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| Suppose that a monopolist’s market demand is given by P = 100 – 2Q and that marginal cost is given by MC = Q/2. a) Calculate the profit-maximizing monopoly price and quantity. b) Calculate the price and quantity that arise under perfect competition with a supply curve P = Q/2. c) Compare consumer and producer surplus under monopoly versus marginal cost pricing. What is the deadweight loss due to monopoly? d) Suppose market demand is given by P = 180 – 4Q. What is the deadweight loss due to monopoly now? Explain why this deadweight loss differs from that in part (c). |
Suppose that a monopolist’s market demand is given by P
A computer-products retailer purchases laser printers from a manufacturer at
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| A computer-products retailer purchases laser printers from a manufacturer at a price of $500 per printer. During the year the retailer will try to sell the printers at a price higher than $500 but may not be able to sell all of the printers. At the end of the year, the manufacturer will pay the retailer 30 percent of the original price for any unsold laser printers. No one other than the manufacturer would be willing to buy these unsold printers at the end of the year. a) At the beginning of the year, before the retailer has purchased any printers, what is the of laser printers? b) After the retailer has purchased the laser printers, what is the associated with selling a laser printer to a prospective customer? (Assume that if this customer does not buy the printer, it will be unsold at the end of the year.) c) Suppose that at the end of the year, the retailer still has a large inventory of unsold printers. The retailer has set a retail price of $1,200 per printer. A new line of printers is due out soon, and it is unlikely that many more old printers will be sold at this price. The marketing manager of the retail chain argues that the chain should cut the retail price by $1,000 and sell the laser printers at $200 each. The general manager of the chain strongly disagrees, pointing out that at $200 each, the retailer would “lose” $300 on each printer it sells. Is the general manager’s argument correct? |
The world is made; up of only two large countries:
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| The world is made; up of only two large countries: Eastland and Westland. Westland is running a large current account deficit and often appeals to Eastland for in reducing this current account deficit. Currently, the government of Eastland purchases $10 billion of goods and services, and all these goods and services are produced in Eastland. The finance minister of Eastland proposes that the government purchase half of its goods from Westland. Specifically, the government of Eastland will continue to purchase $10 billion of goods, but $5 billion will be from Eastland and $5 billion will be from Westland. The finance minister gives the following rationale: “Both countries produce identical goods, so it does not really matter to us which country produced the goods we purchase. Moreover, this change in purchasing policy will reduce Westland’s large current account deficit.” What are the effects of this change in purchasing policy on the current account balance in each country and on the world real interest rate? (What happens to net exports by the private sector in each country after the government of Eastland changes its purchasing policy?) |
Do people respond to market incentives? Consider the following policies.
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| Do people respond to market incentives? Consider the following policies. How do you expect people to respond to them? What environmental impacts might arise? (a) Many places require that “brownfields”-places that previously received contamination, usually from industrial use-be cleaned up before they can be put to new uses. Brownfields are commonly in urban areas. Suburban and rural areas are sometimes known as “greenfields,” since they lack contamination concerns. Where would new businesses want to locate? (b) In the western United States, a great deal of land is owned by the federal government, which does not pay local property taxes. The federal government does, though, give a share of the proceeds of sales of wood products from its lands to support local government purposes, such as schools. How might the local governments view wilderness protections that reduced wood harvests? (c) Many developing countries seek to develop export markets, because people in wealthier countries have more ability to buy products than people in their own countries. They can produce goods more cheaply due to lower labor costs, and often, fewer environmental restrictions on production. What factors would a company consider in deciding where to locate its production? What factors would a developing country consider in deciding whether to increase environmental protections? (d) When gasoline prices hit record levels in the summer of 2008, some U.S. presidential candidates proposed a “gas tax holiday”-reducing the federal gasoline tax-to ease the cost increase. These same presidential candidates expressed concern over the consequences of climate change, to which burning fossil fuels such as gasoline is a contributor. What effects, if any, would a “gas tax holiday” have on climate change? |
Two mutually exclusive projects, A and B, require the same
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| Two mutually exclusive projects, A and B, require the same up-front investment in the first year. Project A generates positive net cash flows in years 2 through 5 and nothing after that. Project B generates nothing in years 2 through 5, positive net cash flows in years 6 through 10, and nothing after that. At an interest rate of 10 percent, project A is a better investment than project B. Explain intuitively why project A must be better than project B at higher interest rates as well. |
You have just purchased a Kia with a $20,000 price
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| You have just purchased a Kia with a $20,000 price tag. The offers to let you pay for your car in five equal annual installments, with the first payment due in a year. a. If the finances your purchase at an interest rate of 10%, how much will your annual payment be? b. How much would your payment be if you had purchased a $40,000 Camry instead of a $20,000 Kia? c. How much would your payment be if you arranged to pay in 10 annual installments instead of 5? Does your payment fall in half? Why or why not? d. How much would your payment fall if you paid $10,000 down at the time of purchase? |
Identify whether each of the following events poses an adverse
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| Identify whether each of the following events poses an adverse selection problem or a moral hazard problem in financial markets. a. A manager of a savings and loan association responds to reports of a likely increase in federal deposit insurance coverage. She directs loan officers to extend mortgage loans to less creditworthy borrowers. b. A loan applicant does not mention that a legal judgment in his divorce case will require him to make alimony payments to his ex-wife. c. An individual who was recently approved for a loan to start a new business decides to use some of the funds to take a Hawaiian vacation. |
1. List the factors that can shift a perfectly competitive
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| 1. List the factors that can shift a perfectly competitive firm’s labor demand curve. 2. Explain why the market demand curve is not the horizontal summation of the firms’ demand curves for labor. 3. List the determinants of the elasticity of demand for labor. 4. Draw the market labor supply curve. 5. Describe the substitution effect of an increase in the wage rate. 6. Describe the income effect of an increase in the wage rate. 7. Explain when an individual’s labor supply curve will be upward-sloping. 8. List the factors that can shift the market labor supply curve. 9. Graphically show labor market equilibrium. 10. Explain why wage rates differ between labor markets. 11. State marginal productivity theory’s prediction about factor payments. |
The poorest countries in the world have a per capita
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| The poorest countries in the world have a per capita income of about $600 today. We can reasonably assume that it is nearly impossible to live on an income below half this level (below $300). Per capita income in the United States in 2010 was about $43,000. With this information in mind, consider the following questions. (a) For how long is it possible that per capita income in the United States has been growing at an average annual rate of 2% per year? (b) Some economists have argued that growth rates are mis measured. For example, it may be difficult to compare per capita income today with per capita income a century ago when so many of the goods we can buy today were not available at any price then. Suppose the true growth rate in the past century was 3% per year rather than 2%. What would the level of per capita income in 1800 have been in this case? Is this answer plausible? |
A discussion of labor unions usually evoke strong feelings. Some
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| A discussion of labor unions usually evoke strong feelings. Some people argue vigorously against labor unions; others argue with equal vigor for them. Some people see labor unions as the reason workers in this country enjoy as high a standard of living as they do; others see labor unions as the reason the country is not so well off economically as it might be. Speculate on why the topic of labor unions generates such strong feelings and emotions—often with little analysis. |
