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- Why is it nonsense to talk about urgent, critical, crying, vital, basic, minimal, social, or private needs?
- Economists would disappear only in a universe where time is unlimited. True or false? Explain.
- Is it inconsistent to state that the United States is the wealthiest nation, but scarcity is still a problem? Explain.
- Some people contend that Americans live in a post-scarcity economy. In terms of normative and positive economics, explain the statement.
- Theory is okay for eggheads, but I'm a hard-boiled woman. Give me the facts and they'll speak for themselves. How do facts speak for themselves?
- What is the role of assumptions in model construction?
- What is the difference among the terms postulate, assertion, assumption, hypothesis, theory, paradigm, and model?
- The major difference between natural sciences and social sciences is that laboratory experimentation is possible in the natural sciences but not in the social sciences. True or false? Explain.
- If a model predicts, can it also be used for control?
- For prediction, a theory must yield empirically validated predictions. Assume you are asked to evaluate a 100-year-old theory that has not yielded an accurate prediction. Supporters of the theory advocate that not enough time has elapsed to validate the theory. Should this theory be accepted or rejected? Explain.
- Consider a poor household on welfare, consuming only food and housing. Should welfare payments be in the form of payments in kind (weekly allocation of food) or money? Discuss.
- A rise in the price of a commodity from $5 to $10 reduces the quantity demanded from 40,000 to 30,000 units. What is the price elasticity of demand at the mean values of price and quantity demande
- What is the relationship between the factors that account for a downward-sloping demand curve and the elasticity of demand?
The price elasticity of demand for a given commodity is larger in absolute value
- The more numerous and closer the substitutes
- If it is a luxury rather than a necessary good
- If it accounts for a large portion of the consumption budget
At high prices rather than low.
What is the rationale for each case?
- Sara is given a choice between paying $15,000 for either a cruise around the world or a brand-new compact automobile. She chooses the automobile. However, just as Sara is about to pay for the automobile, she is informed she can have her choice at no charge. Given this information, Sara promptly changes her mind and chooses the round-the-world cruise.Why?
- The elasticity of demand for automobiles is generally inelastic; however, for a specific make and model it may be elasti Why?
Are the following statements true or false? Explain each answer.
- A linear demand curve has constant elasticity of demand at every quantity level.
- The demand for corn is inelastic, so social welfare can be enhanced by destroying 10 percent of the annual corn production.
- Assume you are on the president’s staff at a large university. The university is currently facing declining enrollments, so the president is considering a large decrease in tuition. What factors would you consider in forecasting the effects of such a tuition reduction?
- In 1982, Delta Airlines posted a quarterly deficit of $16 million. In the quarterly statement, Delta stated the passenger-mile yield did respond to increased airfares, increasing 4 percent, but the yield increase was not enough to offset the decline in air traffi Was the elasticity of demand elastic or inelastic? Explain.
- If the elasticity of demand for the Amtrak passenger service is unitary and the railroad is operating at a loss, can the passenger service be made profitable by changing its price? Explain.
- On a radio program devoted to farm news, it was reported, “Farmers are receiving a high price for cotton, but unluckily production is substantially off this season.” Thus, farmers were not receiving the full benefit of the high price. Analyze this statement in terms of economic theory.
- What did John Maynard Keynes mean when he wrote: “In the long run we are all dead?”
- Why would a firm ever keep any inputs fixed in the face of changing market conditions? What determines which inputs are held fixed and which are allowed to vary?
- Assume you are the manager of a pizza parlor. How would knowledge of your production function aid in your management decisions?
- A farmer purchases a fertilizer plant, so she now has access to a large amount of fertilizer and spreads it over a fixed amount of lan What may happen to the marginal product of land? Explain how input proportions affect the marginal products of inputs.
- The United States is troubled more by agricultural surpluses than shortages. This shows that Malthus’s Law of Diminishing Marginal Returns is an invalid concept. True or false? Explain.
- Assume you have a large flowerpot and all the water, seeds, sunlight, and nutrients you require. Why will diminishing marginal returns still result?
- If the Law of Diminishing Marginal Returns did not exist, the entire world’s supply of food could be grown in a flowerpot. True or false? Explain.
- Further efforts will be fruitless because you have reached the point of diminishing returns. Is this common use of diminishing returns correct? Explain.
- If a firm is operating in the region of diminishing returns, it should decrease its current level of the variable input. True, false, or uncertain? Explain.
- A student is observed not to study beyond the point of diminishing marginal returns while preparing for the CPA examination. Do you think this student will make a good economist?
- Why is it feasible to operate somewhere in Stage II of production without knowing the cost of the input?
- If engineers prepared an equation yielding the technically efficient level of production for a given set of inputs, could they then find the optimum proportion of inputs? Explain.
- Are isoquants drawn convex due to theoretical and empirical reasons or because it is convenient for making second-order conditions for constrained cost-minimization valid for interior solutions? Explain.
- Do firms tend to specialize or diversify in the employment of inputs? Are convex isoquants consistent with your conclusion? What would be observed if isoquants were concave to the origin?
- In the long run, consider a firm with a production process characterized by perfectly substitutable inputs. Is it possible to determine if the marginal rate of technical substitution is high or low? Explain.
- Are fixed-proportions production functions linear homogeneous?
- If there is only one type of input in production, is it possible for constant or increasing returns to scale to exist? Explain.
- Compare the Law of Diminishing Marginal Returns with the concept of decreasing returns to scale.
- Is the Law of Diminishing Marginal Returns applicable in the long run?
- Can there be production without costs? Explain.
- In the United States, a large percentage of food is produced on family-owned and operated farms. This is more efficient than corporate-owned farms, because family farms do not have to pay for most of the labor input. True or false? Explain.
- If a firm wants to estimate its cost function, does it have to know how much profit it would make at each output level? Explain.
- If a firm is producing where v1/MP1 > v2/MP2, what can it do to reduce costs but maintain the same output level?
- Is the problem of least-cost production for a given level of output important only for producers or is it also important for consumers? Explain.
- In terms of least-cost production, which is more efficient, Japanese agriculture with its intensive use of land or United States agriculture with its far less intensive use of land? How have relative prices in the two countries resulted in alternative types of farming?
- During World War II, the United States constructed airstrips in China, employing local labor. Without machinery, the workers mixed concrete and transported it to form the runway. Why would it not have been more efficient to use machinery instead?
- Would a firm always continue to increase production as long as it experienced economies of scale?
- If a firm could produce an output and maintain constant economies of scale at all levels of output, what would be the shape of the firm’s long-run average cost curve? Would its short-run average cost curves have the same shape?
- Can the condition of long-run costs declining and then increasing be explained by decreases and increases in input prices? Explain.
What is wrong with the following statement from an industrial plant manager?
“My plant is working at its most efficient output level. However, a short-run increase in demand can be covered by running the lines at a faster rate and deferring routine maintenance. Thus, in the short run, my marginal cost is realistically zero.”
- State and explain the Law of Diminishing Marginal Returns. What bearing does this law have upon short-run costs?
- Refer to Exercise 3 in Chapter 7, concerning probability of a traffic accident. Caution is costly, it requires time and alertness. Explain why drivers will generally not take complete caution.
- Long-run average cost involves the full cost of all inputs whereas short-run average variable cost involves the cost of only those variable factors. However, short-run average variable cost may exceed long-run average cost. Do you agree or disagree with this statement? Explain.
- For railroads, approximately two-thirds of total costs are fixed, with the remaining one-third variable, so SAVC is only one-third of SAT Thus, railroads will improve their profit position by increasing rail traffic at rates lower than SAT Is this statement valid? Explain.
- Where there are two or more variable inputs, a supply curve is based on the assumption that production is efficient. True or false? Explain. What about only one variable input?
- What are the implications of a productive activity where marginal cost never increases?
- An airline is considering adding an additional route to its schedule. It determines that the ticket revenue from the route will cover fuel, maintenance, and labor, but will not coverall of the costs. Should the airline add the route? Explain.
- Why is it assumed that a firm’s objective is to maximize total profit rather than marginalprofit?
- Why is it not sensible to close a business if it is earning zero pure profits?
- A producer will determine whether to operate or not by considering her short-run average variable costs, her profit level by considering her short-run average total cost, and her optimal level of output by considering her short-run marginal cost. True or false? Explain.
- The greater my sales, the greater my profits. True or false? Explain.
- Explain why a perfectly competitive firm does not expand its output without limit, given that it can sell all of this output at the same per-unit price.
- Douglas’s firm is currently operating at a loss. If the output price increases, he will not increase quantity because if he did marginal cost would rise and he would be losing even more. True or false? Explain.
- Regardless of the amount of water used, the price per cubic foot the public utility charges is the same. What then is the elasticity of supply for water? Explain.
- When prices on the Tokyo stock exchange fall, financial reports indicate that the cause is heavy selling. However, for every share sold a share is bought. Why not refer to it as heavy buying?
- Kenya is interested in discouraging the poaching of elephants for their ivory. Whencontraband ivory is captured, what should the government do with the confiscated ivory?
- It is claimed that on the first of the month, when welfare and Social Security checks arepaid in city ghettos, store owners never discount prices and thus earn higher profits. If high profits are earned by these store owners, what may happen in the long run?
- In a perfectly competitive market, why will all the benefits from a technology change accrue to consumers in the form of lower prices?
- A perfectly competitive firm can sell all the output it can at a given market price. Yet,when there was an abundant cotton harvest, a farmer received a lower price when he sold his large harvest. What happened?
- The U.S. Department of Agriculture recently predicted bumper crops of corn and wheat, but the assistant secretary for economics warned consumers not to expect prices to decrease. He cited the rising cost of production and increased export demand rising as reasons for his warning. The assistant secretary stated, “The classic pattern of supply and demand won’t work this time.” Is his statement true or false? Explain.
- Assume your current total revenue in farming is $120,000 per year and your costs are $10,000 per year for seed and fertilizer, $12,000 for other supplies, and $15,000 interest on machinery loans. You are offered another job that would pay $50,000 per year. If you take it, you will sell your farm and machinery and earn $70,000 per year interest on the money you had invested in land and machines. Should you take the other job? Explain.
- Mr. Young only has the knack for always planting the best crop and consistently earns higher profits than other farmers. Are these really higher profits or something else? Explain.
- Hazel is the production manager of an assembly line. The equipment on the line is undera long-term leasing agreement with a rental rate as a function of the prime rate of interest. Recently, the rental rate has gone up dramatically, so Hazel decides to reduce the production rate along the line. Did she make the correct decision? Explain.
- If at an equilibrium price, every firm in the industry is earning a zero pure profit, does this imply that a fall in market price will result in all firms shutting down? Explain.
- An agricultural experiment’s station director at a major college of agriculture in the Southeastern United States stated that soybeans are currently not profitable due to low prices. Thus, economists should investigate alternative crops for southeastern farmers. Given continued low prices for soybeans, will soybean production remain unprofitable? Explain.
- Some economic historians claim the Industrial Revolution was caused by rising demandthat encouraged firms to expand production while others argue it was due to rapid technological change increasing supply. What was the probable major cause and why?
- The supply curve for a firm in the short run is the short-run marginal cost curve (abovethe point of minimum average variable cost). However, the supply curve in the long run is not the long-run marginal cost curve (above the point of minimum average total cost). Why?
- In the long run, a perfectly competitive firm always operates at the minimum level of average costs for the optimal plant size to produce a given amount of output. True or false? Explain.
- Why, in the short run, is perfectly competitive equilibrium where p = SMC, while in the long-run equilibrium it is where p = SMC = SATC.
- If the long-run equilibrium for a firm is characterized by zero pure profit, why would firms adopt new cost-reducing technologies?
- It is argued that agricultural research benefits low-income households relatively more than those with higher incomes. Why?
- Diseconomies of scale are seldom observed in an industry. Why?
- Economists have estimated the optimum size of a plant by investigating the existing plant sizes, assuming that plants that have survived must be close to optimum size. Is this a reasonable assumption? Explain.
- Assume that an increase in the demand for movies increases the salaries of film artistssubstantially. Is the long-run supply curve for movies likely to be horizontal or upward sloping? Explain.
- Suppose Congress passes a law providing a subsidy for every acre of land used for growing tobacco. How does this program affect the long-run supply curve for tobacco?
- It is inconsistent with the perfectly competitive model for a firm in a long-run equilibrium to ever produce a positive quantity where its long-run average costs are continuously declining. What are the implications of this for an industry where all firms have declining average costs?
- In the early part of the last century, chicken was considered something special, and wasmainly served only on special occasions or on Sunday. Today, chicken is quite common and served throughout the week. Explain this increase in the popularity of chicken.
- An Atlanta cab driver appears to be making a pure profit in the long run after accounting for the operating and labor costs. Does this violate economic theory? Explain.
- Perfectly-competitive industries do not really exist, so what is the point of studying them?
- Assume that a firm is maximizing profit, in the short run, with variable labor input and afixed level of capital. If wages decline, what happens to the firm’s use of capital? What happens to the firm’s level of profit?
- Consider two steel plants, one in China and one in Europe. One plant employs five workers per ton of steel; the other employs seven workers per ton. Can it be determined which plant is more efficient in terms of technological efficiency? How about economic efficiency? Explain.
In his Principles textbook, Alfred Marshall gave the following measure for consumer surplus:
“The amount a consumer would pay over which he does pay for a given amount of a good rather than none at all.”
Another consumer surplus measure is
“The monetary equivalent of the fall in utility a consumer would experience if the right to purchase the good at the market price were taken away.”
What relationship, if any, exists between these two measures? Discuss.
- Assume the market supply curve is vertical, eS = 0. What is the deadweight loss of a sales tax or a subsidy?
- Why is p = MC such a big deal?
- What is so hot about perfect competition?
- In long-run equilibrium, p = LAC = LM Of what significance is p = LAC? How about p = LMC? In answering, distinguish between technological, allocation, and scale efficiency.
- If half of a tropical rain forest in a region is destroyed, the value of the remaining forest would be greater than the value of the whole forest prior to its destruction. Thus, the whole is worth less than the half. This illustrates how the concept of value is distorted in a market economy. True or false? Explain.
- Explain the concept of consumer sovereignty.
- Would it be correct to define an equilibrium price as the price at which the quantity purchased equals the quantity sold? Explain.
- Demand and supply are constantly changing to reflect market conditions such as changing preferences and technologies. With changing market conditions, what is meant when the popular press talks about shortages of teachers, computer programmers, or housing?
- Discuss the possible social advantages and disadvantages of a rise in the price of water during a drought.
- A Roman emperor declared there should be cheapness. For wherever his legions go, prices for food increase many-fol What will be the result of his declaration? Explain.
- Why would anyone be against imposing price controls on necessary goods to protect the poor when facing rapidly rising prices?
- Price controls, designed for rationing available supply, generally work as hoped during a national emergency. However, once the emergency has passed, such price controls are less effective. True or false? Explain.
- The demand for illegal drugs is generally highly inelastic and motivates a large proportion of the crime committed in US inner cities. If a social worker’s objective is to reduce drug use without causing an increase in crime, would she support tougher penalties for users or dealers? Explain.
- If it is true that the demand for illegal drugs is highly inelastic, would users be in favor of tighter or looser controls over drug traffic? Explain.
- Will the establishment of minimum housing standards necessarily be in the best interest of low-income households? What will be the effect of these standards on the quantity, quality, and price of housing?
- In the past, the government regulated the US petroleum industry by placing a price freeze on old oil, where old oil was defined as petroleum in existing wells. Any development of new wells would be considered new oil and not subject to the price freeze. It was assumed that petroleum from existing wells would continue to be supplied even as the price of new oil increased, and the higher price for new oil would encourage the development of new wells. Was this assumption correct? Explain.
- Explain what might have happened if the government had imposed a price ceiling on coffee in the late 1970s after the price rose 400 percent?
- In France, rent control from 1914 to 1948 resulted in limited, if any, residential construction. Why did this result occur?
- Given a ceiling price, does the black-market price indicate what the legal-market price would be without the ceiling price? Explain.
- Would the Mafia deal in summer squash if it became an illegal commodity? Why or why not?
- How has the legalization of abortion influenced the demand, supply, price, quantity, and quality of the service?
- Recently a number of governments have imposed (or propose to impose) a stronger penalty for drug dealers, with a weaker penalty for users. What will likely happen to the price and quantity of drugs consumed? Explain.
- The United Kingdom has a national health care program where medical services are provided free to individuals, with the cost paid through taxes. UK physicians generally complain that patients demand too high a level of services and patients complain they wait too long for such services. As a result, a private medical services market has developed alongside with the public system. Is such a dual system efficient?
- Why did the government agricultural price-support programs result in huge stockpiles of agricultural commodities?
- Many farmers argue that crop restriction programs do not really improve their incomes because the subsidy they receive per retired acre does not offset the loss of income from producing less. What assumptions are they making about the price elasticity of demand?
- Without government price supports, farmers could not afford to grow peanuts, so we would not have any peanuts without such supports. True or false? Explain.
- Assume that labor productivity in agriculture grows at twice the rate for the rest of the economy. Given the continuing problem of surpluses in agricultural commodities, would decreased productivity in agriculture be a desirable solution? Explain.
- Assume that the supply of apartments is fixed in a market period, so the equilibrium rent is determined solely by deman If the property tax on apartments increases, how much of this tax will be passed on to renters?
- A sales tax is placed on a competitive firm’s output. How will this tax affect the cost curves for the firm? What will happen to the firm's price, output, and profit in the short run? What will happen in the long run?
- A standard industry argument for protective tariffs and quotas is that its output is essential for national defense. How does restricting imports ensure supplies of output from such an industry? What alternative policies are available?
- Explain the relationship between the production possibilities frontier and the definition of economics.
- Suppose a new invention causes a constant returns to scale production process for food to become an increasing-returns process. How does this change affect the production contract curve and production possibilities frontier?
- A perfectly competitive price that all agents take as given is the key to economic efficiency. True or false? Explain.
- Firm A is a price-taker and can sell all of its output at a price of $5. In contrast, firm B has to lower its price from $6 to $5 to sell more output. Why isn’t the marginal revenue for firm A the same as the marginal revenue for firm B?
- What is the condition of a single firm in an industry selling at a lower price than would be possible if there were many smaller firms? Explain.
- The following graph is meant to describe the situation of a monopoly. What’s wrong with it?
- Why is the price of an extra unit sold by a firm with monopoly power greater than the extra revenue received?
- On most weekdays, theater matinees are almost empty. Why do managers of theaters not lower their ticket prices to fill up their theaters?
- A firm with monopoly power will charge the highest price it can get. True or false? Explain.
- A monopoly has no competition, so it can charge whatever price it wishes and it always enhances profit by increasing its price. True or false? Explain.
- A profit-maximizing monopoly never produces an output in the range where the price elasticity of demand is less than 1 in absolute value. Why?
- Assume a firm knows the demand curve for its product. If the firm’s objective is to maximize profit, explain why it will price its output so the price elasticity of demand is less than –1. What is the assumption about the cost of production? If production cost is zero, what is the elasticity of demand at the profit-maximizing output level? If total cost declines at a decreasing rate with increases in output, what is the elasticity?
- A monopoly produces 10,000 units of some output, and the price elasticity of demand at this level of output is –½. What should the monopoly do and why?
- The market demand curve for cocaine is said to be highly inelasti Cocaine is also said to be monopolized by street gangs, and it is assumed they attempt to maximize profit. Are these two views consistent?
- We know that the Lerner Index LI, a percentage markup of price over marginal cost, is (p – MC)/p. Why can this markup be viewed as a measure of monopoly power?
- Compared with a manager of a firm with monopoly power, a manager of a perfectly competitive firm has an easy job—because she does not have to be concerned about setting the price. True or false? Explain.
- The more profitable a firm, the greater its monopoly power. Analyze this statement.
- If a street gang can effectively monopolize an illegal drug, would you expect to observe more or less crime? Explain.
- Would a monopoly always continue to increase production as long as it is experiencing economies of scale?
- A firm should always produce at an output at which long-run average cost is minimize True or false? Explain.
- What is meant by the statement “Monopolies concoct scarcity”?
- Monopoly is bad for consumers but good for producers. Thus, on balance, we cannot determine if it lowers social welfare. True or false? Explain.
- What is wrong with exercising monopoly power? What is right about it?
- If monopolies are inefficient, why do governments often try to protect certain sellers against potential competitors wishing to enter a market?
- Microsoft has taken advantage of its dominant position in the operating-system software industry and made huge profits. Thus, it would be perfectly just to impose a special tax on Microsoft as a way of recovering for society some of the exorbitant past profits. True or false? Who would pay for this tax? Explain.
- The sole objective in dealing with monopoly power is eliminating excess profit. This is done by setting price equal to average cost. True or false? Explain.
- What problems face a regulatory agency attempting to force a monopoly to charge the perfectly competitive price?
- The Southern Power Administration, a publicly owned utility, determined that a 50 percent increase in rates would generate an additional revenue of $729 million per year. What does this indicate about the price elasticity of demand? Is the utility maximizing profit? Is it maximizing social welfare? Explain.
- Regulatory commissions frequently require public utilities to set a price that yields the going rate of return by equating price to long-run average cost. In terms of efficiency, economists suggest instead that price should equal marginal cost. What problems exist with the selection of either of these two pricing options?
- Even through their prices are regulated, public utilities generally engage in governmental lobbying efforts. Why do they do so and what do they lobby for?
- Mr Rural lives in the country and Mrs Urban lives in city central. More gas is required to deliver a newspaper to Mr Rural than to Mrs Urban, but the price of the paper is the same for both. Is this a type of price discrimination? Explain.
- Assume all firms except one are perfectly competitive, and the remaining firm is a perfectly price-discriminating monopoly. Explain why the Pareto-efficiency conditions will still be satisfie What differences in allocation and distribution of income result from the one firm not being a perfect competitor?
- Will a monopoly ever provide a Pareto-efficient level of output on its own?
- Assume a firm’s demand curve is below its short-run average total cost curve at all levels of output. Can you conceive of any cases where production may still be profitable? Explain.
- A physician states that she is helping her low-income patients by charging lower fees than she charges her higher-income patients. Who else is she helping? Explain.
- Why do identical books usually sell for so much more in hardcover than in soft-cover? Explain.
- Why is the price of tickets to sporting events and concerts typically lower for children than for adults? Explain.
- A manager of a local movie theater is setting the price schedule for the movies based on the day of the week, time of day, and type of costumer. How should he set prices? Would the pricing schedule be different if the theater was the only one in town rather than one of a number of competing theaters? Explain.
- Is price discrimination socially desirable? Explain.
- Sandra says, “A monopoly will produce a product of higher quality because cutthroat competition will lead to a decline in quality.” Paul says, “A monopoly produces a smaller quantity of product than would a competitive industry and, by the same logic, will also produce a product of lesser quality.” Who is correct? Or are they both wrong? Explain.
- Would a perfectly competitive firm engage in advertising? Explain
- In the early 1980s, Nissan Motor’s promotion for one of its automobiles was “You need this car!” What was this type of advertising designed to do?
- Monopolistic competition is a monopoly up to the point where households become willing to buy close substitutes and competitive beyond this point. True or false? Explain.
- In the past, some industry-watchers predicted that the big national beer companies would increase their market share and the smaller regional companies would disappear. However, there are still a large (and possibly growing number) of small beer companies. Why?
- What stops a firm with monopoly power from offering an infinite number of product varieties? Under what circumstances will only a single variety be offered?
- Suppose all the firms in a monopolistically competitive industry were merged into one large firm. Would this new firm produce as many different brands? Would it produce only a single brand? Explain.
- How do the characteristics of monopolistic competition lead to the existence of idle capacity.
- Compare monopolistic competition with perfect competition in terms of economic efficiency.
- Do oligopolies produce an efficient level of output? Explain.
- Why should firms in monopolistic competition allocate resources toward advertising if a large portion of advertising has canceling effects?
- A competitive industry is in long-run equilibrium, where all firms are earning zero pure profits. All firms in this industry and potential entrants have identical average cost curves. A large increase in demand is forecast for this industry. The industry association, concerned that this increase in demand could worsen pollution emissions by the industry, lobbies government legislators to adopt new environmental regulations for this industry. The association lobbies that any new plant in the industry should be equipped with emission controls involving a completely different plant design than is currently used in existing plants. Also, the association suggests existing plants should be exempted from this regulation because it is not technologically feasible to retrofit. Why would an industry association suggest that their own industry be subjected to such environmental regulation?
- Consider a cartel where each firm has identical and constant marginal costs. If the cartel maximizes total industry profits, how will it divide output among the firms? Explain.
- Suppose US.wheat producers decide to form a cartel and restrict their output. Will their cartel result in an increase in total revenue and profits for its members? Explain.
- During Prohibition in the 1920s, various gangs in Chicago fought for control of the distribution of illegal alcohol. At times, the gangs would meet to settle their disputes and determine who would control which parts of the city. Why did these settlements generally not last long?
- Some economists say that cartels combine the worst social results of monopoly power with none of the advantages. Do you agree or disagree? Explain.
- A competitive firm signs a 10-year lease on a building. The landlord requires annual rent increases based on the rate of inflation of 3 percent per year. How will the rent increase affect the firm's prices for its products?
- Retailers in upscale shopping malls often use their high rents as justification for their high prices. Is this a correct statement of the relationship between rent and product prices? Explain.
- Why does rock star Madonna earn more than a firefighter?
- Provide two examples of inputs receiving economic rent, where one receives a large economic rent and the other small. What is the relationship between economic rent and barriers to entry?
- Marginal productivity does not determine wages, it only determines how many workers will be employed at a given wage. Thus, marginal productivity analysis is a theory of demand for labor, not a theory of distribution. What does determine wages? Does marginal productivity affect such determinants? Explain
- Is the value of the marginal product equal to the input price on a firm's input demand curve? Explain.
- Employers pay unskilled workers low wages and pay no more than necessary. This indicates that low pay has nothing to do with low productivity. True or false? Explain.
- The supply of labor in a perfectly competitive market is reduce What are the effects on the wage rate, the quantity of labor employed, and output market price and quantity? Explain.
- If the marginal revenue product of 1 kilowatt-hour of electric power is $0.10 and the cost of producing this kilowatt-hour is $0.15, what should the firm do? Explain.
- Babe Ruth was probably the greatest baseball player of all time. However, after adjusting for inflation, even below-average ball players today earn more in real terms than the Babe ever di Why?
- How does perfect competition cause individuals to receive income proportional to their effort?
- University professors are highly educated, but their salaries are low relative to this education level. Is this an example where economic theory does not apply? Explain.
- Explain why women might tend to have fewer children as their wage rates increase.
- What does the demand for labor have in common with the demand for a product?
- If a firm hires an unemployed worker, is the opportunity cost of the worker's productivity zero? Explain.
- Why is a firm's labor demand curve more inelastic when the firm has monopoly power in the output market than when the firm is producing competitively?
- Agricultural scientists in California have developed a variety of tomatoes that can be picked by a machine. Who benefits and who is harmed from this research? Explain.
- Can a demand curve for an input be derived if the employer of the input is a monopsony? Why or why not?
- Under what conditions will the wage rate be equal to the marginal input cost? When will it be less than its marginal input cost?
- When is a factor exploited? What is monopoly exploitation and what is monopsony exploitation?
- Firms with monopoly power in their output market pay a wage rate less than workers’ VMP and perfectly competitive firms in their output market pay a wage equal to workers’ VMP, so workers in the same labor market will receive a lower wage from the former and a higher wage from the latter. True or false? Explain.
- Do labor unions reduce the wages and income of some workers? Explain.
- At times, union officials have asked their members to take a cut in wages or benefits. Why?
- The Clayton Act states “The labor of a human being is not a commodity or article of commerce.” As a result, workers are allowed to organize into unions and jointly seek higher wages. Should such union organization be exempted from the antitrust laws? Explain.
- A legislature concerned with the nonunionized workers’ welfare decides to pass a law requiring all workers to be unionize What will happen to the wage rates of formerly nonunionized workers and those workers who were originally unionized? What assumptions can be drawn about a union’s behavior?
- Why is it easy to become a member of some unions and very difficult to become a member of others?
- What are some of the economic effects of featherbedding?
- Under what conditions would you expect the imposition of a minimum wage to have no effect on wages or on the number of workers employed: Increase wages and leave the number of workers unchanged? Increase wages and decrease the number of workers? Increase in both wages and the number of workers?
- What are the problems in defining capital as a resource and what do different types of capital have in common? What does the price of capital pay for?
- What distinguishes an impatient consumer from a patient consumer?
- If, as in many developing countries, lending and borrowing are not possible, what would happen to current and future consumption for a borrower and his level of utility? How about for a lender?
- Income taxes are said to be biased against labor income by failing to allow any deductions for depreciation of a worker's productivity over time. What would be the result of allowing such deductions?
- How can promotional expenditures be regarded as an investment? How does this relate to the concept of such expenditures operating to maintain barriers to entry?
- Do economists view the total return on capital investment as profit? Explain.
- Money itself is not a resource and is thus unproductive. Why should agents be willing to pay a price (interest rate) for acquiring it?
- Are output and profit measured as a flow or a stock?
- Consider a rent-subsidy program that varies the rent of an apartment for households based on income. Such a program results in inefficiency, with the economy operating somewhere inside the production possibility frontier. Can such a program be justified on the basis of Pareto efficiency? Can it be justified on the basis of a social-welfare function? Is there any program that cannot be justified on the basis of some social-welfare function?
- Agricultural scientists at the University of California, Davis have developed a tomato variety that can be picked mechanically. How is this an improvement in production efficiency? Is this also an improvement in social welfare?
- If people were reasonable, strikes and wars would not occur. Do you agree or disagree with this statement? Explain.
- Is maximizing profit an evil or beneficial behavior in a free-market system? Explain.
- Under what circumstances might government subsidies or taxes result in an increase in social welfare?
- “An economist can identify inefficiency and provide options for correcting the inefficiency. However, beyond this, her professional expertise is exhauste” Evaluate this statement critically.
- Determining a policy choice will always involve the adjudication of conflicting claims among agents. True or false? Explain.
Explain why each of the following statements is either true or false:
- Perfect competition results in maximum social welfare.
- The invisible hand always results in Pareto optimality.
- The economy can be at a Pareto-optimal point when households are free to undertake all the exchanges they wish.
- Society can move from one point on a production possibilities frontier to another by redistributing wealth using an inheritance tax.
- Arrow’s Impossibility Theorem states that a social-welfare function must be either democratic or consistent, but it cannot be both. True or false? Explain.
- Capitalism and democracy are very complementary in the sense that they together put some rationality into equality and some humanity into efficiency. Analyze this statement.
- Some critics argue that modern government has become Robin Hood, taking from the rich and giving to the poor. Should governments play Robin Hood? Explain.
- Why should a government policymaker not ignore economic theory? Explain.
- Is a normative argument required to state that perfect competition will generate a Pareto-efficient allocation? Does it require a normative argument to state that perfect competition is the best for society? Explain each answer.
- With so many famine-stricken people in the world it may be ethically wrong for us not to produce all the food we can. Should US farmers produce all the food they can? Explain.
- What is market failure and what causes it to occur? Given market failure, should the free market be replaced with government control over prices and output?
- What is undesirable about voting that cycles?
- Some advocates of free markets and a minimal role for government in an economy state that perfect competition is an ideal system because it yields the condition of the greatest good for the greatest number of people. Is this condition an efficiency or equity criterion for economic welfare? Will perfect competition generate this condition? Explain.
- Why is economic efficiency a necessary condition for maximizing social welfare? Is it the only necessary condition?
- Market socialists state that an economic planning agency could simulate competitive- market forces with equations and solve the equations to arrive at equilibrium prices and outputs. This would be more efficient than the tâtonnement of free markets. True or false? Explain.
- Ronald Reagan stated “The taxing power of the government must be used to provide revenues for legitimate government purposes. It must not be used to regulate the economy or bring about social change.” Comment on this statement.
- If an economy is an organizational system for coordinating production, consumption, and distribution of commodities, what role is played by property rights? Explain.
- How do class-action lawsuits contribute to the improvement of social welfare?
- In some past societies, entitlements for using land could not be transferred to anyone else. A farmer could acquire a new plot of land by clearing it and leave his old plot available for some other individual. How would this type of entitlement affect land conservation compared with land-ownership entitlements?
- Are absentee landlords a potential source of soil-erosion problems? Explain.
- Given a positive externality, the marginal cost function of firm A shifts downward when the output of firm B increases. What is the appropriate per-unit subsidy to offer firm B?
- Monopolies result in inefficient allocations and thus can negatively impact social welfare. What are some of the market and social-welfare benefits of a monopoly in an industry where production is associated with a negative externality?
- Critics contend that the expansion of MARTA, the mass-transit system in Atlanta, will not generate sufficient revenue to cover costs. Thus, expansion is not feasible. Is this argument valid or invalid if the external effects generated by the transit system are considered? Explain.
- An externality exists when, as a result of generating air pollution, a firm increases the cost of another firm. In contrast, it does not exist if the firm increases the cost of another firm by bidding up the price of inputs. Explain the difference.
- One particular type of externality is where there is only one seat left, say, on an airplane or for a particular college course. The agents who are left out are directly affected by the actions of the agent who gets the last seat. Determine a mechanism design that will result in a Pareto-efficient outcome.
- A farmer applying pesticides within a certain radius of an endangered species will disrupt the species' habitat. Apply the Coase Theorem to this situation. Does it make any difference in the outcome whether the endangered species or the farmer has the property right?
- Why are there oyster farms but no salmon farms? Explain.
- Air-pollution problems could be resolved by specifying exclusive rights to air. Evaluate this statement.
- Steven Kelman in What Price Incentives? Economists and the Environment (Auburn House, 1981) suggests that, from an ethical point of view, the use of economic incentives—including emissions charges or emissions permits—in environmental policy is undesirable. He argues that transforming our mental image of the environment from a sanctified preserve to a marketable commodity has detrimental effects not only on our use of the environment but also on our attitude toward it. He points out that applying economic incentives to environmental policy weakens and cheapens our traditional values with regard to the environment. Comment on Kelman's viewpoint.
- Why do many firms have an incentive to lobby for pollution standards as opposed to taxes?
- In many cases, lesser-developed countries reap the benefits of technological advances from more-developed countries. Is this an example of the free-rider problem?
- Consider the following solution to the allocation between two agents of a discrete public good with cost T Each agent states a bid bj, j = 1, 2. If b1 + b2 ≥ TC, the good is provided and each agent pays their bid amount; otherwise, the good is not provided and neither agent pays anything. Will this mechanism yield an efficient allocation? Explain.
- Comment on the following statement: “In a pooling equilibrium, only consumers who unfortunately purchase a lemon are harme”
- How does the incidence of AIDS affect adverse selection?
- Given asymmetric information in baseball, would you expect the salary offered to a free agent to be lower than that paid to a similar player who remained with a team?
- Is the number of commodities produced by a firm a signal as to the quality of the commodities?
- Why is some degree of ignorance optimal?
- The expression “you get what you pay for” suggests using price as a screening device. The higher the price, the better the quality. Under what conditions is this a strong screening device? A weak screening device?
Relate the following law (Gresham’s Law) to adverse selection: “Bad money drives out goo”
Note: This law was derived from money in the form of gold coins, where bad coins resulted from individuals removing some of the gold from a coin.
- Do brand names reduce asymmetric information by providing a signal of quality to consumers? Explain.
- How does the Federal Trade Commission’s enforcement of truth in advertising affect firms’ signaling and Pareto efficiency?
- Given the inefficiency associated with asymmetric information, should the government subsidize the US Postal Service instead of requiring it to be nonprofit? How about subsidizing the Internet?
Comment on the following statement:
“Warranties can mitigate adverse selection but cause moral hazar”
Determine which of the following conditions will result in adverse selection, moral hazard, or both:
- An AIDS victim purchases life insurance on the Internet.
- A hobo locates in a city with an outstanding welfare system.
- A reckless driver drives a fully insured truck.
- A university is willing to accept any student with a high-school degree.
- An airline traveler plans to blow up the plane after taking out a flight insurance policy.
- A novelist procrastinates after receiving an advance on a novel.
- Cotton States Insurance Company provides a $150 discount to any policyholder who has a security system that notifies the police in the case of an emergency or the fire department in the event of a fire. Assuming an actuarially fair insurance policy, what is the expected reduction in loss associated with such a system?
- An alternative to a residual-claimant contract is a relative-performance contract where a manager’s salary is tied to the performance of similar firms within an industry. In general, when profits for an industry are down, the manager is not penalized, but she is penalized when her firm does poorly relative to the industry as a whole. What are the advantages of relative performance versus residual claimant in terms of shirking?
- A firm pays a low wage rate, but gives employees a large bonus at the end of the year. Why would a firm adopt this policy?
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Consider a group of people A, B, C, … and the relation “at least as tall as.”
- Is this relation transitive?
- Is it complete?
- What is the marginal rate of substitution between nickels and dimes? Illustrate the result.
Demonstrate which preference axioms are satisfied and not satisfied by the following statements:
- I reach a point at which I am satiated with one good but not the other.
- “… to pursue mathematical analysis while at the same time turning one’s back on its applications and on intuition is to condemn it to hopeless atrophy.” R. Courant.
- It takes two to tango.
- I prefer a mixture of town and country life to being restricted to one or the other.
- There is not enough money to make me eat a raw oyster.
- Georgia always eats hot dogs in a bun with 1 ounce of mustard.
- I may reach a point at which I am satiated with both goods I am consuming.
- Peanut butter and jelly go together like a horse and carriage.
- With an auto, the more gasoline the better. Without an auto, who cares?
- I prefer a mixture of town and country life to being restricted to one or the other. However, whichever I choose, I know I'll be sorry.
- There is a quantity for each commodity up to which it is a good and beyond which it is a bad.
- Popcorn is addictive; the more you eat, the more you want.
- Mosquitoes ruin a nice day at the beach.
- A day without wine is like a day without sunshine.
- I am indifferent between brown eggs and white eggs, but I am superstitious and believe terrible events will happen if I possess both simultaneously.
- I’d rather be “A,” where “A” could be golfing, skiing, or bowling.
- A 13-year-old girl just started smoking. It seems that as she smokes she wants to give up more of other commodities for one more smoke.
- I like both milk and orange juice, but get less pleasure from a mixture of the two.
- I don’t want a Martini unless it is exactly five parts gin to one part vermouth.
- Taste tests reveal that Burp Cola is exactly as good as the nationally known Burpup brand.
- Live fast, love hard, die young, and leave a beautiful corpse.
- I like both Burp and Burpup Cola, but the more Burp I have the more I am willing to give up Burpup to get one more Burp.
- I like drinking and driving equally well, but it is against the law to mix them so I never do.
- I like ice cream, but frozen yogurt makes me sick.
- Love thy neighbor as thyself.
- I do not care whether I have regular coffee or decaffeinated coffee, as long as it is coffee.