodities have a significant impact on a company's bottom line. For virtually all companies, the price of energy is a substantial portion of their costs. In addition, many industries—such as those that produce beef, chicken, high-fructose corn syrup and ethanol—are highly dependent on the price of corn. In particular, corn has seen a significant increase in price. Suppose energy is a fixed cost and energy prices rise. What happens to the company's average total cost curve? What happens to its marginal cost curve? Illustrate your answer with a diagram.

When fixed costs increase, so will average total costs. The average total cost curve will shift upward. In panel (a) of the accompanying diagram, this is illustrated by the movement of the average total cost curve from its initial position,ATC1, to its new poaition, ATC2. The marginal curve is not affected if the variable costs do not change. So the marginal cost curve remains at its initial position, MC

Labor costs represent a large percentage of total costs for many firms. According to data from the Bureau of Labor Statistics, U.S. labor costs were up 0.8% in 2013, compared to 2012. When labor costs increase, what happens to average total cost and marginal cost? Consider a case in which labor costs are only variable costs and a case in which they are both variable and fixed costs.

When labor costs are a variable cost but not a fixed cost, an increase in labor costs leads to an increase in both average total cost and marginal cost. When labor costs are a variable cost and a fixed cost, the result is the same: both the average total cost and the marginal cost increase.

Labor costs represent a large percentage of total costs for many firms. According to data from the Bureau of Labor Statistics, U.S. labor costs were up 0.8% in 2013, compared to 2012. When productivity growth is positive, what happens to the total product curve and the marginal product of labor curve? Illustrate your answer with a diagram.

When productivity growth is positive, any given quantity of labor can produce more output, causing the total product curve to shift upward. Since each unit of labor can produce more output, the marginal product of labor will increase and the marginal product of labor curve will shift upward. In panel (a) of the accompanying diagram, the upward shift of the total product curve is illustrated by the movement from its initial position, TP1, to its new position, TP2. In panel (b), the upward shift of the marginal product of labor curve is illustrated by the movement from its initial position, MPL1, to its new position, MPL2.

Labor costs represent a large percentage of total costs for many firms. According to data from the Bureau of Labor Statistics, U.S. labor costs were up 0.8% in 2013, compared to 2012. When productivity growth is positive, what happens to the marginal cost curve and the average total cost curve? Illustrate your answer with a diagram.

When productivity growth is positive, the marginal cost curve and the average total cost curve will both shift downward, assuming labor costs have not changed. In the accompanying diagram, the movement of the average total cost curve is illustrated by the shift from its initial position, ATC1, to its new position, ATC2. The movement of the marginal cost curve is illustrated by the shift from its initial position, MC1, to its new position, MC2.

Kate's Katering provides catered meals, and the catered meals industry is perfectly competitive. Kate's machinery costs $100 per day and is the only fixed input. Her variable cost consists of the wages paid to the cooks and the food ingredients. The variable cost per day associated with each level of output is given in the accompanying table. Suppose that the price at which Kate can sell catered meals is $13 per meal. In the short run, will Kate earn a profit? In the short run, should she produce or shut down?

When the price is $13, Kate would incur a loss if she were to produce: the price is below her break-even price. And since the price is also below her shut-down price, Kate should shut down in the short run.

Kate's Katering provides catered meals, and the catered meals industry is perfectly competitive. Kate's machinery costs $100 per day and is the only fixed input. Her variable cost consists of the wages paid to the cooks and the food ingredients. The variable cost per day associated with each level of output is given in the accompanying table. Suppose that the price at which Kate can sell catered meals is $21 per meal. In the short run, will Kate earn a profit? In the short run, should she produce or shut down?

When the price is $21, Kate will make a profit: the price is above her break-even price. And since the price is above her shut-down price, Kate should produce in the short run, not shut down.

Bob produces Blu-ray movies for sale, which requires a building and a machine that copies the original movie onto a Blu-ray. Bob rents a building for $30,000 per month and rents a machine for $20,000 a month. Those are his fixed costs. His variable cost per month is given in the accompanying table. There is free entry into the industry, and anyone who enters will face the same costs as Bob. Suppose that currently the price of a Blu-ray is $25. What will Bob's profit be? Is this a long-run equilibrium? If not, what will the price of Blu-ray movies be in the long run?

When the price is $25, Bob will sell 8,000 DVDs per month and make a profit of $78,000. If there is free entry into the industry, this profit will attract new firms. As firms enter, the price of DVDs will eventually fall until it is equal to the mini- mum average total cost. Here, the average total cost reaches its minimum of $13.83 at 6,000 DVDs per month. So the long-run price of DVDs will be $13.83.

Changes in the price of key commodities have a significant impact on a company's bottom line. For virtually all companies, the price of energy is a substantial portion of their costs. In addition, many industries—such as those that produce beef, chicken, high-fructose corn syrup and ethanol—are highly dependent on the price of corn. In particular, corn has seen a significant increase in price. When the cost of corn goes up, what happens to the average total cost curve of an ethanol producer? What happens to its marginal cost curve? Illustrate your answer with a diagram.

When variable costs increase, so do average total costs and marginal costs. Both curves will shift upward. In panel (b) of the accompanying diagram, the movement of the average total cost curve is illustrated by the shift from its initial position, ATC1 to its new position, ATC2. The movement of the marginal cost curve is illustrated by the shift from its initial position, MC1, to its new position, MC2.

For each of the following, is the industry perfectly competitive? Referring to market share, standardization of the product, and/or free entry and exit, explain your answers. Aspirin

Yes, aspirin is produced in a perfectly competitive industry. Many manufacturers produce aspirin, the product is standardized, and new manufacturers can easily enter and existing manufacturers can easily exit the industry.

Restaurant meals and housing (measured in the number of rooms) are the only two goods that Neha buys. She has income of $1,000. Initially, she buys a consumption bundle such that she spends exactly half her income on restaurant meals and the other half of her income on housing. Then her income increases by 50%, but the price of restaurant meals increases by 100% (it doubles). The price of housing remains the same. After these changes, if she wanted to, could Neha still buy the same consumption bundle as before?

Yes, she could. If she spends equally as much money on housing as before, she gets the same number of rooms as before (the price of housing has not changed). However, she now has twice as much money left over as before to spend on restaurant meals (her income increased by 50%). But the price of restaurant meals has doubled also, so she could still buy the same quantity of restaurant meals as before.

What can you conclude about the price elasticity of demand in each of the following statements? "The pizza delivery business in this town is very competitive. I'd lose half my customers if I raised the price by as little as 10%."

a 10% increase in price reduces quantity demanded by 50%. the price elasticity of demand is -50%/10%=-5%. demand is elastic

You own and operate a bike store. Each year, you receive revenue of $200,000 from your bike sales, and it costs you $100,000 to obtain the bikes. In addition, you pay $20,000 for electricity, taxes, and other expenses per year. Instead of running the bike store, you could become an accountant and receive a yearly salary of $40,000. A large clothing retail chain wants to expand and offers to rent the store from you for $50,000 per year. How do you explain to your friends that despite making a profit, it is too costly for you to continue running your store?

accounting profit- 80,000 economic profit- 10,000 you would be better off renting the store to the large chain and becoming an accountant yourself, since your opportunity cost of continuing to run the store is too high

For each of the following situations, decide whether Al has diminishing marginal utility. Explain. Al enjoys watching reruns of the old sitcom Friends. He claims that these episodes are always funny, but he does admit that the more he sees an episode, the less funny it gets.

al has diminishing marginal utility of friends episodes

For each of the following situations, decide whether Al has diminishing marginal utility. Explain. Al loves toasted marshmallows. The more he eats, however, the fuller he gets and the less he enjoys each additional marshmallow. And there is a point at which he becomes satiated: beyond that point, more marshmallows actually make him feel worse rather than better.

al has diminishing marginal utility of marshmallows

For each of the following situations, decide whether Al has diminishing marginal utility. Explain. The more economics classes Al takes, the more he enjoys the subject. And the more classes he takes, the easier each one gets, making him enjoy each additional class even more than the one before.

al has increasing marginal utility of economic classes. each class adds moe total utility than previous class

Amy, Bill, and Carla all mow lawns for money. Each of them operates a different lawn mower. The accompanying table shows the total cost to Amy, Bill, and Carla of mowing lawns. Who has increasing marginal cost, who has decreasing marginal cost, and who has constant marginal cost?

amy has decreasing marginal cost bill has constant marginal cost carla has increasing marginal cost

Worldwide, the average coffee grower has increased the amount of acreage under cultivation over the past few years. The result has been that the average coffee plantation produces significantly more coffee than it did 10 to 20 years ago. Unfortunately for the growers, however, this has also been a period in which their total revenues have plunged. In terms of an elasticity, what must be true for these events to have occurred? Illustrate these events with a diagram, indicating the quantity effect and the price effect that gave rise to these events.

an increased amount of acreage that is cultivated results in rightward shift in supply curve, this also reduces the price of coffee and increases the quantity demanded. true-the price effect must have outweighed the quantity effect. demand is inelastic. quantity effect-quantity demanded increases resulting increases total revenue. price effect- total revenue falls

Take a linear demand curve like that shown in Figure 6-5, where the range of prices for which demand is elastic and inelastic is labeled. In each of the following scenarios, the supply curve shifts. Show along which portion of the demand curve (that is, the elastic or the inelastic portion) the supply curve must have shifted in order to generate the event described. In each case, show on the diagram the quantity effect and the price effect. Recent attempts by the Colombian army to stop the flow of illegal drugs into the United States have actually benefited drug dealers.

attempts to stop flow of drugs in the u.s shifts supply curve leftward, raising price of drugs and reducing the quantity demanded. revenue decreases by area B but increases by Area A.

In each of the following examples, explain whether the decision is rational or irrational. Describe the type of behavior exhibited. Barry considers himself an excellent investor in stocks. He selects new stocks by finding ones with characteristics similar to those of his previous winning stocks. He chocks up losing trades to ups and downs in the macroeconomy.

barry is behaving irrationally, overestimating his stock picking ability

Assess the following four tax policies in terms of the benefits principle versus the ability-to-pay principle. A reduction in the amount of income tax paid based on the number of dependent children in the household.

based on the ability-to-pay principle. people who have more dependent children in their households will have higher expenses and so are less able to pay a given amount of income taxes, other things equal

Assess the following four tax policies in terms of the benefits principle versus the ability-to-pay principle. An 8% tax on imported goods valued in excess of $800 per household brought in on passenger flights

based on the ability-to-pay, since the people paying the tax will presumably be individuals who buy expensive items abroad and then import them on passenger flights

Assess the following four tax policies in terms of the benefits principle versus the ability-to-pay principle. Airline-flight landing fees that pay for air traffic control

based on the benefit principle, since the airlines pay the landing fee and are also the beneficiary of air traffic control services

Assess the following four tax policies in terms of the benefits principle versus the ability-to-pay principle. A tax on gasoline that finances maintenance of state roads

based on the benefit principle, since the people who use the states roads will be the ones paying the gasoline tax

In Transylvania the basic income tax system is fairly simple. The first 40,000 sylvers (the official currency of Transylvania) earned each year are free of income tax. Any additional income is taxed at a rate of 25%. In addition, every individual pays a social security tax, which is calculated as follows: all income up to 80,000 sylvers is taxed at an additional 20%, but there is no additional social security tax on income above 80,000 silvers. Which income group's incentives are most adversely affected by the combined income and social security tax systems?

between 40,000 and 80,000 because they have the highest marginal tax rate 45%

Cal "Cool" Cooper has $200 to spend on cell phones and sunglasses. How does Cal's consumption of cell phones change as the price of cell phones falls? In words, describe the income effect and the substitution effect of this fall in the price of cell phones, assuming that cell phones are a normal good.

cal's consumption of phones increases from 1 to 2 as the price of cells phones falls. this is due to substitute and income effect. cal's consumption of cell phones increases.

In 1990, the United States began to levy a tax on sales of luxury cars. For simplicity, assume that the tax was an excise tax of $6,000 per car. The accompanying figure shows hypothetical demand and supply curves for luxury cars. After the reduction in the excise tax from $6,000 to $4,500 per car, what is the price paid by consumers? What is the price received by producers? What is tax revenue now?

consumer is now 53,000. price is received by producer is 48,500. gov't tax revenue is 4,500 x 60,000 cars= 270 million

Consider the original market for pizza in Collegetown, illustrated in the accompanying table. Collegetown officials decide to impose an excise tax on pizza of $4 per pizza. Calculate the consumer surplus and the producer surplus after the imposition of the tax. By how much has the imposition of the tax reduced consumer surplus? By how much has it reduced producer surplus?

consumer purchase is now zero consumer surplus is reduced by $3 producer surplus is zero reduced by 3$

In each of the following examples, explain whether the decision is rational or irrational. Describe the type of behavior exhibited. In 2010, the Panera Bread company opened a store in Clayton, Missouri, that allowed customers to pay any amount they like for their orders; instead of prices, the store listed suggested donations based on the cost of the goods. All profits went to a charitable foundation set up by Panera. In 2011, the store was pleased with the success of the program.

customers are behaving rationally, exhibiting concerns about fairness

In the United States, each state government can impose its own excise tax on the sale of cigarettes. Suppose that in the state of North Texarkana, the state government imposes a tax of $2.00 per pack sold within the state. In contrast, the neighboring state of South Texarkana imposes no excise tax on cigarettes. Assume that in both states the pre-tax price of a pack of cigarettes is $1.00. Assume that the total cost to a resident of North Texarkana to smuggle a pack of cigarettes from South Texarkana is $1.85 per pack. (This includes the cost of time, gasoline, and so on.) Assume that the supply curve for cigarettes is neither perfectly elastic nor perfectly inelastic. Draw a corresponding diagram showing a situation in which it does not make economic sense for a North Texarkanan to smuggle a pack of cigarettes from South Texarkana to North Texarkana. Explain your diagram.

demand is less elastic. as results consumer pay an after tax price of $2.50. this case does not make smuggling an economic choice.

In the United States, each state government can impose its own excise tax on the sale of cigarettes. Suppose that in the state of North Texarkana, the state government imposes a tax of $2.00 per pack sold within the state. In contrast, the neighboring state of South Texarkana imposes no excise tax on cigarettes. Assume that in both states the pre-tax price of a pack of cigarettes is $1.00. Assume that the total cost to a resident of North Texarkana to smuggle a pack of cigarettes from South Texarkana is $1.85 per pack. (This includes the cost of time, gasoline, and so on.) Assume that the supply curve for cigarettes is neither perfectly elastic nor perfectly inelastic. Suppose the demand for cigarettes in North Texarkana is perfectly inelastic. How high could the cost of smuggling a pack of cigarettes go until a North Texarkanan no longer found it profitable to smuggle?

demand is perfectly inelastic. cost of smuggling can be as high as 1.99. at cost of 2.00 smuggling would be indifferent.

Do you think the price elasticity of demand for Ford sport-utility vehicles (SUVs) will increase, decrease, or remain the same when each of the following events occurs? The time period over which you measure the elasticity lengthens. During that longer time, new models such as four-wheel-drive cargo vans appear.

price elasticity of demand for ford SUV's will increase over time because more substitutes become available

In the United States, each state government can impose its own excise tax on the sale of cigarettes. Suppose that in the state of North Texarkana, the state government imposes a tax of $2.00 per pack sold within the state. In contrast, the neighboring state of South Texarkana imposes no excise tax on cigarettes. Assume that in both states the pre-tax price of a pack of cigarettes is $1.00. Assume that the total cost to a resident of North Texarkana to smuggle a pack of cigarettes from South Texarkana is $1.85 per pack. (This includes the cost of time, gasoline, and so on.) Assume that the supply curve for cigarettes is neither perfectly elastic nor perfectly inelastic. Draw a diagram of the supply and demand curves for cigarettes in North Texarkana showing a situation in which it makes economic sense for a North Texarkanan to smuggle a pack of cigarettes from South Texarkana to North Texarkana. Explain your diagram.

demand is relatively inelastic. it would cost 2.85$ to purchase and smuggle in this situation. North texarkana would be better off smuggling rather than purchasing cigs in North T

What can you conclude about the price elasticity of demand in each of the following statements? I always spend a total of exactly $10 per week on coffee."

demand is unit-elastic

The accompanying table gives part of the supply schedule for personal computers in the United States. Price of computer | Quantity of computers supplied $1,100 12,000 900 8,000 Suppose firms produce 1,000 more computers at any given price due to improved technology. As price increases from $900 to $1,100, is the price elasticity of supply now greater than, less than, or the same as it was in part a?

elasticty estimate would be lower price change 20% part A. new price elasticity of supply is 36%/20%= 1.8 which is less than part a.

A recent study determined the following elasticities for Volkswagen Beetles: price elasticity of demand=2 income elasticity of demand=1.5 The supply of Beetles is elastic. Based on this information, are the following statements true or false? Explain your reasoning. An increase in consumer income will increase the price and quantity of Beetles sold.

false

Cal "Cool" Cooper has $200 to spend on cell phones and sunglasses. The price of cell phones falls to $50 each, but the price of sunglasses remains at $50 per pair. Which bundles lie on Cal's budget line? Draw a diagram like Figure 10-4 in which both the marginal utility per dollar spent on cell phones and the marginal utility per dollar spent on sunglasses are illustrated. Use this diagram and the utility-maximizing principle of marginal analysis to decide how Cal should allocate his money. That is, from all the bundles on his budget line, which bundle will Cal choose? The accompanying table gives his utility of cell phones and sunglasses.

from all the bundles the marginal utility of phones is the same as the marginal utility of glasses at 2 phones and 2 pairs of glasses

Assume De Beers is the sole producer of diamonds. When it wants to sell more diamonds, it must lower its price in order to induce shoppers to buy more. Furthermore, each additional diamond that is produced costs more than the previous one due to the difficulty of mining for diamonds. De Beers's total benefit schedule is given in the accompanying table, along with its total cost schedule. Calculate the total profit to De Beers from producing each quantity of diamonds. Which quantity gives De Beers the highest total profit?

greatest total net gain is 5 diamonds

group A price elasticity of demand is 0.625(inelastic), total revenue will decreases. as result of discount. Group B since PED is 1.25(elastic). total revenue will increase as a result of the discount.

Hiro owns and operates a small business that provides economic consulting services. During the year he spends $57,000 on travel to clients and other expenses. In addition, he owns a computer that he uses for business. If he didn't use the computer, he could sell it and earn yearly interest of $100 on the money created through this sale. Hiro's total revenue for the year is $100,000. Instead of working as a consultant for the year, he could teach economics at a small local college and make a salary of $50,000. What is Hiro's accounting profit?

hero accounting profit is 43,000$

hires economic profit is 7,100$

In each of the following cases involving taxes, explain: (i) whether the incidence of the tax falls more heavily on consumers or producers, (ii) why government revenue raised from the tax is not a good indicator of the true cost of the tax, and (iii) how deadweight loss arises as a result of the tax. The government imposes an excise tax on the sale of all toothbrushes. Before the tax, 2 million toothbrushes were sold every year at a price of $1.50. After the tax is imposed, 800,000 toothbrushes are sold every year; consumers pay $2 per toothbrush, $1.25 of which producers receive.

i- consumers ii-same as others iii- same as others

In each of the following cases involving taxes, explain: (i) whether the incidence of the tax falls more heavily on consumers or producers, (ii) why government revenue raised from the tax is not a good indicator of the true cost of the tax, and (iii) how deadweight loss arises as a result of the tax. The government imposes an excise tax on the sale of all college textbooks. Before the tax was imposed, 1 million textbooks were sold every year at a price of $50. After the tax is imposed, 600,000 books are sold yearly; students pay $55 per book, $30 of which publishers receive.

i- producers ii- poor estimate of the true cost because it doesn't take in the fact that 400,000 potential consumers already bought the book iii- deadweight loss arises because consumer and producer loss surplus that is not captured as gov't revenue

In each of the following cases involving taxes, explain: (i) whether the incidence of the tax falls more heavily on consumers or producers, (ii) why government revenue raised from the tax is not a good indicator of the true cost of the tax, and (iii) how deadweight loss arises as a result of the tax. The government imposes an excise tax on the sale of all airline tickets. Before the tax was imposed, 3 million airline tickets were sold every year at a price of $500. After the tax is imposed, 1.5 million tickets are sold yearly; travelers pay $550 per ticket, $450 of which the airlines receive.

i- split evenly ii- poor estimate of true cost because 1.5 mill potential consumer would have bought the tickets already iii- deadweight arise because C and P loss surplus that is not captured by gov't revenue

Use the demand schedule for diamonds given in Problem 5. De Beers is a monopolist, but it can now price-discriminate perfectly among all five of its potential customers. De Beers's marginal cost is constant at $100. There is no fixed cost. If De Beers can price-discriminate perfectly, to which customers will it sell diamonds and at what prices?

if De Beers can price-discriminate perfectly, it will charge each customer that cus- tomer's willingness to pay. That is, it will charge Raquel $400, Jackie $300, Joan $200, and Mia $100. De Beers does not want to sell to Sophia since she will only buy at a price of $0, and that would be below De Beers's marginal cost.

Nile.com, the online bookseller, wants to increase its total revenue. One strategy is to offer a 10% discount on every book it sells. Nile.com knows that its customers can be divided into two distinct groups according to their likely responses to the discount. The accompanying table shows how the two groups respond to the discount. Suppose Nile.com knows which group each customer belongs to when he or she logs on and can choose whether or not to offer the 10% discount. If Nile.com wants to increase its total revenue, should discounts be offered to group A or to group B, to neither group, or to both groups?

if Nile.com wants to increases revenue, it should not offer the discount to group A and it should offer the discount to group B.

Download Records decides to release an album by the group Mary and the Little Lamb. It produces the album with no fixed cost, but the total cost of creating a digital album and paying Mary her royalty is $6 per album. Download Records can act as a single-price monopolist. Its marketing division finds that the demand schedule for the album is as shown in the accompanying table. The marginal cost of producing each album is constant at $6. To maximize profit, what level of output should Download Records choose, and which price should it charge for each album?

if the marginal cost of each album is $6, download records will maximize profit by producing 4,000 albums, since for each album up to 4,000, marginal revenue is greater than marginal cost. For any further albums, marginal cost would exceed marginal revenue. Producing 4,000 albums, Download Records will charge $14 for each album.

The Collegetown movie theater serves 900 students and 100 professors in town. Each student's willingness to pay for a movie ticket is $5. Each professor's willingness to pay is $10. Each will buy only one ticket. The movie theater's marginal cost per ticket is constant at $3, and there is no fixed cost. Suppose the movie theater cannot price-discriminate and charges both students and professors the same price per ticket. If the movie theater charges $5, who will buy tickets and what will the movie theater's profit be? How large is consumer surplus?

if the movie theater charges $5perticket,bothstudentsandprofessorswillbuy tickets. The movie theater will sell to 1,000 customers (students and professors), at a price of $5 each. Since the movie theater's cost per ticket is $3, its profit is $2 per ticket for a total profit of 1,000 $2 $2,000. Students will experience no consumer surplus, but each of the 100 professors will experience consumer sur- plus of $10 −$5 $5 for a total consumer surplus of 100 $5 $500.

Use an elasticity concept to explain each of the following observations Consumers in a less developed country like Guatemala spend proportionately more of their income on equipment for producing things at home, like sewing machines, than consumers in a more developed country like Canada.

income elasticity of demand

Use an elasticity concept to explain each of the following observations During economic booms, the number of new personal care businesses, such as gyms and tanning salons, is proportionately greater than the number of other new businesses, such as grocery stores.

income elasticity of demand

In Transylvania the basic income tax system is fairly simple. The first 40,000 sylvers (the official currency of Transylvania) earned each year are free of income tax. Any additional income is taxed at a rate of 25%. In addition, every individual pays a social security tax, which is calculated as follows: all income up to 80,000 sylvers is taxed at an additional 20%, but there is no additional social security tax on income above 80,000 silvers. Is the income tax in Transylvania progressive, regressive, or proportional? Is the social security tax progressive, regressive, or proportional?

income tax- progressive social security tax- mix of progressive and regressive but regressive overall

Take a linear demand curve like that shown in Figure 6-5, where the range of prices for which demand is elastic and inelastic is labeled. In each of the following scenarios, the supply curve shifts. Show along which portion of the demand curve (that is, the elastic or the inelastic portion) the supply curve must have shifted in order to generate the event described. In each case, show on the diagram the quantity effect and the price effect. New construction increased the number of seats in the football stadium and resulted in greater total revenue from box-office ticket sales.

increase in the # of seats shift the supple curve rightward reducing the price of stadium and increasing the quantity demanded. total revenue decreases by are A but increases quantity in area B. supply curve is a vertical line because the supply of seats is inelastic.

In the United States, 2013 was a bad year for growing wheat. And as wheat supply decreased, the price of wheat rose dramatically, leading to a lower quantity demanded (a movement along the demand curve). The accompanying table describes what happened to prices and the quantity of wheat demanded. 2012 2013 Quantity demanded (bushels) 2.2 billion 2.0 billion Average price (per bushel) $3.42 $4.26 Did the bad harvest increase or decrease the total revenue of U.S. wheat farmers? How could you have predicted this from your answer to part a?

increase, the price effect of this price rise outweighs the quantity effect

Take a linear demand curve like that shown in Figure 6-5, where the range of prices for which demand is elastic and inelastic is labeled. In each of the following scenarios, the supply curve shifts. Show along which portion of the demand curve (that is, the elastic or the inelastic portion) the supply curve must have shifted in order to generate the event described. In each case, show on the diagram the quantity effect and the price effect. A fall in input prices has led to higher output of Porsches. But total revenue for the Porsche Company has declined as a result.

increasing production shifts the supply curve rightward. lowering the price of porches and increasing the quantity demanded. if this reduces total revenue, we must be on inelastic portion of the demand curve.

individual who earns less than 10,00 marginal tax rate is 100% individual who earns more than 10,000 marginal tax rate is zero individual with pre-tax income of 5000 pays 5000 individual with pre-tax income of 40,000 pays 10,000 tax is regressive

In the United States, each state government can impose its own excise tax on the sale of cigarettes. Suppose that in the state of North Texarkana, the state government imposes a tax of $2.00 per pack sold within the state. In contrast, the neighboring state of South Texarkana imposes no excise tax on cigarettes. Assume that in both states the pre-tax price of a pack of cigarettes is $1.00. Assume that the total cost to a resident of North Texarkana to smuggle a pack of cigarettes from South Texarkana is $1.85 per pack. (This includes the cost of time, gasoline, and so on.) Assume that the supply curve for cigarettes is neither perfectly elastic nor perfectly inelastic. Still assume that demand for cigarettes in North Texarkana is perfectly inelastic and that all smokers in North Texarkana are smuggling their cigarettes at a cost of $1.85 per pack, so no tax is paid. Is there any inefficiency in this situation? If so, how much per pack? Suppose chip-embedded cigarette packaging makes it impossible to smuggle cigarettes across the state border. Is there any inefficiency in this situation? If so, how much per pack?

inefficiency incurred in this situation despite the fact that no taxis paid and no transactions are discouraged, it is the $1.85 that is spent smuggling, if technology eliminated smuggling, there is no inefficiency.

Jackie owns and operates a website design business. To keep up with new technology, she spends $5,000 per year upgrading her computer equipment. She runs the business out of a room in her home. If she didn't use the room as her business office, she could rent it out for $2,000 per year. Jackie knows that if she didn't run her own business, she could return to her previous job at a large software company that would pay her a salary of $60,000 per year. Jackie has no other expenses. How much total revenue does Jackie need to make in order to break even in the eyes of her accountant? That is, how much total revenue would give Jackie an accounting profit of just zero?

jackies accounting profit is: total revenue-%5,000 for her accounting profit to be just equal to zero, her total revenue would have to be 5000

Jackie owns and operates a website design business. To keep up with new technology, she spends $5,000 per year upgrading her computer equipment. She runs the business out of a room in her home. If she didn't use the room as her business office, she could rent it out for $2,000 per year. Jackie knows that if she didn't run her own business, she could return to her previous job at a large software company that would pay her a salary of $60,000 per year. Jackie has no other expenses. How much total revenue does Jackie need to make in order for her to want to remain self-employed? That is, how much total revenue would give Jackie an economic profit of just zero?

jackies economic profit is: total revenue- $67,000 for this to be just equal to zero, jackass total revenue would have to be %67,000

In each of the following examples, explain whether the decision is rational or irrational. Describe the type of behavior exhibited. Kimora has planned a trip to Florida during spring break in March. She has several school projects due after her return. Rather than do them in February, she figures she can take her books with her to Florida and complete her projects there.

kimara is behaving irrationally, exhibiting unrealistic expectation about her future actions

In each of the following examples, explain whether the decision is rational or irrational. Describe the type of behavior exhibited. Kookie's best friend likes to give her gift cards that Kookie can use at her favorite stores. Kookie, however, often forgets to use the cards before their expiration date or loses them. Kookie, though, is careful with her own cash.

kookie is behaving irrationally, engaging in mental accounting

You are the manager of a gym, and you have to decide how many customers to admit each hour. Assume that each customer stays exactly one hour. Customers are costly to admit because they inflict wear and tear on the exercise equipment. Moreover, each additional customer generates more wear and tear than the customer before. As a result, the gym faces increasing marginal cost. The accompanying table shows the marginal costs associated with each number of customers per hour. Suppose that each customer pays $15.25 for a one-hour workout. Use the profit-maximizing principle of marginal analysis to find the optimal number of customers that you should admit per hour.

marginal benefit of each consumer is 15.25 you should admit three consumers per hour. the 4th customers (15.50) exceeds 15.25

marginal tax rate is 10% on first 10,000 of income on next 20,000 20% anything above 20,000 is 30% individual with pre-tax income of 5000 would pay 500 individual with pre-tax income of 40,000 would pay 9000 tax is progressive

marginal tax rate is zero individual with pre-tax income of 5000 would pay 0 individual with pre-tax income of 40,000 would pay 6000 tax is progressive

What can you conclude about the price elasticity of demand in each of the following statements? "My economics professor has chosen to use the Krugman/Wells textbook for this class. I have no choice but to buy this book."

no substitute available, so demand is inelastic

Georgia and Lauren are economics students who go to a karate class together. Both have to choose how many classes to go to per week. Each class costs $20. The accompanying table shows Georgia's and Lauren's estimates of the marginal benefit that each of them gets from each class per week. Use marginal analysis to find Lauren's optimal number of karate classes per week. Explain your answer.

optimal # of classes for lauren is 1. can't afford another

Assume De Beers is the sole producer of diamonds. When it wants to sell more diamonds, it must lower its price in order to induce shoppers to buy more. Furthermore, each additional diamond that is produced costs more than the previous one due to the difficulty of mining for diamonds. De Beers's total benefit schedule is given in the accompanying table, along with its total cost schedule. Draw the marginal cost curve and the marginal benefit curve and, from your diagram, graphically derive the optimal quantity of diamonds to produce.

optimal # of diamonds to produce is 5 optimal point 5 and 600

The Centers for Disease Control and Prevention (CDC) recommended against vaccinating the whole population against the smallpox virus because the vaccination has undesirable, and sometimes fatal, side effects. Suppose the accompanying table gives the data that are available about the effects of a smallpox vaccination program. Using marginal analysis, determine the optimal percentage of the population that should be vaccinated.

optimal percentage of population that should be vaccinated is 50%

patty should work for 3 hours because her marginal benefit of going from 2 hours to 3 hours (20$) exceeds the marginal cost of going from 2 hours to 3 hours. working a 4th hour is not optimal

percent change in the quantity demanded by group A is 6.25% and since the change in price is 10%, the price-elasticity of demand for group A is 0.625. percent change in the quantity demanded by groupB is 12.5% and since the change in price is 10%, the price of elasticity of demand for group B is 1.25

A recent report by the U.S. Centers for Disease Control and Prevention (CDC), published in the CDC's Morbidity and Mortality Weekly Report, studied the effect of an increase in the price of beer on the incidence of new cases of sexually transmitted disease in young adults. In particular, the researchers analyzed the responsiveness of gonorrhea cases to a tax-induced increase in the price of beer. The report concluded that "the ... analysis suggested that a beer tax increase of $0.20 per six-pack could reduce overall gonorrhea rates by 8.9%." Assume that a six-pack costs $5.90 before the price increase. Use the midpoint method to determine the percent increase in the price of a six-pack, and then calculate the cross-price elasticity of demand between beer and incidence of gonorrhea. According to your estimate of this cross-price elasticity of demand, are beer and gonorrhea complements or substitutes?

percent increase in the price of beer is 3.3% the price-cross elasticity of demand is -2.7 since the cross-price elasticity of demand is negative, beer and gonorrhea are complements.

There is a debate about whether sterile hypodermic needles should be passed out free of charge in cities with high drug use. Proponents argue that doing so will reduce the incidence of diseases, such as HIV/AIDS, that are often spread by needle sharing among drug users. Opponents believe that doing so will encourage more drug use by reducing the risks of this behavior. As an economist asked to assess the policy, you must know the following: (i) how responsive the spread of diseases like HIV/AIDS is to the price of sterile needles and (ii) how responsive drug use is to the price of sterile needles. Assuming that you know these two things, use the concepts of price elasticity of demand for sterile needles and the cross-price elasticity between drugs and sterile needles to answer the following questions. In what circumstances do you believe this is a bad policy?

policy would be bad idea of the price elasticy of demand for sterile needles is low and the cross-price elasticity of demand between drugs and needles is high and negative.

policy would be beneficial if the price elasticity of demand for sterile needles is high(elastic) and the cross-price elasticity of demand between drugs and sterile needles is negative and low

Taiwan is a major world supplier of semiconductor chips. A recent earthquake severely damaged the production facilities of Taiwanese chip-producing companies, sharply reducing the amount of chips they could produce. Assume that the total revenue of a typical non-Taiwanese chip manufacturer rises due to these events. In terms of an elasticity, what must be true for this to happen? Illustrate the change in total revenue with a diagram, indicating the price effect and the quantity effect of the Taiwan earthquake on this company's total revenue.

price effect- gain total revenue quantity effect- fall in total revenue true- price effect must outweigh the quantity effect

Use an elasticity concept to explain each of the following observations Cement is the primary building material in Mexico. After new technology makes cement cheaper to produce, the supply curve for the Mexican cement industry becomes relatively flatter.

price elasticity of demand

Use an elasticity concept to explain each of the following observations Some goods that were once considered luxuries, like a telephone, are now considered virtual necessities. As a result, the demand curve for telephone services has become steeper over time.

price elasticity of demand

Taiwan is a major world supplier of semiconductor chips. A recent earthquake severely damaged the production facilities of Taiwanese chip-producing companies, sharply reducing the amount of chips they could produce. Now assume that the total revenue of a typical non-Taiwanese chip manufacturer falls due to these events. In terms of an elasticity, what must be true for this to happen? Illustrate the change in total revenue with a diagram, indicating the price effect and the quantity effect of the Taiwan earthquake on this company's total revenue.

quantity effect must outweigh the price effect. price effect- rises revenue quantity effect- revenue Falls

In each of the following examples, explain whether the decision is rational or irrational. Describe the type of behavior exhibited. Rick has just gotten his teaching degree and has two job offers. One job, replacing a teacher who has gone on leave, will last only two years. It is at a prestigious high school, and he will be paid $35,000 per year. He thinks he will probably be able to find another good job in the area after the two years are up but isn't sure. The other job, also at a high school, pays $25,000 per year and is virtually guaranteed for five years; after those five years, he will be evaluated for a permanent teaching position at the school. About 75% of the teachers who start at the school are hired for permanent positions. Rick takes the five-year position at $25,000 per year.

rick is behaving rationally, exhibiting risk behavior

since hero's economic profit is negative, he would be better off if he didn't operate to the consulting business and taught economics instead.

The production of agricultural products like wheat is one of the few examples of a perfectly competitive industry. In this question, we analyze results from a study released by the U.S. Department of Agriculture about wheat production in the United States back in 2013. The average variable cost per acre planted with wheat was $127 per acre. Assuming a yield of 44 bushels per acre, calculate the average variable cost per bushel of wheat.

since the yield is 44 bushels per acre, we know that producing 44 bushels of wheat if=s associated wiith an average variable cost of 127. So the production of 1 bushel of wheat is associated with an average variable cost of 127/44 bushels = 2.88 per bushel.

In each of the following cases, do you think the price elasticity of supply is (i) perfectly elastic; (ii) perfectly inelastic; (iii) elastic, but not perfectly elastic; or (iv) inelastic, but not perfectly inelastic? Explain using a diagram. Owners of vacation homes in Maine rent them out during the summer. Due to the soft economy this year, a 30% decline in the price of a vacation rental leads more than half of homeowners to occupy their vacation homes themselves during the summer.

supply is elastic. price elasticity of supply is greater than 50%/30%= 1.7%

In each of the following cases, do you think the price elasticity of supply is (i) perfectly elastic; (ii) perfectly inelastic; (iii) elastic, but not perfectly elastic; or (iv) inelastic, but not perfectly inelastic? Explain using a diagram. Fewer people want to fly during February than during any other month. The airlines cancel about 10% of their flights as ticket prices fall about 20% during this month.

supply is inelastic. price does not change but the quantity supplied does change.

In each of the following cases, do you think the price elasticity of supply is (i) perfectly elastic; (ii) perfectly inelastic; (iii) elastic, but not perfectly elastic; or (iv) inelastic, but not perfectly inelastic? Explain using a diagram. The price of a kilowatt of electricity is the same during periods of high electricity demand as during periods of low electricity demand.

supply is perfectly elastic price does not change but the quantity supplied does change

In each of the following cases, do you think the price elasticity of supply is (i) perfectly elastic; (ii) perfectly inelastic; (iii) elastic, but not perfectly elastic; or (iv) inelastic, but not perfectly inelastic? Explain using a diagram. An increase in demand this summer for luxury cruises leads to a huge jump in the sales price of a cabin on the Queen Mary 2.

supply is perfectly inelastic. rightward shift in demand curve, price increases, without an increase in the quantity supplied

You are advising the government on how to pay for national defense. There are two proposals for a tax system to fund national defense. Under both proposals, the tax base is an individual's income. Under proposal A, all citizens pay exactly the same lump-sum tax, regardless of income. Under proposal B, individuals with higher incomes pay a greater proportion of their income in taxes. In terms of efficiency, which tax is better? Explain.

tax A is better because it creates a marginal tax rate of zero once tax is paid, every additional dollar earned is no longer taxed.

You are advising the government on how to pay for national defense. There are two proposals for a tax system to fund national defense. Under both proposals, the tax base is an individual's income. Under proposal A, all citizens pay exactly the same lump-sum tax, regardless of income. Under proposal B, individuals with higher incomes pay a greater proportion of their income in taxes. Is the tax in proposal A based on the ability-to-pay principle or on the benefits principle? What about the tax in proposal B?

tax A- benefit principle tax B- ability-to-pay principle

You are advising the government on how to pay for national defense. There are two proposals for a tax system to fund national defense. Under both proposals, the tax base is an individual's income. Under proposal A, all citizens pay exactly the same lump-sum tax, regardless of income. Under proposal B, individuals with higher incomes pay a greater proportion of their income in taxes. Is the tax in proposal A progressive, proportional, or regressive? What about the tax in proposal B?

tax A- regressive tax B- progressive

Assume that the demand for gasoline is inelastic and supply is relatively elastic. The government imposes a sales tax on gasoline. The tax revenue is used to fund research into clean fuel alternatives to gasoline, which will improve the air we all breathe. Is this tax based on the benefits principle or the ability-to-pay principle? Explain.

tax based on the ability-to-pay

tax policy D because people who make less than 10,000 will make nothing

The United States imposes an excise tax on the sale of domestic airline tickets. Let's assume that in 2013 the total excise tax was $6.10 per airline ticket (consisting of the $3.60 flight segment tax plus the $2.50 September 11 fee). According to data from the Bureau of Transportation Statistics, in 2013, 643 million passengers traveled on domestic airline trips at an average price of $380 per trip. The accompanying table shows the supply and demand schedules for airline trips. The quantity demanded at the average price of $380 is actual data; the rest is hypothetical. What is the government tax revenue in 2013 from the excise tax?

tax revenue 6.10per trip x 643million trips=3,922.3 million

All states impose excise taxes on gasoline. According to data from the Federal Highway Administration, the state of California imposes an excise tax of $0.40 per gallon of gasoline. In 2013, gasoline sales in California totaled 18.4 billion gallons. What was California's tax revenue from the gasoline excise tax? If California doubled the excise tax, would tax revenue double? Why or why not?

tax revenue is $0.40per gallon x 18.4 billion gallons=7.36 bill, doubling the excise tax would reduce the amount of gasoline bought and sold, and tax revenue would less than double.

the state needs to raise money, and the governor has a choice of imposing an excise tax of the same amount on one of two previously untaxed goods: the state can tax sales of either restaurant meals or gasoline. Both the demand for and the supply of restaurant meals are more elastic than the demand for and the supply of gasoline. If the governor wants to minimize the deadweight loss caused by the tax, which good should be taxed? For each good, draw a diagram that illustrates the deadweight loss from taxation.

tax should be imposed on gasoline

You work for the Council of Economic Advisers, providing economic advice to the White House. The president wants to overhaul the income tax system and asks your advice. Suppose that the current income tax system consists of a proportional tax of 10% on all income and that there is one person in the country who earns $110 million; everyone else earns less than $100 million. The president proposes a tax cut targeted at the very rich so that the new tax system would consist of a proportional tax of 10% on all income up to $100 million and a marginal tax rate of 0% (no tax) on income above $100 million. You are asked to evaluate this tax proposal. Would this tax system create more or less tax revenue, other things equal? Is this tax system more or less efficient than the current tax system? Explain.

tax system would raise almost the same amount of the tax revenue and is more efficient than the current tax system

The U.S. government is considering reducing the amount of carbon dioxide that firms are allowed to produce by issuing a limited number of tradable allowances for carbon dioxide (CO2) emissions. In an April 25, 2007, report, the U.S. Congressional Budget Office (CBO) argues that "most of the cost of meeting a cap on CO2 emissions would be borne by consumers, who would face persistently higher prices for products such as electricity and gasoline ... poorer households would bear a larger burden relative to their income than wealthier households would." What assumption about one of the elasticities you learned about in this chapter has to be true for poorer households to be disproportionately affected?

the CBO must think that the income elasticity of demand for energy products, although positive, is less than 1: energy products are income elastics.

Damien Matthews is a busy actor. He allocates his free time to watching movies and working out at the gym. The accompanying table shows his utility from the number of times per week he watches a movie or goes to the gym.Damien has 14 hours per week to spend on watching movies and going to the gym. Each movie takes 2 hours and each gym visit takes 2 hours. (Hint: Damien's free time is analogous to income he can spend. The hours needed for each activity are analogous to the price of that activity.) Draw a diagram like Figure 10-4 in which both the marginal utility per hour spent at the gym and the marginal utility per hour spent watching movies are illustrated. Use this diagram and the utility-maximizing principle of marginal analysis to decide how Damien should allocate his time.

the bundle containing 4 gym visits and 3 movies is optimal

Bruno can spend his income on two different goods: Beyoncé MP3s and notebooks for his class notes. For each of the following three situations, decide if the given consumption bundle is within Bruno's consumption possibilities. Then decide if it lies on the budget line or not. MP3s cost $3 each, and notebooks cost $10 each. Bruno has income of $50. He is considering a consumption bundle containing 10 MP3s and 3 notebooks.

the bundle is not within bruno's consumption possibility, it lies above his budget line

Bruno can spend his income on two different goods: Beyoncé MP3s and notebooks for his class notes. For each of the following three situations, decide if the given consumption bundle is within Bruno's consumption possibilities. Then decide if it lies on the budget line or not. MP3s cost $2 each, and notebooks cost $3 each. Bruno has income of $60. He is considering a consumption bundle containing 15 MP3s and 10 notebooks.

the bundle is within bruno's consumption possibility since he spends all his money, it lies on his budget line

Assume that the demand for gasoline is inelastic and supply is relatively elastic. The government imposes a sales tax on gasoline. The tax revenue is used to fund research into clean fuel alternatives to gasoline, which will improve the air we all breathe. Who bears more of the burden of this tax, consumers or producers? Show in a diagram who bears how much of the burden.

the burden is borne predominately on consumers

Prior to the late 1990s, the same company that generated your electricity also distributed it to you over high-voltage lines. Since then, 16 states and the District of Columbia have begun separating the generation from the distribution of electricity, allowing competition between electricity generators and between electricity distributors. Assume that deregulation of electricity generation creates a perfectly competitive market. Also assume that electricity generation does not exhibit the characteristics of a natural monopoly. Use a graph to illustrate the cost curves in the long-run equilibrium for an individual firm in this industry.

the cost curves of an individual electricity generator are shown in panel (b). since the market is perfectly competitive, on the long run, price Pc, will be equal to minimum average total cost, and the individual generator will produce electricity at the quantity Qc, where marginal cost is just equal to the market price. GRAPH.

The accompanying diagram shows the market for cigarettes. The current equilibrium price per pack is $4, and every day 40 million packs of cigarettes are sold. In order to recover some of the health care costs associated with smoking, the government imposes a tax of $2 per pack. This will raise the equilibrium price to $5 per pack and reduce the equilibrium quantity to 30 million packs.

the economist working for the tobacco lobby is over estimating the change in consumer surplus. the economist working for the 2nd hand smoke lobby under estimate the loss of consumer surplus

The accompanying table gives part of the supply schedule for personal computers in the United States. Price of computer | Quantity of computers supplied $1,100 12,000 900 8,000 Suppose a longer time period under consideration means that the quantity supplied at any given price is 20% higher than the figures given in the table. As price increases from $900 to $1,100, is the price elasticity of supply now greater than, less than, or the same as it was in part a?

the elasticity estimate would be unchanged same in part A.

The accompanying table presents prices for washing and ironing a man's shirt taken from a survey of California dry cleaners. Observing profits in the Goleta area, another dry cleaning service, Diamond Cleaners, enters the market. It charges $1.95 per shirt. What is the new average price of washing and ironing a shirt in Goleta? Illustrate the effect of entry on the average Goleta price by a shift of the short-run supply curve, the demand curve, or both.

the entry of a new firm increases the quantity supplied at each price and shifts the supply curve to the right, as indicated by the move from S1 to S2 in the accompanying diagram. So the new equilibrium corresponds to a lower equilibrium price, $2.20, and a higher equilibrium quantity. GRAPH

The United States imposes an excise tax on the sale of domestic airline tickets. Let's assume that in 2013 the total excise tax was $6.10 per airline ticket (consisting of the $3.60 flight segment tax plus the $2.50 September 11 fee). According to data from the Bureau of Transportation Statistics, in 2013, 643 million passengers traveled on domestic airline trips at an average price of $380 per trip. The accompanying table shows the supply and demand schedules for airline trips. The quantity demanded at the average price of $380 is actual data; the rest is hypothetical. On January 1, 2014, the total excise tax increased to $6.20 per ticket. What is the quantity of tickets transacted now? What is the average ticket price now? What is the 2014 government tax revenue?

the equilibrium quantity now falls to 642, with the price rising to 380.02. tax revenue rises to 6.20 per trip x 642mill trips=3980.4

Marty's Frozen Yogurt is a small shop that sells cups of frozen yogurt in a university town. Marty owns three frozen-yogurt machines. His other inputs are refrigerators, frozen-yogurt mix, cups, sprinkle toppings, and, of course, workers. He estimates that his daily production function when he varies the number of workers employed (and at the same time, of course, yogurt mix, cups, and so on) is as shown in the accompanying table. What are the fixed inputs and variable inputs in the production of cups of frozen yogurt?

the fixed inputs are those whose quantities do not change as the quantity of out- put changes: frozen-yogurt machines, refrigerators, and the shop. The variable inputs are those whose quantities do change as the quantity of output changes: frozen-yogurt mix, cups, sprinkle toppings, and workers.

Cal "Cool" Cooper has $200 to spend on cell phones and sunglasses. Each cell phone costs $100 and each pair of sunglasses costs $50. Which bundles lie on Cal's budget line? Draw a diagram like Figure 10-4 in which both the marginal utility per dollar spent on cell phones and the marginal utility per dollar spent on sunglasses are illustrated. Use this diagram and the optimal consumption rule to decide how Cal should allocate his money. That is, from all the bundles on his budget line, which bundle will Cal choose? The accompanying table gives his utility of cell phones and sunglasses.

the following lie on cal's budget line: 0 phones, 4 pairs of glasses 1 phone, 2 pair of glasses 2 phones, 0 pairs of glasses. the optimal bundle is 1 cell phone and 2 pairs of glasses. Mu of phones and glasses are equal.

The accompanying table lists the cross-price elasticities of demand for several goods, where the percent quantity change is measured for the first good of the pair, and the percent price change is measured for the second good. Good Cross-price elasticities of demand Air-conditioning units and kilowatts of electricity −0.34 Coke and Pepsi +0.63 High-fuel-consuming sport-utility vehicles (SUVs) and gasoline −0.28 McDonald's burgers and Burger King burgers +0.82 Butter and margarine +1.54 Compare the absolute values of the cross-price elasticities and explain their magnitudes. For example, why is the cross-price elasticity of McDonald's burgers and Burger King burgers less than the cross-price elasticity of butter and margarine?

the larger (and positive) the cross-price elasticity of demand, the more likely the two goods are closer gross substitutes. the greater (and negative) the cross-price elasticity, the more strongly the two goods are gross compliments.

This diagram illustrates your local electricity company's natural monopoly. It shows the demand curve for kilowatt-hours (kWh) of electricity, the company's marginal revenue (MR) curve, its marginal cost (MC) curve, and its average total cost (ATC) curve. The government wants to regulate the monopolist by imposing a price ceiling. If the government does not regulate this monopolist, which price will it charge? Illustrate the inefficiency this creates by shading the deadweight loss from monopoly.

the monopolists would choose a price of $0.80. deadweight loss is shaded and labeled in the accompanying Figure. GRAPH.

In the United States, 2013 was a bad year for growing wheat. And as wheat supply decreased, the price of wheat rose dramatically, leading to a lower quantity demanded (a movement along the demand curve). The accompanying table describes what happened to prices and the quantity of wheat demanded. 2012 2013 Quantity demanded (bushels) 2.2 billion 2.0 billion Average price (per bushel) $3.42 $4.26 Using the midpoint method, calculate the price elasticity of demand for winter wheat.

the price elasticity of demand is 0.44 and demand is inelastic

The accompanying table gives part of the supply schedule for personal computers in the United States. Price of computer | Quantity of computers supplied $1,100 12,000 900 8,000 Calculate the price elasticity of supply when the price increases from $900 to $1,100 using the midpoint method. Is it elastic, inelastic or unit-elastic?

the price elasticity of supply is 40%/20%= 2 elastic

Use the concept of marginal utility to explain the following: Newspaper vending machines are designed so that once you have paid for one paper, you could take more than one paper at a time. But soda vending machines, once you have paid for one soda, dispense only one soda at a time.

the soda vending machine has to be designed to prevent you from taking more than one soda, and it does so by dispensing only one soda at a time.

The U.S. government would like to help the American auto industry compete against foreign automakers that sell trucks in the United States. It can do this by imposing an excise tax on each foreign truck sold in the United States. The hypothetical pre-tax demand and supply schedules for imported trucks are given in the accompanying table. How does the excise tax on imported trucks benefit American automakers? Whom does it hurt? How does inefficiency arise from this government policy?

the tax leads to a rise in price of imported trucks, the effect of the tax is to increase the demand for american made trucks, which leads to a higher price for them, As a result buyers of both domestic and foreign trucks pay higher prices because of the tax. ineffiency arises because some mutually beneficial transactions no longer occur due to the tiger prices for trucks caused by the tax.

For each of the following situations, decide whether the bundle Lakshani is considering is optimal or not. If it is not optimal, how could Lakshani improve her overall level of utility? That is, determine which good she should spend more on and which good should she spend less on. Lakshani has $50 per season to spend on tickets to football games and tickets to soccer games. Each football ticket costs $10 and each soccer ticket costs $5. She is thinking about buying 3 football tickets and 2 soccer tickets. Her marginal utility from the third football ticket is twice as much as her marginal utility from the second soccer ticket.

this bundle is not optimal all though the marginal utility of soccer tickets is equal to football tickets. it does not lie on her budget line.

For each of the following situations, decide whether the bundle Lakshani is considering is optimal or not. If it is not optimal, how could Lakshani improve her overall level of utility? That is, determine which good she should spend more on and which good should she spend less on. Lakshani has $200 to spend on sneakers and sweaters. Sneakers cost $50 per pair, and sweaters cost $20 each. She is thinking about buying 2 pairs of sneakers and 5 sweaters. She tells her friend that the additional utility she would get from the second pair of sneakers is the same as the additional utility she would get from the fifth sweater.

this bundle lies on lakshani's budget line, but the marginal utility per dollar for sneakers and sweater is not equal. marginal utility per pair sneakers is equal to her marginal utility per sweater. she would improve her level of utility if she spends more money on sweaters and less on sneakers

For each of the following situations, decide whether the bundle Lakshani is considering is optimal or not. If it is not optimal, how could Lakshani improve her overall level of utility? That is, determine which good she should spend more on and which good should she spend less on. Lakshani has $5 to spend on pens and pencils. Each pen costs $0.50 and each pencil costs $0.10. She is thinking about buying 6 pens and 20 pencils. The last pen would add five times as much to her total utility as the last pencil.

this bundle lies on lakshani's budget line. her marginal utility per dollar spent on pencils, this is not optimal bundle.

True or false? Explain your reasoning. The short-run average total cost can never be less than the long-run average total cost.

true. The long-run average total cost is the average total cost you get by choosing the most favorable level of fixed cost in the long run; that is, it is the lowest aver- age total cost that is possible when you can adjust how much of the fixed input you use. In other words, the long-run average total cost of producing a certain level of output is the lowest average total cost with which that level of output can be produced.

According to data from the U.S. Department of Energy, sales of the fuel-efficient Toyota Prius hybrid fell from 158,574 vehicles sold in 2008 to 139,682 in 2009. Over the same period, according to data from the U.S. Energy Information Administration, the average price of regular gasoline fell from $3.27 to $2.35 per gallon. Using the midpoint method, calculate the cross-price elasticity of demand between Toyota Prii (the official plural of "Prius" is "Prii") and regular gasoline. According to your estimate of the cross-price elasticity, are the two goods complements or substitutes? Does your answer make sense?

two are substitutes because the cross-price elasticity of demand is positive.

Suppose you have just paid a nonrefundable fee of $1,000 for your meal plan for this academic term. This allows you to eat dinner in the cafeteria every evening. You are offered a part-time job in a different restaurant where, rather than being able to eat for free, you receive only a large discount on your meals. Each meal there will cost you $2; if you eat there each evening this semester, it will add up to $200. Your roommate says that you should eat in the restaurant since it costs less than the $1,000 that you paid for the meal plan. Is your roommate right? Explain why or why not.

your roommate is wrong. since the 1000$ that you have already paid for the meal plan is non-refundable, it should not enter your decision making now.

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