ECON FINAL CHAPTER 10-20

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Characterize each of the following items rival or nonrival. I. apples II. open-heart surgery

Both I and II are rival.

Sandy owns a firm with annual revenues of $1,000,000. Wages, rent, and other costs are $900,000. What is Sandy's accounting profit?

$100,000

When selling e-books, music on iTunes, and downloadable software, the marginal cost of producing and selling one more unit of output is essentially zero: MC = 0. All firms are trying to maximize their profits (profit = TR - TC). Let's think about a monopoly in this kind of market. In the special case where marginal cost is zero, "profit maximization" is equivalent to which of the following statements?

"Maximize total revenue."

Consider a perfectly competitive market for rolled steel (measured by the ton) with just two firms: SmallCo and BigCo. (If we wanted to be more realistic, we could say there were 100 firms like SmallCo and 100 firms like BigCo, but that would just make the math harder without generating any insight.) The two firms have marginal cost schedules like this: Q/ SmallCo MC/ BigCo MC 1/$10/$10 2/$20/$10 3/$30/$10 4/$40/$10 5/$50/$20 6/$60/$30 7/$70/$40 8/$80/$50 What would the price have to be in this perfectly competitive market for these two firms to produce a total of 5 tons of steel?

$10

Ralph opens a small shop selling bags of trail mix. The price of the mix is $5, and the market for trail mix is very competitive. When the price is $5, how much profit will Ralph make?

$15

The average daily demand for dinners at Paradise Grille, an upscale casual restaurant, is as follows: Demand for dinners by senior citizens: P = 50 - 0.5q; MR = 50 - Q Demand for dinners by regular diners: P = 100 - Q; MR = 100 - 2q Marginal cost = $10 in both cases Ignoring fixed costs, how much profit would Paradise Grille make if it could price-discriminate? (Hint: First, find the profit-maximizing price and quantity for each group, found in question 9. Use those to calculate total revenue.)

$2,825

Consider a firm facing the following demand curve and cost structure: Demand: P = 50 - Q; Fixed cost = 100; Marginal cost = 10. What is the profit-maximizing price that a monopolist should set?

$30

Consider a firm facing the following demand curve and cost structure: Demand: P = 50 - Q; Fixed cost = 100; Marginal cost = 10. What is the total profit at the optimal level of output?

$300

In the table below, we consider how Alex, Tyler, and Monique would fare under á la carte pricing and under bundling for cable TV when there are two channels: Lifetime and the Food Network. Alex and Tyler like to watch Project Runway so they each place a higher value on Lifetime than on the Food Network. Monique is practicing to be an Iron Chef in her second life and so she places a higher value on the Food Network than on Lifetime. Alex/ Tyler / Monique Lifetime /10/15/3 The Food Network /7/4/9 The Bundle /15/19/12 If the channels are priced individually, the most profitable prices for the cable operator turn out to be $10 for Lifetime and $7 for the Food Network. At these prices, how much profit is there if there are no fixed costs and the marginal cost of providing an extra channel to any consumer is $0?

$34

In the highly competitive memory key industry, a new innovation makes it possible to cut the average cost of a 20-megabyte memory key, small enough to fit in your pocket, from $5 to $4. In the long run, what will the price of a 20-megabyte memory key be?

Consider a perfectly competitive market for rolled steel (measured by the ton) with just two firms: SmallCo and BigCo. (If we wanted to be more realistic, we could say there were 100 firms like SmallCo and 100 firms like BigCo, but that would just make the math harder without generating any insight.) The two firms have marginal cost schedules like this: Q/ SmallCo MC/ BigCo MC 1/$10/$10 2/$20/$10 3/$30/$10 4/$40/$10 5/$50/$20 6/$60/$30 7/$70/$40 8/$80/$50 What would the price have to be in this competitive market for these two firms to produce a total of 11 tons of steel?

$40

In the highly competitive TV manufacturing industry, a new innovation makes it possible to cut the average cost of a 50-inch plasma screen from $1,000 to $400. Most TV manufacturers quickly adopt this new innovation, earning massive short-run profits. In the long run, what will the price of a 50-inch plasma TV be?

$400

Sandy owns a firm with annual revenues of $1,000,000. Wages, rent, and other costs are $900,000. Suppose that instead of being an entrepreneur Sandy could get a job with an annual salary of $50,000. Assume that a job would be as satisfying to Sandy as being an entrepreneur. Calculate Sandy's economic profit.

$50,000

Sandy owns a firm with annual revenues of $1,000,000. Wages, rent, and other costs are $900,000. Suppose that instead of being an entrepreneur Sandy could get a job with an annual salary of $250,000. Assume that a job would be as satisfying to Sandy as being an entrepreneur. Calculate Sandy's economic profit.

-$150,000

How many famines have occurred in functioning democracies?

Sandy owns a firm with annual revenues of $1,000,000. Wages, rent, and other costs are $900,000. Suppose that instead of being an entrepreneur Sandy could get a job with an annual salary of $100,000. Assume that a job would be as satisfying to Sandy as being an entrepreneur. Calculate Sandy's economic profit.

What percentage of famines have occurred in countries without functioning democracies?

100%

Ralph opens a small shop selling bags of trail mix. The price of the mix is $5, and the market for trail mix is very competitive. At what quantity will Ralph produce?

The length of the "long run" will vary from industry to industry. How long would you estimate the long run is in the market for pretzels and sodas sold from street carts in the Wall Street financial district in New York?

2-3 days

Solve the following equations for q to find the output level where MC1 = MC2 making the output level, q, optimal in a free market. MC1 = 2+4q1 MC2 = 7+2g2

2.5

Here is the information on a firm: Demand: P = 50 - Q; Fixed cost = 100; Marginal cost = 10 Which of the quantities given in the choices below yields the greatest total profit for the firm?

Characterize each of the following items as excludable or nonexcludable. I. apples II. open-heart surgery

Both I and II are excludable.

The average daily demand for dinners at Paradise Grille, an upscale casual restaurant, is as follows: Demand for dinners by senior citizens: P = 50 - 0.5q; MR = 50 - Q Demand for dinners by regular diners: P = 100 - Q; MR = 100 - 2q Marginal cost = $10 in both cases If you owned this restaurant, what "Senior Citizen Discount" would you offer? (Hint: Use the profit-maximizing price for each group from the previous question to calculate the percentage discount for senior citizens.)

45%

Suppose Carrie decides to lease a photocopier and open up a black-and-white photocopying service in her dorm room for use by faculty and students. Her total cost, as a function of the number of copies she produces per month, is given in the table below. #ofphotocopiespermonth/total cost/FC/VC/TR/Profit 0/100 1k/110 2k/125 3k/145 4k/175 5k/215 6k/285 Fill in the missing numbers in the table, assuming Carrie can charge 5 cents per black-and-white copy. How many copies per month should Carrie sell?

5,000 copies

Characterize each of the following items as excludable or nonexcludable. I. farm-raised salmon II. Yosemite National Park

Both I and II are excludable.

Economists have found that increasing the proportion of girls in primary and secondary school leads to significant improvement in students' cognitive outcomes (Lavy and Schlosser [2007]. "Mechanisms and impacts of gender peer effects at school." NBER Working Paper 13292). One key reason seems to be that on average boys create more trouble in class, which makes it harder for everyone to learn. Economists would say that "boys are a tax on every child's education." Just based on this study, if you are a parent of a boy, would you rather your son be in a class with mostly boys or mostly girls? What if you are the parent of a girl?

All parents would prefer their children to be placed in classes with mostly girls.

In the textbook, The Applied Theory of Price, D. N. McCloskey refers to the equation MR = MC as the rule of rational life. What types of firms follow this rule?

All types of firms follow this rule.

Let's suppose that the demand for allergists increases in California. How does the invisible hand respond to this demand?

Allergists from other states (or countries) could move to California. Surgeons, hematologists, and other doctors in California could become allergists after some retraining. More people could enter medical school, specialize in allergy, and move to California.

How does easy arbitrage affect the ability of a firm to price-discriminate? Who is more likely to get priced out of a market with easy arbitrage: those with elastic demand or those with inelastic demand?

Arbitrage makes it harder to price-discriminate, and those with elastic demand are more likely to be priced out of the market.

Characterize each of the following items as excludable or nonexcludable. I. the Chinese language II. the idea of calculus

Both I and II are nonexcludable.

Characterize each of the following items as rival or nonrival. I. Central Park, New York, when it's nearly empty II. cable television

Both I and II are nonrival.

Characterize each of the following items as rival or nonrival. I. the Chinese language II. the idea of calculus

Both I and II are nonrival.

Assess the validity of the following statements. I. A price-discriminating business will be willing to spend money to make a product better. II. A price-discriminating business will be willing to spend money to make a product worse.

Both I and II are true.

Assess the validity of the following statements. I. Price discrimination is more likely to occur in monopoly-type markets than in competitive markets. II. A monopoly will create more output when it's allowed to perfectly price-discriminate compared with when the government bans price discrimination.

Both I and II are true.

Evaluate the accuracy of the following statements: I. When a monopoly is maximizing its profits, marginal revenue equals marginal cost. II. Ironically, if a government regulator sets a fixed price for a monopoly lower than the unregulated price, it is typically raising the marginal revenue of selling more output.

Both statements are true.

CS = $7

This chapter noted that chickens and the "chicken of the sea" (tuna) are fundamentally different in terms of population though they are both food. Indeed, chickens are eaten far more than tuna, and chickens are abundant compared with their ocean-living cousins. What difference between these two species does this chapter identify as the explanation for this seemingly strange puzzle?

Chickens are an owned resource; tuna is not an owned resource.

A dry cleaner has a sign in its window: "Free Internet coupons." The dry cleaner lists its Web site, and indeed there are good discounts available with the coupons. Most customers don't use the coupons. What is likely to be the main difference between customers who use the coupons and those who don't use them?

Consumers who use the coupons have elastic demand and consumers who don't use them have inelastic demand.

When a drought hits a country and a famine is possible, what probably falls more: the demand for food or the demand for haircuts? Why?

Demand for haircuts falls more because haircuts are more of a luxury good than food.

When someone is sick, the patient's decision to take an antibiotic imposes costs on others—it helps bacteria evolve resistance faster. But it also gives free benefits to others: It may slow down the spread of infectious disease the same way that vaccinations do. Thus, antibiotics can create external costs as well as external benefits. In theory, these could cancel each other out, so that just the right amount of antibiotics is being used. But economists think that on balance, there is overuse of antibiotics, not underuse. Why? (Hint: Think on the margin!)

Economists believe that the marginal social cost of using antibiotics is greater than the marginal social benefit of using antibiotics.

Is college education—a college course, for instance—excludable? Is it rivalrous? If your class has more students, do you get a worse education, on average?

Education is excludable and rival.

A government is torn between auctioning annual pollution allowances and setting an annual pollution tax. Unlike in the messy real world, this government is quite certain that it can achieve the same price and quantity either way. If the government wants to choose the method that will pull in more government tax revenue, which method should it choose?

Either of these methods would generate the same revenue.

You saw what happens in the long run when demand rises in a constant cost industry. Let's see what happens when demand falls in such an industry: For instance, think about the market for gasoline or pizza in a small city after the city's biggest textile mill shuts down. The figure below shows this type of fall in demand and the resulting shift from the initial long-run equilibrium to a short-run equilibrium and finally a second long-run equilibrium. Will the long-run response mostly involve firms leaving the industry, or will it mostly involve individual firms shrinking?

Firms will leave the industry and remaining firms will be the same size.

Which of the following categories is the smallest fraction of the U.S. federal budget? Which are the two largest? Welfare Interest on the federal debt Defense Foreign aid Social Security Medicare

Foreign aid is the smallest and Social Security and defense are the largest.

Two customers, Fred and Lamont, walk into a Grady's Used Pickups. Lamont is good at shopping around, but Fred knows what he likes and just buys it. Who probably has a more inelastic demand for one of Grady's pickups?

Fred's demand is more inelastic.

Economists have found that increasing the proportion of girls in primary and secondary school leads to significant improvement in students' cognitive outcomes (Lavy and Schlosser [2007]. "Mechanisms and impacts of gender peer effects at school." NBER Working Paper 13292). One key reason seems to be that boys create more trouble in class, on average, which makes it harder for everyone to learn. Economists would say that "Boys are a tax on every child's education." Do girls in a classroom provide positive or negative externalities? What about boys?

Girls provide positive externalities and boys provide negative externalities.

Characterize each of the following items as excludable or nonexcludable. I. Central Park, New York II. cable television

I is nonexcludable, II is excludable.

Characterize each of the following items as rival or nonrival. I. farm-raised salmon II. Yosemite National Park

I is rival, II is nonrival.

Evaluate the accuracy of the following statements: I. When a monopoly is maximizing its profits, price is greater than marginal cost. II. For a monopoly producing a certain amount of output, price is less than marginal revenue.

I is true, II is false.

Perhaps it was in elementary school that you first realized that if everyone in the world gave you a penny, you'd become fantastically rich. This insight is at the core of modern politics. Sort the following government policies into "concentrated benefits" and "diffuse benefits." I. Social Security II. Tax cuts for families III. Social Security Disability Insurance for the severely disabled IV. National Park Service spending for remote trails V. National Park Service spending on the National Mall in Washington, D.C. VI. Tax cuts for people making more than $250,000 per year VII. Sugar quotas

I, II, and V are examples of diffuse benefits, while III, IV, VI, and VII represent concentrated benefits.

How can the market mechanism guarantee that the marginal cost of production will be the same across all firms if those firms have different owners, are in different locations, and have unique cost functions known only to the firms themselves? Why don't these different firms need to have one shared owner or one shared manager to coordinate this "equal marginal cost" condition? Assume that the market is perfectly competitive.

In a free market, each firm owner has an incentive to choose the level of output such that such that price equals marginal cost.

Every year, American television introduces many new shows, only about one-third of which survive past their first season. The few shows that last, however, prove to be very profitable. How does creative destruction explain why studios bother to make new shows if most of them will fail?

It allows for new ideas to be tested and to see what is going to work for greater future profit.

The rise of the Internet and file sharing has turned media such as movies and music into public goods. How?

It has made those goods nonexcludable.

It is a rival good because it can only be owned by one person at a time.

It makes the marginal cost curve shift upward and to the left.

Driving along America's interstates, you'll notice that few rest areas feature commercial businesses. Vending machines are the only reliable source of food or drink, much to the annoyance of the weary traveler looking for a hot meal. Thank the National Association of Truck Stop Operators (NATSO), who consistently lobby the U.S. government to deny commercialization in these areas. They argue that: "Interchange businesses cannot compete with commercialized rest areas, which are conveniently located on the highway right-of-way. . . . [R]est area commercialization results in an unfair competitive environment for privately operated interchange businesses and will ultimately destroy a successful economic business model that has proven beneficial for both consumers and businesses." How does the NATSO argument affect travel for consumers?

It makes travel more expensive and less convenient.

When a sports team hires an expensive new player or builds a new stadium, you often hear claims that ticket prices have to rise to cover the new, higher cost of the player or new stadium. Let's see what monopoly theory says about that. It's safe to treat these new expenses as fixed costs—something that doesn't change if the number of customers rises or falls. Treat the local sports team as a monopoly in this question, and to keep it simple, let's assume there's only one ticket price. As long as the sports team is profitable, what affect will a rise in fixed costs have on the equilibrium ticket price?

It will not affect the ticket price.

When is a pharmaceutical company more likely to spend $100 million to research a new drug: when it knows it will be able to charge different prices in different countries or when it knows that it will be required to charge the same price in different countries? Why?

It will spend that much research money when it knows it will be able to charge different prices in different countries, because this would lead to higher profits.

We mentioned that carpet manufacturing looks like a decreasing cost industry. In American homes, carpets are much less popular than they were in the 1960s and 1970s, when wall-to-wall carpeting was fashionable in homes. Suppose that carpeting became even less popular than it is today: What would this fall in demand probably do to the price of carpet in the long run?

It would cause the price of carpet to rise.

An initiative on Arizona's 2006 ballot would have a $1 million lottery prize handed out every election. The only way to enter the lottery would be to vote in a primary or general election. How do you think a lottery like this would influence voter ignorance?

It would increase voter ignorance.

Canada's Labrador Peninsula (which includes modern-day Newfoundland and most of modern-day Quebec) was once home to the Montagnes, an indigenous group who, in contrast to their counterparts in the American Southwest, established property rights over land. This institutional change was a direct result of the increase in the fur trade after European traders arrived. Before these traders came, the amount of land in the Labrador Peninsula far exceeded the indigenous people's needs. Hunting animals specifically for fur was not yet widely practiced. What can you conclude about the relative scarcity of land or animals?

Land and animals were not scarce since the supply of them exceeded the demand.

According to the elimination principle, how would you characterize the long-run profits in Industry X after demand rises in Industry X? You can assume Industry X is a decreasing cost industry.

Long-run profits are zero.

The competitive industry of children's pajamas is in long-run equilibrium when a new government safety regulation raises the average cost of children's pajamas by $2 per pair. If this is an increasing cost industry, how much will this new safety regulation change the average pajama maker's profits in the long run?

Long-run profits will remain the same.

Rapido, the shoe company, is so popular that it has monopoly power. It's selling 20 million shoes per year, and it's highly profitable. The marginal cost of making extra shoes is quite low, and it doesn't change much if they produce more shoes. Rapido's marketing experts tell the CEO of Rapido that if it decreased prices by 20%, it would sell so many more shoes that profits would rise. If the expert is correct, at its current output, what can you infer about its marginal revenue and marginal cost?

MC < MR

Rapido, the shoe company, is so popular that it has monopoly power. It's selling 20 million shoes per year, and it's highly profitable. The marginal cost of making extra shoes is quite low, and it doesn't change much if they produce more shoes. Apollo, another highly profitable shoe company, also has market power. It's selling 15 million shoes per year, and it faces marginal costs quite similar to Rapido. Apollo's marketing experts conclude that if they increased prices by 20%, profits would rise. If the experts are correct, at its current output, what can you infer about Apollo's marginal revenue and marginal cost?

MC > MR

Consider a firm facing the following demand curve and cost structure: Demand: P = 100 - 2q; Fixed cost = 100; Marginal cost = 10. What is the formula for this firm's marginal revenue curve?

MR = 100 - 4q

Consider a firm facing the following demand curve and cost structure: Demand: P = 50 - Q; Fixed cost = 100; Marginal cost = 10. What is the formula for this firm's marginal revenue curve?

MR = 50 - 2q

Warner Bros. is trying to decide what kind of movies to make this year. Should it make one movie for release this summer, an action flick with a romantic subplot, or should it make two movies for release this summer: a pure action flick and a pure romantic drama? Amanda and Yvonne are thinking of going out to the movies. Amanda likes action flicks more, but Yvonne likes a little bit of romance. Here's their willingness to pay for the separate kinds of movies. As you can see, both Amanda and Yvonne are annoyed by the idea of a hybrid movie: each would rather see their favorite kind of movie. Amanda/Yvonne Pure Action /$10/$2 Pure Romance / $2/$10 Action+Romance /$9/$9 Now, let's look at this from Warner Bros. point of view. You're the mid-level executive who has to decide which project to green-light. Your marketing people have figured out that there are 5 million people like Amanda and 5 million people like Yvonne in the United States, and they'll only see one film per summer. To make things simple, assume that the marginal cost of showing the movie one more time is zero, and that ticket prices are fixed at $8. If the cost of producing any of the three films is $30 million, what should Warner Bros. do?

Make only the action-romance hybrid movie.

Warner Bros. is trying to decide what kind of movies to make this year. Should it make one movie for release this summer, an action flick with a romantic subplot, or should it make two movies for release this summer: a pure action flick and a pure romantic drama? Amanda and Yvonne are thinking of going out to the movies. Amanda likes action flicks more, but Yvonne likes a little bit of romance. Here's their willingness to pay for the separate kinds of movies. As you can see, both Amanda and Yvonne are annoyed by the idea of a hybrid movie: Each would rather see their favorite kind of movie. Amanda/Yvonne Pure Action /$10/$2 Pure Romance / $2/$10 Action+Romance /$9/$9 Now, let's look at this from Warner Bros. point of view. You're the mid-level executive who has to decide which project to green-light. Your marketing people have figured out that there are 5 million people like Amanda and 5 million people like Yvonne in the United States, and they'll only see one film per summer. To make things simple, assume that the marginal cost of showing the movie one more time is zero, and that ticket prices are fixed at $8. If the hybrid costs $40 million to make, the pure action flick $30 million, and the romance a mere $15 million? What should Warner Bros. do?

Make the action-romance hybrid movie.

Maxicon is opening a new coal-fired power plant, but the government wants to keep pollution down. Which is a more efficient way to reduce pollution: requiring Maxicon to use one particular air-scrubbing technology that will reduce pollution by 25% or commanding Maxicon to reduce pollution by 25% in any way they can?

Mandating the pollution reduction only will be more efficient, since Maxicon will be better equipped to find lower cost ways of performing the reduction.

Suppose Sam sells apples in a competitive market. The apples are picked from his apple tree. Assume all apples are equal in quality, but grow at different heights on the tree. Sam, being fearful of heights, demands greater compensation the higher he goes: So, for him, the cost of grabbing an apple rises with the height he must climb. What does this suggest about the marginal cost of apples?

Marginal cost is increasing.

When selling e-books, music on iTunes, and downloadable software, the marginal cost of producing and selling one more unit of output is essentially zero: MC = 0. Let's think about a monopoly in this kind of market. If the monopolist is doing its best to maximize profits, what will marginal revenue equal at a firm like this?

Marginal revenue will be equal to zero.

In 2005, American studios released 563 movies and American publishers produced 176,000 new books. How does the fixed cost of producing movies and books explain such a wide difference? Which is riskier: publishing a book or producing a movie?

Movies have higher fixed costs and are therefore more risky than books.

A business that price-discriminates will generally: I. charge some customers higher prices than other customers. II. charge some customers more than marginal cost, and charge other customers less than marginal cost

Only I is true.

Assess the validity of the following statements: I. Bundling is more likely to occur in industries in which fixed costs are high and marginal costs are low. II. Bundling is more likely to occur in industries in which fixed costs are low and marginal costs are high.

Only I is true.

Driving along America's interstates, you'll notice that few rest areas feature commercial businesses in these areas. Vending machines are the only reliable source of food or drink, much to the annoyance of the weary traveler looking for a hot meal. Thank the National Association of Truck Stop Operators (NATSO), who consistently lobby the U.S. government to deny commercialization. They argue that "Interchange businesses cannot compete with commercialized rest areas, which are conveniently located on the highway right-of-way. . . . [R]est area commercialization results in an unfair competitive environment for privately operated interchange businesses and will ultimately destroy a successful economic business model that has proven beneficial for both consumers and businesses." Why does NATSO often succeed in its lobbying efforts despite the fact that it inconveniences a large number of travelers?

NATSO succeeds because each traveler is only slightly inconvenienced, while truck stop operators see large benefits.

Assess the validity of the following statements. I. Compared with most other countries, full democracies tend to put a lot of restrictions on markets and property rights. II. When it comes to disposable income, American presidents seem to prefer "making a good first impression" rather than "going out with a bang."

Neither I nor II is true.

The demand for most metals tends to increase over time. Moreover, as we discussed in this chapter and also in Chapter 4 these types of natural resource industries tend to be increasing cost industries. And yet the price of metals compared with other goods has tended to fall slowly over time (albeit with many spikes in between).The following figure, for example, shows an index of prices for aluminum, copper, lead, silver, tin, and zinc from 1900 to 2000 (adjusted for inflation). The trend is downward. Why do you think this is the case?

New technology has made it easier to extract metals.

In this chapter, we discussed the story of Dalton, Georgia, and its role as the carpet capital of the world. A similar story can be used to explain why some 60% of the motels in the United States are owned by people of Indian origin or why, as of 1995, 80% of doughnut shops in California were owned by Cambodian immigrants. Let's look at the latter case. In the 1970s, Cambodian immigrant Ted Ngoy began working at a doughnut shop. He then opened his own doughnut shop (and later, more shops). Ngoy was drawn to the doughnut industry because it required little English, start-up capital, or special skills. Speaking the same language as your workers, however, helps a lot. As other Cambodian refugees came to Los Angeles fleeing the tyrannical rule of the Khmer Rouge, which group—the refugees or existing LA residents—was Ngoy more likely to hire from? Did this make it more or less likely that other Cambodian refugees would open doughnut shops?

Ngoy was more likely to hire Cambodian refugees, which made it more likely that other Cambodian refugees would open doughnut shops.

Arguing about economics late one night in your dorm room, your friend says, "In a free market economy, if people are willing to pay a lot for something, then businesses will charge a lot for it." One way to translate your friend's words into a model is to think of a product with highly inelastic demand: items like lifesaving drugs or basic food items. Let's consider a market in which costs are roughly constant: perhaps they rise a little or fall a little as the market grows, but not by much. In the long run, is your friend right?

No, because competition will ensure that the price falls to the zero profit level in the long run, and because the price in the long run is determined by the location of the average cost curve, not the demand curve. DR. Correct. In the long run, competition ensures that the price will be bid down to the zero profit level, which is based on the location of the average cost curve. This means that in the long run the location of the average cost curve matters much more than the location of the demand curve. In a perfectly competitive model, this would be where P = MR = AC = MC.

Carbon dioxide is a byproduct of the burning of fossil fuels, something necessary for many modes of transportation and manufacturing processes. It has been asserted by scientists that carbon dioxide is the cause of global warming, which imposes negative externalities on the entire world population. Considering what we've learned about externalities, should human-caused global warming be completely stopped? What is the optimal level of human-made carbon dioxide, compared with the current level?

No, we shouldn't eliminate the entire externality, but the optimal level of human-made carbon dioxide is likely less than today's amount.

In the competitive electrical motor industry, the workers at Galt Inc. threaten to go on strike. To avoid the strike, Galt Inc. agrees to pay its workers more. At all other factories, the wage remains the same. Surely, more workers will want to work at Galt Inc. now that it pays higher wages. Will more workers actually work at Galt Inc. after the labor agreement is struck? Why or why not?

No. Fewer workers will work at Galt because the higher marginal cost after the labor deal means Galt will be making fewer motors.

If a corrupt government grants Maxicon, the operator of a new coal-fired power plant, all of the (tradable) pollution permits in the entire nation (even though there are many energy companies), does this guarantee that Maxicon will engage in an enormous amount of pollution? Why or why not?

No. If the permits are tradable, Maxicon may reduce its pollution and sell many of the permits.

In Chapter 6 we said that taxes create deadweight losses. When we tax goods with negative externalities should we worry about deadweight losses? Why or why not?

No. When the government taxes a good with a negative externality, it will remove the deadweight loss generated by the externality.

Assess the validity of the following statements. I. During Bangladesh's politically created famine, the average amount of food per person was much lower than usual. II. Democracies are less likely to kill their own citizens than other kinds of governments.

Only II is true.

Assess the validity of the following statements. I. Surprisingly, newspapers aren't that important for informing voters about hungry citizens. II. Compared with dictatorship or oligarchy, democracies have a stronger incentive to make the economic pie bigger.

Only II is true.

Which of the following people are paying for public goods? I. In Britain, Alistair pays a tax to support the British Broadcasting Company. He doesn't own a radio or TV. II. Monica pays her local property taxes and state incomes taxes. Police patrol her neighborhood regularly. III. Richard, a young boy in 1940s Los Angeles, jumps on board the streetcar without paying. IV. In the United States, Sara pays taxes to fund children's immunizations. She lives out in the forest, has no family, and rarely sees other people. V. In Japan, Dave, a tourist from the United States, enjoys the public parks.

Only example II is a person paying for public goods.

Which of the following are forced riders? I. In Britain, Alistair pays a tax to support the British Broadcasting Company. He doesn't own a radio or TV. II. Monica pays her local property taxes and state incomes taxes. Police patrol her neighborhood regularly. III. Richard, a young boy in 1940s Los Angeles, jumps on board the streetcar without paying. IV. In the United States, Sara pays taxes to fund children's immunizations. She lives out in the forest, has no family, and rarely sees other people. V. In Japan, Dave, a tourist from the United States, enjoys the public parks.

Only examples I and IV are forced riders.

Which of the following are free riders? I. In Britain, Alistair pays a tax to support the British Broadcasting Company. He doesn't own a radio or TV. II. Monica pays her local property taxes and state incomes taxes. Police patrol her neighborhood regularly. III. Richard, a young boy in 1940s Los Angeles, jumps on board the streetcar without paying. IV. In the United States, Sara pays taxes to fund children's immunizations. She lives out in the forest, has no family, and rarely sees other people. V. In Japan, Dave, a tourist from the United States, enjoys the public parks.

Only examples III and V are free riders.

P = $30 for senior citizens and $55 for regular diners

In Figure 11.6, you saw what happens in the long run when demand rises in a constant cost industry. Let's see what happens when demand falls in such an industry: For instance, think about the market for gasoline or pizza in a small city after the city's biggest textile mill shuts down. The figure below shows this type of fall in demand and the resulting shift from the initial long-run equilibrium to a short-run equilibrium and finally a second long-run equilibrium. When is P > AC? When is P < AC? When does P = AC?

P = AC in both long-run equilibria and P < AC in the short-run equilibrium.

Paulette, Camille, and Hortense each own wineries in France. They produce inexpensive, mass-market wines. Over the last few years, such wines sold for 7 euros per bottle; but with a global recession, the price has fallen to 5 euros per bottle. Given the information below, let's find out which of these three winemakers (if any) should shut down temporarily until times get better. To keep things simple, let's assume that each winemaker has calculated the optimal quantity to produce if they decide to stay in business; your job is simply to figure out if she should produce that amount or just shut down. Winemaker/FC/VC/Recession Revenues/Profits Paulette / 50k/80k/120k Camille/100k/40k/70k Hortense/200k/250k/200k What is each winemaker's profit?

Paulette = -10,000, Camille = -70,000, Hortense = -250,000

Paulette and Camille should stay in business and Hortense should shut down.

Let's imagine that the firm with cost curves illustrated in the left panel of the figure below is a large cable TV provider. Now assume that the firm is regulated and that the regulator sets the price so that the firm earns a normal (zero) profit. What price does the regulator set?

Price = average cost (AC)

This chapter noted that chickens and the "chicken of the sea" (tuna) are fundamentally different in terms of population though they are both food. Indeed, chickens are eaten far more than tuna, and chickens are abundant compared with their ocean-living cousins. As population and prosperity has increased, the demand for chicken has increased. What happens to the price of chickens as a result? What happens to the number of people raising chickens as a result of the price change?

Price increases. More people will raise chickens.

In a constant cost industry, what happens to the price of the good in the long run when there is a rise in demand?

Price stays the same.

Suppose there are two industries: a high-profit industry, Industry H, and a low-profit industry, Industry L. If the two industries have similar costs, what must be TRUE about prices in the two industries?

Prices in Industry H must be higher than Industry L.

As we saw in this chapter, drug companies often charge much more for the same drug in the United States than it does in other countries. Congress often considers passing laws to make it easier to import drugs from these low-price countries. If one of these laws passes, and it becomes effortless to buy AIDS drugs from Africa or antibiotics from Latin America—drugs that are made by the same companies and have essentially the same quality controls as the drugs here in the United States—how will drug companies change the prices they charge in Latin America and Africa? Why?

Prices in Latin America and Africa will rise.

Profits are equal to zero in both long-run equilibria and profits are negative in the short-run equilibrium.

Consider a firm facing the following demand curve and cost structure: Demand: P = 100 - 2q; Fixed cost = 100; Marginal cost = 20. What is the level of output for this firm where marginal revenue is equal to marginal cost?

Q = 20

Consider a firm facing the following demand curve and cost structure: Demand: P = 50 - Q; Fixed cost = 100; Marginal cost = 10. What is the level of output for this firm where marginal revenue is equal to marginal cost?

Q = 20

Consider a firm facing the following demand curve and cost structure: Demand: P = 100 - 2q: Fixed cost = 100; Marginal cost = 10. What is the level of output for this firm where marginal revenue is equal to marginal cost?

Q = 22.5

Ralph opens a small shop selling bags of trail mix. The price of the mix is $5, and the market for trail mix is very competitive. If all other sellers of trail mix have the same marginal and average costs as Ralph, what should he expect to happen to the number of competitors in the future? What will the price of trail mix be in the long run?

Ralph should expect more competitors and the price of trail mix will fall to $4.

Suppose Sam sells apples in a competitive market. The apples are picked from his apple tree. Assume all apples are equal in quality, but grow at different heights on the tree. Sam, being fearful of heights, demands greater compensation the higher he goes: So, for him, the cost of grabbing an apple rises with the height he must climb, as shown in the Total Cost column below. The market price of an apple is $0.50. apples / total cost/ MC/ MR/ Change in profit 1/0.10/0.10/0.50/0.40 2/0.22 3/0.50 4/1.00 5/1.73 6/2.78 Which apples does Sam pick first?

Sam picks the apples on low branches first.

Suppose Sam sells apples in a competitive market. The apples are picked from his apple tree. Assume all apples are equal in quality, but grow at different heights on the tree. Sam, being fearful of heights, demands greater compensation the higher he goes: So, for him, the cost of grabbing an apple rises with the height he must climb. The market price of an apple is $0.50. What is Sam's marginal revenue for selling apples?

Sam's marginal revenue is $0.50 for each apple.

Suppose the friends decide to vote in a single-elimination tournament. In the first round, the friends will choose between two candidates, with the winner proceeding to the second round to face off against the third candidate. (This is the way many sporting events and legislatures work.) Now, suppose that Jean is in charge of deciding in which order to hold the votes. He wants to make sure that his favorite, Walras, wins the final vote. Which two candidates should he choose to face off in the first round to ensure that Walras wins the tournament?

Say vs. Bastiat

We mentioned that the median voter theorem doesn't always work, and sometimes a winning policy doesn't exist. This fact has driven economists and political scientists to write thousands of papers and books, both proving that fact and also trying to find good workarounds. The most famous theoretical example of how voting doesn't work is the Condorcet paradox. The Marquis de Condorcet, a French nobleman in the 1700s, wondered what would happen if three voters had preferences like those below. Three friends are holding a vote to see which French economist they should read in their study group. Here are their preferences: They vote by majority rule. If the vote is Walras vs. Say, who will win? Say vs. Bastiat? Bastiat vs. Walras?

Say; Bastiat; Walras

Tommy Suharto, the son of Indonesian President Suharto (in office from 1967 to 1998), owned a media conglomerate, Bimantara Citra. In their entertaining book, Economic Gangsters, economists Raymond Fisman and Edward Miguel compared the stock price of Bimantara Citra with that of other firms on Indonesia's stock exchange around July 4, 1996, when the government announced that President Suharto was traveling to Germany for a health checkup. What do you think happened to the price of Bimantara Citra shares relative to other shares on the Indonesian stock exchange that day? What does this suggest?

Shares of Bimantara Citra likely fell by significantly more than shares in firms without such close connections to the president. This suggests that corruption was rampant in Indonesia.

Consider a perfectly competitive market for rolled steel (measured by the ton) with just two firms: SmallCo and BigCo. (If we wanted to be more realistic, we could say there were 100 firms like SmallCo and 100 firms like BigCo, but that would just make the math harder without generating any insight.) The two firms have marginal cost schedules like this: Q/ SmallCo MC/ BigCo MC 1/$10/$10 2/$20/$10 3/$30/$10 4/$40/$10 5/$50/$20 6/$60/$30 7/$70/$40 8/$80/$50 Ignoring the fixed costs of starting up the firms, what's the cheapest way to make 5 tons of steel?

SmallCo will make 1 ton and BigCo will make 4 tons.

Consider a perfectly competitive market for rolled steel (measured by the ton) with just two firms: SmallCo and BigCo. (If we wanted to be more realistic, we could say there were 100 firms like SmallCo and 100 firms like BigCo, but that would just make the math harder without generating any insight.) The two firms have marginal cost schedules like this: Q/ SmallCo MC/ BigCo MC 1/$10/$10 2/$20/$10 3/$30/$10 4/$40/$10 5/$50/$20 6/$60/$30 7/$70/$40 8/$80/$50 Ignoring the fixed costs of starting up the firms, what's the cheapest way to make 11 tons of steel?

SmallCo will make 4 tons and BigCo will make 7 tons.

Evaluate the accuracy of the following statements: I. In the United States, government regulation of cable TV cut the price of premium channels down to average cost. II. When consumers have many options, monopoly markup is lower. III. A patent is a government-created monopoly.

Statements II and III are true, but I is false.

According to the elimination principle, what happens to the short-run supply in Industry X when demand rises in Industry X? You can assume Industry X is a decreasing cost industry.

Supply will increase.

Palm Springs, California, was once the playground of the rich and famous—for example, the town has a Frank Sinatra Drive, a Bob Hope Drive, and a Bing Crosby Drive. The city once had a law against building any structure that could cast a shadow on anyone else's property between 9 AM and 3 PM (Source: Armen Alchian and William Allen. 1964. University Economics, Belmont, CA: Wadsworth). What are some alternatives to this command and control solution?

Taxes levied on buildings that cast shadows. Subsidies on buildings that do not cast shadows. Tradable allowances for buildings that cast shadows.

In which of the following cases are the Coase theorem's assumptions likely to be TRUE? In other words, when will the parties be likely to strike an efficient bargain? How do you know? Case 1: My neighbor wants me to cut down an ugly shrub in my front yard. The ugly shrub, of course, imposes a negative externality on him and on his property value. Case 2: My neighbors all would love for me to get that broken-down Willys Jeep off my front lawn. It's been years now, after all. And would it be too much for me to paint the house and fill up that 6-foot ditch in the front yard? The whole neighborhood is annoyed. Case 3: A coal-fired electricity plant dumps its leftover hot water into the nearby lake, killing all the fish. Thousands of homes line the banks of the lake. Case 4: A coal-fired electricity plant dumps its leftover hot water into the nearby river, killing all the fish for a mile downstream. There is one large privately owned fishery one-mile downstream affected by this. After that, the water cools enough so it's not a problem.

The Coase theorem's assumptions would hold in cases 1 and 4, but not in cases 2 and 3.

In 1983, Congress passed the Orphan Drug Act, which gave firms that developed pharmaceuticals to treat rare diseases (diseases with U.S. patient populations of 200,000 people or fewer) the exclusive rights to sell their pharmaceutical for seven years, basically an extended patent life. In other words, the act gave greater market power to pharmaceutical firms who developed drugs for rare diseases. Perhaps surprisingly, a patient organization, the National Organization for Rare Disorders (NORD), lobbied for the act. Why would a patient group lobby for an act that would increase the price of pharmaceuticals to its members?

The act would increase the number of new drugs.

Consider the special case of a monopoly in which MC = 0. Let's find the firm's best choice when more goods can be produced at no extra cost. A great deal of e-commerce is close to this model, where the fixed cost of inventing the product and satisfying government regulators is the only cost that matters. Consider a monopoly facing the following demand curve and fixed costs: P = 120 - 12q; Fixed costs = 1,000 Should the firm go into business? If so, how much should the firm produce?

The firm should not go into business.

Consider the special case of a monopoly in which MC = 0. Let's find the firm's best choice when more goods can be produced at no extra cost. A great deal of e-commerce is close to this model, where the fixed cost of inventing the product and satisfying government regulators is the only cost that matters. Consider a monopoly facing the following demand curve and fixed costs: P = 2,000 - Q; Fixed costs = 900,000 Should the firm go into business? If so, how much should the firm produce?

The firm should produce 1,000 units.

Consider the special case of a monopoly in which MC = 0. Let's find the firm's best choice when more goods can be produced at no extra cost. A great deal of e-commerce is close to this model, where the fixed cost of inventing the product and satisfying government regulators is the only cost that matters. Consider a monopoly facing the following demand curve and fixed costs: P = 100 - Q. Fixed Costs = 1,000 Should the firm go into business? If so, how much should the firm produce?

The firm should produce 50 units.

A flu shot typically costs between $25 and $50, but some firms offer their employees free flu shots. Why might a firm prefer to offer its employees free flu shots if the alternative is an equally costly wage increase?

The firm wants to encourage employees to get flu shots because they want to avoid a loss of productivity because of days lost to illness, and because they have positive externalities on those around them (other employees).

Consider a market, as illustrated in the figure below, in which all firms have the same average cost curve. If a perfectly competitive firm in this market tried to set a price above the minimum point on its average cost curve, how many units would it sell?

The firm would sell zero units.

Fires create external costs because they spread from one building to another. If the government wants to reduce the external costs of fires, should it encourage subsidies for sprinkler systems or should they just mandate that everyone have sprinklers?

The government should subsidize sprinkler systems.

Consider a typical monopoly firm like the one shown in the figure below. If the monopolist finds a way to cut marginal costs, what will happen?

The monopolist will pass along some of the cost savings to the consumer in the form of lower prices.

According to the elimination principle, what happens to the number of firms, number of workers, and the quantity of capital in Industry X when demand rises in Industry X? You can assume that Industry X is a decrease cost industry.

The number of firms and workers and the quantity of capital all increase.

In the competitive electrical motor industry, the workers at Galt Inc. threaten to go on strike. To avoid the strike, Galt Inc. agrees to pay its workers more. At all other factories, the wage remains the same. What will happen to the number of motors produced by Galt Inc.?

The number of motors produced will fall.

Consider a market like the one illustrated in the figure below. If a monopoly in this market tried to set its price above the minimum point on its average cost curve, what would happen to the number of units it sells?

The number of units sold would fall.

Who probably has more elastic demand for a Hertz rental car: someone who reserves a car online weeks before a trip, or someone who walks up to a Hertz counter after he walks off an airplane after a 4-hour flight? Who probably gets charged more?

The person who booked in advance has a more elastic demand and will be charged less.

The competitive industry of children's pajamas is in long-run equilibrium when a new government safety regulation raises the average cost of children's pajamas by $2 per pair. If this is an increasing cost industry, then what happens to the price of children's pajamas in the long run?

The price increases by less than $2.

In the competitive electrical motor industry, the workers at Galt Inc. threaten to go on strike. To avoid the strike, Galt Inc. agrees to pay its workers more. At all other factories, the wage remains the same. In this competitive market, what will the Galt Inc. labor agreement do to the market price of motors?

The price of motors will remain the same.

The competitive industry of children's pajamas is in long-run equilibrium when a new government safety regulation raises the average cost of children's pajamas by $2 per pair. If this is a constant cost industry, then what happens to the price of children's pajamas in the long run?

The price rises by exactly $2.

Replacement parts for classic cars are expensive, even though these parts aren't any more complicated than parts for new cars. If people began recycling old cars more in the United States—repairing them rather than sending them off to junkyards—what would likely happen to the price of spare parts in the long run?

The price would decrease.

In the market for really good ideas—ideas that will dramatically change the world for the better—the private benefit of one more really good idea (from speaker's fees, book sales, patents, etc.) is $1,000,000.The marginal social benefit is $100,000,000. Determine whether there is an external cost or external benefit as a result of this situation, the size of that cost or benefit (in dollars), and whether a tax or a subsidy is the best way to compensate for the externality.

There is an external benefit of $99,000,000 per new idea and a subsidy is necessary to compensate for it.

In the market for automobiles, the private benefit of one more small SUV is $20,000 and the social cost of one more small SUV is $30,000. Determine whether there is an external cost or external benefit as a result of this situation, the size of that cost or benefit (in dollars), and whether a tax or a subsidy is the best way to compensate for the externality.

There is an external cost of $10,000 per SUV and a tax would be necessary to compensate for it.

In the market for fashionable clothes, the marginal social benefit of one more dress per person is $100, and the marginal private benefit is $500. Determine whether there is an external cost or external benefit as a result of this situation, the size of that cost or benefit (in dollars), and whether a tax or a subsidy is the best way to compensate for the externality.

There is an external cost of $400 per dress and a tax would be necessary to compensate for it.

Consider a firm facing the following demand curve and cost structure: Demand: P = 50 - Q; Fixed cost = 100; Marginal cost = 10. What is the total revenue and total cost for the monopolist at the optimal level of output?

Total revenue = $600; Total cost = $300

Tyler and Alex buy Lifetime and Monique and Alex buy the Food Network.

You've been hired as a management consultant to four different companies in competitive industries. They're each trying to figure out if they should produce a little more output or a little less output to maximize their profits. The firms all have typical marginal cost curves: They rise as the firm produces more. Your staff did all the hard work for you of figuring out the price of each firm's output and the marginal cost of producing one more unit of output at their current level of output.

WaffleCo and GoDaddy.com are producing too much and Rio Blanco and Luke's Lawn Service are producing too little.

Some people think that business create monopolies by destroying their competition, and there is certainly some truth to that. But as we learned from Obi-Wan Kenobi,"[Y]ou will find that many of the truths we cling to depend greatly on our own point of view." For instance, some people (convenience shoppers) love shopping at one particular store and will only switch stores when the product they want is outrageously expensive, while other people (bargain shoppers) will gladly spend hours looking through newspaper advertisements searching for the best deal. When both these kinds of people are shopping at the same Walmart, how would you describe Walmart's power over each?

Walmart has monopoly power over convenience shoppers.

Suppose the friends decide to vote in a single-elimination tournament. In the first round, the friends will choose between two candidates, with the winner proceeding to the second round to face off against the third candidate. (This is the way many sporting events and legislatures work.) Now, suppose that Claude is in charge of deciding in which order to hold the votes. He wants to make sure that his favorite, Say, wins the final vote. Which two candidates should he choose to face off in the first round to ensure that Say wins the tournament?

Walras vs. Bastiat

Suppose the friends decide to vote in a single-elimination tournament. In the first round, the friends will choose between two candidates with the winner proceeding to the second round to face off against the third candidate. (This is the way many sporting events and legislatures work.) Now, suppose that Marie is in charge of deciding in which order to hold the votes. She wants to make sure that her favorite, Bastiat, wins the final vote. Which two candidates should she choose to face off in the first round in order to ensure that Bastiat wins the tournament?

Walras vs. Say

Some media companies (especially in music and movie industries) run ads claiming that downloading or copying media is the same thing as stealing a DVD from a store. Let's see if this is the case. Suppose someone stole a DVD from a retail outlet. Regardless of how that person values the DVD, does the movie company lose any revenue as a result of the theft? Why or why not?

Yes, because someone could have bought that DVD.

Some media companies (especially in music and movie industries) run ads claiming that downloading or copying media is the same thing as stealing a CD or DVD from a store. Let's see if this is the case. Suppose someone illegally downloaded a movie instead of purchasing it. If that person placed a high value on the movie (they valued it more than the price required to purchase it legally), does the movie company lose any revenue as a result of the theft? If that person placed a low value on the movie (they valued it less than the price required to purchase it legally), does the movie company lose any revenue as a result of the theft?

Yes; No

China developed gunpowder, paper, the compass, water-driven spinning machines, and many other inventions long before their European counterparts. Yet they did not adopt cannons, industrialization, and many other applications until after the West did. Suppose you are an inventor in ancient China and suddenly realize that the fireworks used for celebration could be enlarged into a functioning weapon. Suppose there was no patent system, but you could sell your inventions to the government. What would your inclination be to invest in technological development compared with a world with a good patent law?

You would be less likely to invest.

Replacement parts for classic cars are expensive, even though these parts aren't any more complicated than parts for new cars. What kind of industry is the market for old car parts?

a decreasing cost industry

Emeril says, "In my economics class, I learned that the only way to fund public goods was to have the government tax citizens to pay for those goods. Is that what you learned?" Rachel responds, "Actually, in my class, we used Modern Principles, and we learned that there are other ways to fund public goods, like ________________." Complete Rachel's statement.

advertising or artificially making some public goods excludable

Canada's Labrador Peninsula (which includes modern-day Newfoundland and most of modern-day Quebec) was once home to the Montagnes, an indigenous group who, in contrast to their counterparts in the American Southwest, established property rights over land. This institutional change was a direct result of the increase in the fur trade after European traders arrived. Before these traders came, the amount of land in the Labrador Peninsula far exceeded the indigenous people's needs. Hunting animals specifically for fur was not yet widely practiced. Before the Europeans' arrival, land was commonly held. Land and animals were not scarce because the supply of them exceeded the demand. Once the European traders came, the demand for fur increased. When did the tragedy of the commons occur relative to the arrival of European traders?

after European fur traders arrived

If a particular government policy—like a decision to go to war or to raise taxes— only works when citizens are informed, is that an argument for that policy or against that policy?

against the policy

We mentioned that voters are myopic, mostly paying attention to how the economy is doing in the few months before a presidential election. If they want to be rational, should they pay attention to all four years of the economy, just the first year, just the last two years, or some other combination?

all four years

Even if profit is negative, if revenues ______________, then it's best to stay open in the short run.

are greater than variable costs

Look carefully at Figure 11.6. What is represented by the space in between the average cost (AC) and average variable cost (AVC) curves?

average fixed cost (AFC)

Did firms find it easier to price-discriminate before the existence of eBay or after? Which of the two "principles of price discrimination" does this stem from?

before; arbitrage.

In the process of creative destruction, what gets destroyed?

both firms and business plans

center-left

The figure below shows the political leanings of 101 voters. Voters will vote for the candidate who is closest to them on the spectrum, as in the typical median voter story. Again as usual, politicians compete against each other, entering the "political market" just as freely as firms enter the economic market. As you saw in previous election, the candidates all catered to the median voter, who was at the center-left. Now, four years later, it's time for a new election. Suppose that the two right-leaning groups of voters have merged: The 25 center-right voters move to the far right, forming a far-right coalition. Applying the median voter theorem, in the new election, whose position will win now?

center-left

Cable television is best characterized as a:

club good.

Yosemite National Park is best characterized as a:

club good.

In many of our price discrimination examples, we think that businesses try to break customers into two groups: more price-sensitive and less price-sensitive. Consider the market for lunches in restaurants. Which of the following examples are likely to fit into the first group? I. Busy lawyers with 20-minute lunches II. College students III. Health-conscious soccer moms IV. Long-haul truck drivers

college students and long-haul truck drivers

Central Park, New York, when it is very crowded is best characterized as a:

common resource.

In the table below, we consider how Alex, Tyler, and Monique would fare under á la carte pricing and under bundling for cable TV when there are two channels: Lifetime and the Food Network. Alex and Tyler like to watch Project Runway so they each place a higher value on Lifetime than on the Food Network. Monique is practicing to be an Iron Chef in her second life and so she places a higher value on the Food Network than on Lifetime. Alex/ Tyler / Monique Lifetime /10/15/3 The Food Network /7/4/9 The Bundle /15/19/12 If the channels are priced individually, the most profitable prices for the cable operator turn out to be $10 for Lifetime and $7 for the Food Network. Now consider what happens under bundling: Customers get a take-it-or-leave-it offer of both channels, or they get nothing at all. The profit-maximizing bundle price turns out to be $12, and at that price, Alex, Tyler, and Monique all subscribe. How much consumer surplus is there at this price? How much profit will the firm make if there are no fixed costs and the marginal cost of providing an extra channel to any consumer is $0?

consumer surplus = $10; profit = $36

When the government expands the number of pollution allowances, does that increase or decrease the cost of polluting? What about when the number of pollution allowances is cut back?

decreases; increases

Complete the following sentence: If a pharmaceutical company is trying to decide what kinds of drugs to research, it will probably be lured toward inventing:

drugs with few good substitutes, because the demand for these drugs will be more inelastic

The benefit your neighbor receives from hearing you play your pleasant music is a(n):

external benefit.

The extra safety your neighbor might experience because criminals tend to stay away from neighborhoods that have a lot of burglar alarms is a(n):

external benefit.

The annoyance your neighbor feels because she doesn't like your achingly conventional music is a(n):

external cost.

The crime that is more likely to occur to your neighbor once a criminal sees a "Protected by Alarm" sticker on your window is a(n):

external cost.

Rapido, the shoe company, is so popular that it has monopoly power. It's selling 20 million shoes per year, and it's highly profitable. The marginal cost of making extra shoes is quite low, and it doesn't change much if they produce more shoes. Rapido's marketing experts tell the CEO of Rapido that if it decreased prices by 20%, it would sell so many more shoes that profits would rise. If Rapido's CEO follows the expert's advice, marginal revenue will _____, and total revenue will ______.

fall; rise

Suppose Sam sells apples in a competitive market. The apples are picked from his apple tree. Assume all apples are equal in quality, but grow at different heights on the tree. Sam, being fearful of heights, demands greater compensation the higher he goes: So, for him, the cost of grabbing an apple rises with the height he must climb, as shown in the Total Cost column below. The market price of an apple is $0.50. apples / total cost/ MC/ MR/ Change in profit 1/0.10/0.10/0.50/0.40 2/0.22 3/0.50 4/1.00 5/1.73 6/2.78 How many apples does Sam pick?

four

In Figure 11.6, you saw what happens in the long run when demand rises in a constant cost industry. Let's see what happens when demand falls in such an industry: For instance, think about the market for gasoline or pizza in a small city after the city's biggest textile mill shuts down. The figure below shows this type of fall in demand. When firms cut prices, they often do so in dramatic ways. When will the local pizza shops offer "Buy one, get one free" offers? During which stage will the local gas station be more likely to offer a "Free car wash with fill-up"?

in the short run, after demand falls

In 2006, Medicare Part D was created to subsidize spending on prescription drugs. One would expect this expansion to ________ pharmaceutical prices, because ____________.

increase; fewer prescription expenses will be paid by those who consume the drugs

Monopolists charge a higher markup when demand is highly _________, and when customers have ____ good substitutes for a product.

inelastic; few

Profits will be higher for a patented drug with an _________ demand, and a drug with a highly elastic demand is ____ likely to be "important" than a patented drug with an inelastic demand.

inelastic; less

Around 130 million voters participated in the 2008 U.S. presidential election. Imagine that you are deciding whether to vote in the next presidential election. What do you think is the probability that your vote will determine the outcome of the election?

less than 0.01%

A New York City street vendor selling popcorn is ____ likely to charge a larger markup than a movie theater selling popcorn because ____ .

less; there are few close substitutes for popcorn in a movie theater. In addition, there are many close substitutes for a given street vendor's popcorn in New York City

Which of the following is TRUE when a monopoly is producing the profit-maximizing quantity of output?

marginal revenue = marginal cost

The length of the "long run" will vary from industry to industry. How long would you estimate the long run is in the market for electrical engineers? [Hint: Consider the length of time a student would spend in school to get an engineering degree before entering the market.]

more than 2-3 years

A pharmaceutical company selling a powerful new antibiotic is ____ likely to charge a higher markup than a firm selling a new powerful cure for dandruff because ____.

more; the demand for a dandruff cure is more elastic than the demand for a powerful antibiotic

A producer of new, trendy shoes is ____ likely to charge a larger markup than someone selling ordinary tennis shoes because ____.

more; there are fewer substitutes for trendy shoes than for ordinary shoes

Consider a factory, located in the middle of nowhere, producing a nasty smell. As long as no one is around to experience the unpleasant odor, are any externalities produced? What happens if a family moves in next door to the smelly factory; is there an externalities problem now?

no; yes

In 2008, Jean Nouvel won the Pritzker Architecture Prize (the highest prize in architecture). One of his most notable works is the Torre Agbar (pictured), a breakthrough skyscraper that lights up each night thanks to more than 4,000 LED devices—a pricey but purely cosmetic feature. Many people enjoy looking at the illuminated façade of Torre Agbar, the third-tallest building in Barcelona. Considering that enjoyment, how would you classify the Torre Agbar: rival or nonrival? Excludable or nonexcludable?

nonrival and nonexcludable

Just based on self-interest, who is more likely to support strong patent and copyright protection on video games: People who really like old-fashioned video games or people who want to play the best, most advanced video games?

people who want to play new, advanced games, because they want to encourage innovation by video game companies

The pleasure you receive from listening to your iTunes download is a(n):

private benefit.

The safety you enjoy as a result of having the security system is a(n):

private benefit.

The price you pay for a security system for your home is a(n):

private cost.

The price you pay for an iTunes download is a(n):

private cost.

Into which of the four categories of goods does education —a college course, for instance—seem to fit best?

private good

Apples are best characterized as a:

private good.

Farm-raised salmon are best characterized as a:

private good.

Open-heart surgery is best characterized as a:

private good.

According to the elimination principle, what initially happens to profits in Industry X when demand rises in Industry X?

profits rise

In 2008, Jean Nouvel won the Pritzker Architecture Prize (the highest prize in architecture). One of his most notable works is the Torre Agbar (pictured), a breakthrough skyscraper that lights up each night thanks to more than 4,000 LED devices—a pricey but purely cosmetic feature. Many people enjoy looking at the illuminated façade of Torre Agbar, the third-tallest building in Barcelona. What type of good is the LED facade of this building?

public good

Central Park, New York, when it is nearly empty is best characterized as a:

public good.

The Chinese language is best characterized as a:

public good.

The idea of calculus is best characterized as a:

public good.

Some razors, like Gillette's Fusion and Venus razors, have disposable heads. The razor comes with an initial pack with a razor handle plus three or four heads; after that, you need to buy refills separately. What would you call this form of price discrimination? Where do you think Gillette gets more revenue?

tying; Gillette gets more revenue from the refills.

Just based on self-interest, who is more likely to support strong patents on pharmaceuticals: young people or old people? Why?

young people, because they have a longer time horizon to enjoy the benefits of newly invented drugs

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