Bartleby Sitemap - Textbook Solutions
All Textbook Solutions for Principles of Economics 2e
How does the demand curve perceived by a monopolist compare with the market demand curve?Is a monopolist a price taker? Explain briefly.What is the usual shape of a total revenue curve for a monopolist? Why?What is the usual shape of a marginal revenue cuwe for a monopolist? Why?How can a monopolist identify the profit-maximizing level of output if it knows its total revenue and total cost curves?How can a monopolist identify the profit-maximizing level of output if it knows its marginal revenue and marginal costs?When a monopolist identifies its profit-maximizing quantity of output, how does it decide what price to charge?Is a monopolist allocatively efficient? Why or why not?How does the quantity produced and price charged by a monopolist compare to that of a perfectly competitive film?ALCOA does not have the monopoly power it once had. How do you suppose their barriers to entry were weakened?Why are generic pharmaceuticals significantly cheaper than name brand ones?For many years, the Justice Department has tried to break up large firms like IBM, Microsoft, and most recently Google, on the grounds that their large market share made them essentially monopolies. In a global market, where U.S. films compete with firms from other countries, would this policy make the same sense as it might in a purely domestic context?Intellectual property laws are intended to promote innovation, but some economists, such as Milton Friedman, have argued that such laws are not desirable. In the United States, there is no intellectual property protection for food recipes or for fashion designs. Considering the state of these two industries, and hearing in mind the discussion of the inefficiency of monopolies, can you think of any reasons why intellectual property laws might hinder innovation in some cases?Imagine that you ale managing a small firm and thinking about entering the market of a monopolist. The monopolist is currently charging a high price, and you have calculated that you can make a nice profit charging 10 less than the monopolist. Before you go ahead and challenge the monopolist, what possibility should you consider for how the monopolist might react?If a monopoly firm is earning profits, how much would you expect these profits to be diminished by entry in the long run?Return to Figure 9.2. Suppose P0 is 10 and P1 is 11. Suppose a new firm with the same LRAC curve as the incumbent tries to bleak into the market by selling 4,000 units of output. Estimate from the graph what the new firms average cost of producing output would be. If the incumbent continues. to produce 6,000 units, how much output would the two films supply to the market? Estimate what would happen to the market price as a result of the supply of both the incumbent firm and the new entrant. Approximately how much profit would each firm earn? Figure 9.2 Economics of Scale and Natural MonoployDraw the demand curve, marginal revenue, and marginal cost curves from Figure 9.6, and identify the quantity of output the monopoly wishes to supply and the price it will charge. Suppose demand for the monopolys product increases dramatically. Draw the new demand me. What happens to the marginal revenue as a result of the increase in demand? What happens to the marginal cost curve? Identify the new profit-maximizing quantity and price. Does the answer make sense to you? Figure 9.6 Illustrating Profits at the HealthPill MonolpolyDraw a monopolists demand curve, marginal revenue, and marginal cost curves. Identify the monopolists profit-maximizing output level. Now, think about a slightly higher level of output (sayQ0+1). According to the graph, is there any consumer willing to pay more than the marginal cost of that new level of output? If so, what does this mean?Suppose that, due to a successful advertising campaign, a monopolistic competitor experiences an increase in demand for its product. How will that affect the price it charges and the quantity it supplies?Continuing with the scenario in question 1, in the long run, the positive economic profits that the monopolistic competitor earns will attract a response either from existing firms in the industry or film outside. As those films capture the original films profit, what will happen to the original films profit-maximizing price and output levels?Consider the curve in the figure below, which shows the market demand. marginal cost, and marginal revenue curve for firms in an oligopolistic industry. In this example, we assume firms have zero fixed costs. Suppose the firms collude to form a cartel. What price will the cartel charge? What quantity will the cartel supply? How much profit will the cartel earn? Suppose now that the cane] breaks up and the oligopolistic firms compete as vigorously as possible by cutting the price and increasing sales. What will be the industry quantity and price? What will be the collective profits of all firms in the industry? Compare the equilibrium price, quantity, and profit for the cartel and cutthroat competition outcomes.Sometimes oligopolies in the same industry are very different in size. Suppose we have a duopoly where one firm (Film A) is large and the other film (Film B) is small, as the prisoners dilemma box in Table 10.4 shows. Assuming that both films know the payoffs, what is the likely outcome in this case?What is the relationship between product differentiation and monopolistic competition?How is the perceived demand curve for a monopolistically competitive film different from the perceived demand curve for a monopoly or a perfectly competitive film?How does a monopolistic competitor choose its profit-maximizing quantity of output and price?How can a monopolistic competitor tell whether the price it is charging will cause the firm to earn profits or experience losses?If the firms in a monopolistically competitive market are earning economic profits or losses in the short run, would you expect them to continue doing so in the long run? Why?Is a monopolistically competitive firm productively efficient? Is it allocatively efficient? Why or why not?Will the firms in an oligopoly act more like a competitors or more like competitors? Briefly explain.Does each individual in a prisoners dilemma benefit more from cooperation or from pursuing self-interest? Explain briefly.What stops oligopolists from acting together as a monopolist and earning the highest possible level of profits?Aside from advertising, how can monopolistically competitive films increase demand for their products?Make a case for why monopolistically competitive industries never reach long-run equilibrium.Would you rather have efficiency or variety? That is, one opportunity cost of the variety of products we have is that each product costs more per unit than if there were only one kind of product of a given type, like shoes. Perhaps a better question is, What is the right amount of variety? Can there be too many varieties of shoes, for example?Would you expect the kinked demand curve to be more extreme (like a right angle) or less extreme (like a normal demand curve) if each film in the cartel produces a near-identical product Like OPEC and petroleum? What if each film produces a somewhat different product? Explain your reasoning.When OPEC raised the price of oil dramatically in the mid-1970s, experts said it was unlikely that the cartel could stay together over the long term-that the incentives for individual members. to cheat would become too strong. More than fort),r years later, OPEC still exists. Why do you think OPEC has been able to beat the odds and continue to collude? Hint: You may wish to consider non-economic reasons.Andreas Day Spa began to offer a relaxing aromatherapy treatment. The film asks you how much to charge to maximize profits. The first two columns in Table 10.5 provide the price and quantity for the demand curve for treatments. The third column shows its total costs. For each level of output, calculate total revenue, marginal revenue, average cost, and marginal cost. What is the profit-maximizing level of output for the treatments and how much will the firm earn in profits?May and Raj me the only two growers who provide organically grown corn to a local grocery store. They know that if they cooperated and produced less corn, they could raise the price of the com. If they work independently, they will each earn 100. If they decide to work together and both lower their output, they call each earn 150. If one person lowers output and the other does not, the person who lowers output will earn $1 and the other person will capture the entire market and will earn 200. Table 10.6 represents the choices available to Mary and Raj. What is the best choice for Raj if he is sole that Mary will cooperate? If Mary thinks Raj will cheat, what should Mary do and why? What is the prisoners dilemma result? What is the preferred choice if they could ensure cooperation? A = Work independently; B = Cooperate and Lower Output. (Each results entry lists Rajs earnings first, and Marys earnings second.)Jane and Bill are apprehended for a bank robbery. They are taken into separate rooms and questioned by the police about their involvement in the crime. The police tell them each that if they confess and turn the other person in, they will receive a fighter sentence. If they both confess, they will be each be sentenced to 30 years. If neither confesses, they will each receive a 20-year sentence. If only one confesses, the they will receive 15 years and the one who stayed silent will receive 35 years. Table 10.7 below represents the choices available to Jane and Bill. If Jane trusts Bill to stay silent, what should she do? If Jane thinks that Bill will confess, what should she do? Does Jane have a dominant strategy? Does Bill have a dominant strategy? A = Confess; B = Stay Silent. (Each results entry lists Janes sentence first (in years), and Bills sentence second.)Is it true that a merger between two films that are not already in the top four by size can affect both the four-firm concentration ratio and the Herfindahl-Hirshmau Index? Explain briefly.Is it true that the four-firm concentration ratio puts more emphasis on one or two very large films, while the Herfindahl-Hirshmau Index puts more emphasis on all the films in the entire market? Explain briefly.Some years ago. two intercity bus companies, Greyhound Lines, Inc. and Trailways Transportation System, wanted to merge. One possible definition of the market for this case was the market for intercity bus service. Another possible definition was the market for intercity transportation, including personal cars, car rentals, passenger trains, and commuter air flights.' Which definition do you think the bus companies preferred, and why?As a result of globalization and new information and communications technology, would you expect that the definitions of markets that antitrust authorities use will become broader or narrower?Why would a firm choose to use one or more of the anticompetitive practices described in Regulating Anticompetitive Behavior?Urban transit systems, especially those with rail systems, typically experience significant economies of scale in operation. Consider the transit system data in Table 11.4. Note that the quantity is in millions of riders.From the graph you drew to answer Exercise 11.6, would you say this transit system is a natural monopoly? Justify. Use the following information to answer the next three questions. In the years before wireless phones, when telephone technology requited having a wile matting to every home, it seemed plausible that telephone service had diminishing average costs and might require regulation like a natural monopoly. For most of the twentieth century, the national U.S. phone company was AT&T, and the company functioned as a regulated monopoly. Think about the deregulation of the U.S. telecommunications industry that has occurred over the last few decades. (This is not a research assignment, but a thought assignment based on what you have learned in this chapter.)What real world changes made the deregulation possible?What are some of the benefits of the deregulation?What might some of the negatives of deregulation be?What is a corporate merger? What is an acquisition?What is the goal of antitrust policies?How do we measure a four-firm concentration ratio? What does a high measure mean about the extent of competition?How do we measure a Herfindahl—Hirshman Index? What does a low measure mean about the extent of competition?Why can it be difficult to decide what a market is for purposes of measuring competition?What is a minimum resale price maintenance agreement? How might it reduce competition and when might it be acceptable?What is exclusive dealing? How might it reduce competition and when might it be acceptable?What is a tie-in sale? How might it reduce competition and when might it be acceptable?What is predatory pricing? How might it reduce competition, and why might it be difficult to tell when it should be illegal?If public utilities are a natural monopoly, what would be the danger in deregulating them?If public utilities are a natural monopoly, what would be the danger in splitting them into a number of separate competing firms?What is cost-plus regulation?What is price cap regulation?What is deregulation? Name some industries that have been deregulated in the United States.What is regulatory capture?Why does regulatory capture reduce the persuasiveness of the case for regulating industries for the benefit of consumers?Does either the four-firm concentration ratio or the HHI directly measure the amount of competition in an industry? Why or why not?What would be evidence of serious competition between firms in an industry? Can you identify two highly competitive industries?Can you think of any examples of successful predatory pricing in the real world?If you were developing a product (like a web browser) for a market with significant barriers to entry, how would you try to get your product into the market successfully?In the middle of the twentieth century, major U.S. cities had multiple competing city bus companies. Today, there is usually only one and it runs as a subsidized, regulated monopoly. What do you suppose caused the change?Why are urban areas willing to subsidize urban transit systems? Does the argument for subsidies make sense to you?Deregulation, like all changes in government policy, always has pluses and minuses. What do you think some of the minuses might be for airline deregulation?Do you think it is possible for government to outlaw everything that businesses could do wrong? If so, why does government not do that? If not, how can regulation stay ahead of rogue businesses that push the limits of the system until it breaks?Use Table 11.5 to calculate the four-firm concentration ratio for the U.S. auto market. Does this indicate a concentrated market or not?Use Table 11.5 and Table 11.6 to calculate the Herfindal-Hirschman Index for the U.S. auto market. Would the FTC approve a merger between GM and Ford?If the transit system were allowed to operate as an unregulated monopoly, what output would it supply and what price would it charge?If the transit system were regulated to operate with no subsidy (i.e., at zero economic profit), what approximate output would it supply and what approximate price would it charge?If the transit system were regulated to provide the most allocatively efficient quantity of output, what output would it supply and what price would it charge? What subsidy would be IIECESSEIIY to insure this efficient provision of transit services?Identify the following situations as an example of a negative or a positive externality: You are a birder (bird watcher), and your neighbor has put up several birdhouses in the yard as well as planting trees and flowers that attract birds. Your neighbor paints his house a hideous color. Investments in private education raise your countrys standard of living. Trash dumped upstream flows downstream right past your home. Your roommate is a smoker, but you are a nonsmoker.Identify whether the market supply curve will shift right or left or will stay the same for the following: Films in an industry are required to pay a fine for their carbon dioxide emissions. Companies are sued for polluting the water in a river. Power plants in a specific city are not required to address the impact of their air quality emissions. Companies that use fracking to remove oil and gas from rock are required to clean up the damage.For each of your answers to Exercise 12.2, will equilibrium price rise or fall or stay the same?Table 12.5 provides the supply and demand conditions for a manufacturing film. The third column represents a supply curve without accounting for the social cost of pollution. The fourth column represents the supply curve when the film is required to account for the social cost of pollution. Identify the equilibrium before the social cost of production is included and after the social cost of production is included.Consider two approaches to reducing emissions of CO2 into the environment from manufacturing industries in the United States. In the first approach, the U.S. government makes it a policy to use only predetermined technologies. In the second approach, the U.S. government determines which technologies are cleaner and subsidizes their use. Of the two approaches, which is the command-and-control policy?Classify the following pollution-control policies as command-and-control or market incentive based. A state emissions tax on the quantity of carbon emitted by each firm. The federal government requires domestic auto companies to improve car emissions by 2020. The EPA sets national standards for water quality. A city sells permits to films that allow them to emit a specified quantity of pollution. The federal government pays fishermen to preserve salmon.An emissions tax on a quantity of emissions from a film is not a command-and-control approach to reducing pollution. Why?Four films called Elm, Maple, Oak, and (Shelly, produce wooden chairs. However, they also produce a great deal of garbage (a mixture of glue, varnish, sandpaper, and wood scraps). The first row of Table 12.6 shows the total amount of garbage (in tons) that each film currently produces. The other rows of the table show the cost of reducing garbage produced by the first five tons, the second five tons, and so on. First, calculate the cost of requiring each firm to reduce the weight of its garbage by one-fourth. Now, imagine that the government issues marketable permits for the current level of garbage, but the permits will shrink the weight of allowable garbage for each film by one-fourth. What will be the result of this alternative approach to reducing pollution?The rows in Table 12.7 show three market-oriented tools for reducing pollution. The columns of the table show three complaints about command-and-control regulation. Fill in the table by stating briefly how each market-oriented tool addresses each of the three concerns.Suppose a city releases 16 million gallons of raw sewage into a nearby lake. Table 12.8 shows the total costs of cleaning up the sewage to different levels, together with the total benefits of doing so. (Benefits include environmental, recreational, health, and industrial benefits.) Using the information in Table 12.8, calculate the marginal costs and marginal benefits of reducing sewage emissions for this city. See Production, Costs and Industry Structure if you need a refresher on how to calculate marginal costs. What is the optimal level of sewage for this city? Why not just pass a law that films can emit zero sewage? After all, the total benefits of zero emissions exceed the total costs.The state of Colorado requires oil and gas companies who use fracking techniques to retune the land to its original condition after the oil and gas extractions. Table 12.9 shows the total cost and total benefits (in dollars) of this policy. Calculate the marginal cost and the marginal benefit at each quantity (acre) of land restored. See Production. Costs and Industry Structure if you need a refresher on how to calculate marginal costs and benefits. If we apply marginal analysis, what is the optimal amount of land to be restored?Consider the case of global environmental problems that spill across international borders as a prisoners dilemma of the sort studied in Monopolistic Competition and Oligopoly. Say that there are two countries, A and B. Each country can cheese whether to protect the environment, at a cost of 10, or not to protect it, at a cost of zero. If one country decides to protect the environment, there is a benefit of 16, but the benefit is divided equally between the two countries. If both countries decide to protect the environment, there is a benefit of 32, which is divided equally between the two centuries. In Table 12.10, fill in the costs, benefits, and total payoffs to the countries of the following decisions. Explain why, without some international agreement, they are likely to end up with neither country acting to protect the environment.A country called Sherwood is very heavily covered with a forest of 50,000 trees. There are proposals to clear some of Sherwoods forest and grow com, but obtaining this additional economic output will have an environmental cost from reducing the number of trees. Table 12.11 shows possible combinations of economic output and environmental protection. Sketch a graph of a production possibility frontier with environmental quality on the horizontal axis, measured by the number of trees, and the quantity of economic output, measured in corn, on the vertical axis. Which choices display productive efficiency? How can you tell? Which choices show allocative efficiency? How can you tell? In the choice between T and R, decide which one is better. Why? In the choice between T and S, can you say which one is better, and why? If you had to guess, which choice would you think is more likely to represent a command-and-control environmental policy and which choice is more likely to represent a market-oriented environmental policy, choice Q or S? Why?What is an externality?Give an example of a positive externality and an example of a negative externality.What is the difference between private costs and social costs?In a market without environmental regulations, will the supply curve for a film account for private costs, external costs, both, or neither? Explain.What is command-and-control environmental regulation?What are the three problems that economists have noted with regard to command-and-control regulation?What is a pollution charge and what incentive does it provide for a firm to take external costs into account?What is a marketable permit and what incentive does it provide for a firm to account for external costs?What are better-defined property rights and what incentive do they provide to account for external costs?As the extent of environmental protection expands, would you expect marginal costs of environmental protection to rise or fall? Why or why not?As the extent of environmental protection expands, would you expect the marginal benefits of environmental protection to rise or fall? Why or why not?What are the economic tradeoffs between low-income and high-income countries in international conferences on global environmental damage?What arguments d0 low-income countries make in international discussions of global environmental clean-up?In the tradeoff between economic output and environmental protection, what do the combinations on the protection possibility curve represent?What does a point inside the production possibility frontier represent?Suppose you want to put a dollar value on the external costs of carbon emissions from a power plant. What information or data would you obtain to measure the external [not social] cost?Would environmentalists favor command-and-control policies as a way to reduce pollution? Why or why not?Consider two ways of protecting elephants from poachers in African countries. In one approach, the government sets up enormous national parks that have sufficient habitat for elephants to thrive and forbids all local people to enter the parks or to injure either the elephants or their habitat in any way. In a second approach, the government sets up national parks and designates 10 villages around the edges of the park as official tourist centers that become places where tourists can stay and bases for guided tours inside the national park. Consider the different incentives of local villagers-who often are very poor-in each of these plans. Which plan seems more likely to help the elephant population?Will a system of marketable permits work with thousands of films? Why or why not?Is zero pollution possible under a marketable permits system? Why or why not?Is zero pollution an optimal goal? Way or why not?From an economic perspective, is it sound policy to pursue a goal of zero pollution? Why or why not?Recycling is a relatively inexpensive solution to much of the environmental contamination from plastics, glass, and other waste materials. Is it a sound policy to make it mandatory for everybody to recycle?Can extreme levels of pollution hurt the economic development of a high-income country? Why or why not?How can high-income countries benefit from covering much of the cost of reducing pollution created by low-income countries?Technological innovations shift the production possibility curve. Look at graph you sketched for Exercise 12.13 Which types of technologies should a country promote? Should clean technologies be promoted over other technologies? Why or why not?Show the market for cigarettes in equilibrium, assuming that there are no laws banning smoking in public. Label the equilibrium private market price and quantity as Pm and Qm. Add whatever is needed to the model to show the impact of the negative externality from second-hand smoking. (Hint: In this case it is the consumers, not the sellers, who are creating the negative externality.) Label the social optimal output and price as Fe and Qe. On the graph, shade in the deadweight loss at the market output.Refer to Table 12.2. The externality created by the refrigerator production was 100. However, once we accounted for both the private and additional external costs, the market price increased by only 50. If the external costs were 100 why did the price only increase by 50 when we accounted for all costs?Table 12.12, shows the supply and demand conditions for a firm that will play trumpets on the streets when requested. QS1 is the quantity supplied without social costs. QS2 is the quantity supplied with social costs. What is the negative externality in this situation? Identify the equilibrium price and quantity when we account only for private costs, and then when we account for social costs. How does accounting for the externality affect the equilibrium price and quantity?A city currently emits 15 million gallons (MG) of raw sewage into a lake that is beside the city. Table 12.13 shows the total costs (TC) in thousands of dollars of cleaning up the sewage to different levels, together with the total benefits (TB) of doing so. Benefits include environmental, recreational, health, and industrial benefits. Using the information in Table 12.13 calculate the marginal costs and marginal benefits of reducing sewage emissions for this City. What is the optimal level of sewage for this city? How can you tell?In the Land of Purity, there is only one form of pollution, called gunk. Table 12.14 shows possible combinations of economic output and reduction of gunk, depending on what kinds of environmental regulations you choose. Sketch a graph of a production possibility frontier with environmental quality on the horizontal axis, measured by the percentage reduction of gunk, and with the quantity of economic output on the vertical axis. Which choices display productive efficiency? How can you tell? Which choices show allocative efficiency? How can you tell? In the choice between K and L, can you say which one is better and why? In the choice between K. and N, can you say which one is better, and why? If you had to guess, which choice would you think is move likely to represent a command-and-control environmental policy and which choice is more likely to represent a market-oriented environmental policy, choice L or M? Why?Do market demand curves reflect positive externalities? Why or why not?Suppose that Sonys R. Is this a private or social benefit?The Gizmo Company is planning to develop new household gadgets. Table 13.4 shows the companys demand for financial capital for research and development of these gadgets, based on expected rates of return from sales. Now, say that every investment would have an additional 5 social benefit—that is, an investment that pays at least a 6 return to the Gizmo Company will pay at least an 11 return for society as a whole; an investment that pays at least 7 for the Gizmo Company will pay at least 12 for society as a whole, and so on. Answer the questions that follow based on this information. If the going interest rate is 9, how much will Gizmo invest in R. How much will the firm invest if it also receives the social benefits of its investment? (Add an additional 5 return on all levels of investment.)The Junkbuyers Company travels from home to home, looking for opportunities to buy items that would otherwise end up with the garbage, but which the company can resell or recycle. Which will be larger, the private or the social benefits?When residents in a neighborhood tidy it and keep it neat, there am a number of positive spillovers: higher property values, less crime, happier residents. What types of government policies can encourage neighborhoods to clean up?Education provides both private benefits to those who receive it and broader social benefits for the economy as a whole. Think about the types of policies a government can follow to address the issue of positive spillovers in technology and then suggest a parallel set of policies that governments could follow for addressing positive externalities in education.Which of the following goods or services are nonexcludable? police protection streaming music from satellite transmission programs roads primary education cell phone serviceAre the following goods non-rival in consumption? slice of pizza laptop computer public radio ice cream coneIn what ways (it) company investments in research and development create positive externalities?Will the demand for borrowing and investing in R&D be higher or lower if there are no external benefits?Why might private markets tend to provide too few incentives for the development of new technology?What can government do to encourage the development of new technology?What are the two key characteristics of public goods?Name two public goods and explain why they are public goods.What is the free rider problem?Explain why the federal government funds national defense.Call a company be guaranteed all of the Social benefits of a new invention? Why or why not?Is it inevitable that government must become involved in supporting investments in new technology?How do public television stations, like PBS, try to overcome the free rider problem?Why is a football game on ESPN a quasi-public good but a game on the NBC, CBS, or ABC is a public good?Provide two examples of goods/services that are classified as private goods/services even though they are provided by a federal government.Radio stations, tornado sirens, light houses, and street lights are all public goods in that all are nonrivalrous and nonexclusionary. Therefore why does the government provide tornado sirens, street lights and light houses but not radio stations (other than PBS stations)?HighFlyer Airlines wants to build new airplanes with greatly increased cabin space. This will allow HighFlyer Airlines to give passengers more comfort and sell more tickets at a higher price. However, redesigning the cabin means rethinking many other elements of the airplane as well, like engine and luggage placement, and the most efficient shape of the plane for moving through the air. HighFlyer Airlines has developed a list of possible methods to increase cabin space, along with estimates of how these approaches would affect the planes operating costs and ticket sales. Based on these estimates, Table 13.5 shows the value of R, how much should the firm invest in R on top of the private return; that is, an R private return to HighFlyer Airlines would have a 9 social return. How much investment is socially optimal at the 6 interest rate?Assume that the marginal private costs of a film producing fuel-efficient can; is greater than the marginal social costs. Assume that the marginal private benefits of a firm producing fuel efficient cars are the same as the marginal social benefits. Discuss one wags.r that the government cans fly to increase production and sales of fuel efficient cars to the socially desirable amount. Hint: the government is flying to affect production through costs, net benefits.Becky and Sarah are sisters 1who share a room. Their room can easily get messy, and their parents am always telling them to tidy it. Here are the costs and benefits to both Becky and Sarah, of taking the time to clean their room: If both Becky and Sarah clean, they each spends two hours and get a clean room. If Becky decides not to clean and Sarah does all the cleaning, then Sarah spends 10 hours cleaning (Becky spends 0) but Sarah is exhausted. The same would occur for Becky if Sarah decided not to clean—Becky spends 10 hours and becomes exhausted. If both girls decide not to clean, they both have a dirty room. What is the best outcome for Becky and Sarah? What is the worst outcome? (It would help you to construct a prisoners dilemma table.) Unfortunately, we know that the optimal outcome will most liker not happen, and that the sisters probably will choose the worst one instead. Explain what it is about Beckys and Sarahs reasoning that will lead them both to choose the worst outcome.Table 14.10 shows levels of employment (Labor), the marginal product at each of those levels, and the price at which the film can sell output in the perfectly competitive market where it operates. What is the value of the marginal product at each level of labor? If the firm operates in a perfectly competitive labor market where the going market wage is 12, what is the films profit maximizing level of employment?Table 14.11 shows levels of employment (Labor), the marginal product at each of those levels, and a monopolys marginal revenue. What is the monopolys marginal revenue product at each level of employment? If the monopoly operates in a perfectly competitive labor market where the going market wage is 20, what is the films profit maximizing level of employment?Table 14.12 shows the quantity demanded and supplied in the labor market for driving city buses in the town of Unionville, where all the bus drivers belong to a union. What would the equilibrium wage and quantity be in this market if no union existed? Assume that the union has enough negotiating power to raise the wage to 4 per hour higher than it would otherwise be. Is there now excess demand or excess supply of labor?Do unions typically oppose new technology out of a fear that it will reduce the number of union jobs? Why or why not?Compared with the share of workers in most other high-income countries, is the share of U.S. workers whose wages are determined by union bargaining higher or lower? Why or why not?Are firms with a high percentage of union employees more likely to go bankrupt because of the higher wages that they pay? Why or why not?D0 countries with a higher percentage of unionized workers usually have less growth in productivity because of strikes and other disruptions caused by the unions? Why or why not?Table 14.13 shows information from the supply curve for labor for a monopsonist, that is, the wage rate required at each level of employment. What is the monopsonists marginal cost of labor at each level of employment? If each unit of labors marginal revenue product is 13, what is the firms profit maximizing level of employment and wage?Explain i11each of the following situations how market forces might give a business an incentive to act in a less discriminatory fashion. A local flower delivery business run by a bigoted white owner notices that many of its local customers are black. An assembly line has traditionally only hired men, but it is having a hard time hiring sufficiently qualified workers. A biased owner of a firm that provides home health care services would like to pay lower wages to Hispanic workers than to other employees.Does the earnings gap between the average wages of females and the average wages of males prove labor market discrimination? Why or why not?If immigration is reduced, what is the impact on the wage for low-skilled labor? Explain.What determines the demand for labor for a firm operation in a perfectly competitive out market?What determines the demand for labor for a firm with market power in the output market?What is a perfectly competitive labor market?What is a labor union?Why do employers have a natural advantage in bargaining with employees?What are some of the most important laws that protect employee right?How does the presence of a labor union change negotiations between employers and workers?What is the long-term trend in American union membership?Would you expect the presence of labor unions to lead to higher or lower pay for worker-members? Would you expect a higher or lower quantity of workers hired by those employers? Explain briefly.What are the main causes for the recent [tends in union membership rates in the United States? Why are union rates lower in the United States than in many other developed countries?What is a monopsony?What is the marginal cost of labor?How does monopsony affect the equilibrium wage and employment levels?What is a bilateral monopoly?How does a bilateral monopoly affect the equilibrium wage and employment levels compared to a perfectly competitive labor market?Describe how the earnings gap between men and women has evolved in recent decades.Describe how the earnings gap between blacks and whites has evolved in recent decades.Does a gap between the average earnings of men and women, or between whites and blacks, prove that employers are discriminating in the labor market? Explain briefly.Will a free market tend to encourage or discourage discrimination? Explain briefly.What policies, when used together with antidiscrimination laws, might help to reduce the earnings gap between men and women or between white and black workers?Describe how affirmative action is applied in the labor market.What factors can explain the relatively small effect of low-skilled immigration on the wages of low-skilled workers?Have levels of immigration to the United States been relatively high or low in recent years? Explain.How would you expect immigration by primarily low-skill workers to affect American low-skilled workers?What is the marginal cost of labor for a firm that operates in a competitive labor market? How does this compare with the MCL for a monopsony?Given the decline in union membership over the past 50 years, what does the theory of bilateral monopoly suggest will have happened to the equilibrium level of wages over time? Why?Are unions and technological improvements complementary? Why or why not?Will union membership continue to decline? Why or why not?If it is not profitable to discriminate, why does discrimination persist?If a company has discriminated against minorities in the past, should it be required to give priority to minority applicants today? Why or why not?If the United States allows a greater quantity of highly skilled workers, what will be the impact on the average wages of highly skilled employees?If all countries eliminated all barriers to immigration, would global economic growth increase? Why or why not?Describe how each of these changes is likely to affect poverty and inequality: Incomes rise for low-income and high-income workers, but rise more for the high-income earners. Incomes fall for low-income and high-income workers, but fall more for high-income earners.Jonathan is a single father with one child. He can work as a server for $6 per hour for up to 1,500 hours per year. He is eligible for welfare, and so if he does not earn any income, he will receive a total of 10,000 per year. He can work and still receive government benefits, but for every 1 of income, his welfare stipend is 1 less. Create a table similar to Table 15.4 that shows Jonathans options. Use four columns, the first showing number of hours to work, the second showing his earnings from work, the third showing the government benefits he will receive, and the fourth column showing his total income (earnings + government support). Sketch a labor-leisure diagram of Jonathans opportunity set with and without government support.Imagine that the government reworks the welfare policy that was affecting Jonathan in question 1, so that for each dollar someone like Jonathan earns at work, his government benefits diminish by only 30 cents. Reconstruct the table from question 1 to account for this change in policy. Draw Jonathans labor-leisure opportunity sets, both for before this welfare program is enacted and after it is enacted.We have discovered that the welfare system discourages recipients from working because the more income they earn, the less welfare benefits they receive. How does the earned income tax credit attempt to loosen the poverty trap?How does the TANF attempt to loosen the poverty trap?A group 0f 10 people have the following annual incomes: 24,000,18,000,50,000,100,000,12,000,36,000,80,000,10,000,24,000,16,000. Calculate the share of total income that each quintile receives from this income distribution. Do the top and bottom quintiles in this distribution have a greater or larger share of total income than the top and bottom quintiles of the U.S. income distribution?Table 15.9 shows the share of income going to each quintile of the income distribution for the United Kingdom in 1979 and 1991. Use this data to calculate what the points on a Lorenz curve would be, and sketch the Lorenz curve. How did inequality in the United Kingdom shift over this time period? How can you see the patterns in the quintiles in the Lorenz curves?Using two demand and supply diagrams, one for the low-wage labor market and one for the high-wage labor market, explain how information technology can increase income inequality if it is a complement to high-income workers like salespeople and managers, but a substitute for low-come workers like file clerks and telephone receptionists.Using two demand and supply diagrams, one for the low-wage labor market and one for the high-wage labor market, explain how a program that increased educational levels for a substantial number of low-skill workers could reduce inflame inequality.Here is one hypothesis: A well-funded social safety net can increase economic equality but will reduce economic output. Explain why this might be so, and sketch a production possibility curve that shows this tradeoff.Here is a second hypothesis: A well-funded social safety net may lead to less regulation of the market economy. Explain why this might be so, and sketch a production possibility curve that shows this tradeoff.Which set of policies is more likely to cause a tradeoff between economic output and equality: policies of redistribution policies aimed at the ladder of opportunity? Explain how the production possibility frontier tradeoff between economic equality and output might look in each case.Why is there reluctance on the part of some in the United States to redistribute income so that greater equality can be achieved?How is the poverty rate calculated?What is the poverty line?What is the difference between poverty and income inequality?How does the poverty trap discourage people from working?How can the effect of the poverty trap be reduced?Who are the near-poor?What is the safety net?Briefly explain the differences between TANF, the earned income tax credit, SNAP, and Medicaid.Who is included in the top income quintile?What is measured on the two axes of a Lorenz curve?If a country had perfect income equality what would the Lorenz curve look like?How has the inequality of income changed in the U.S. economy since the late 1970s?What are some reasons why a certain degree of inequality of income would be expected in a market economy?What are the main reasons economists give for the increase in inequality of incomes?Identify some public policies that can reduce the level of economic inequality.Describe how a push for economic equality might reduce incentives to work and produce output. Then describe how a push for economic inequality might nut have such effects.What goods and services would you include in an estimate of the basic necessities for a family of four?If a family of three earned 20,000, would they be able to make ends meet given the official poverty threshold?Exercise 15.2 and Exercise 15.3 asked you to describe the labor-leisure tradeoff for Jonathon. Since, in the first example, there is no monetary incentive for Jonathon to work, explain why he may choose to work anyway. Explain what the opportunity costs of working and not working might be for Jonathon in each example. Using your tables and graphs from Exercise 15.2 and Exercise 15.3, analyze how the government welfare system affects Jonathans incentive to work.Explain how you would create a government program that would give an incentive for labor to increase hours and keep labor from falling into the poverty trap.Many critics of government programs to help low-income individuals argue that these programs create a poverty trap. Explain how programs such as TANF, EITC, SNAP, and Medicaid will affect low-income individuals and whether or not you think these programs will benefit families and children.Think about the business cycle: during a recession, unemployment increases; it decreases in an expansionary phase. Explain what happens to TANF, SNAP, and Medicaid programs at each phase of the business cycle (recession, trough, expansion, and peak).Explain how a country may experience greater equality in the distribution of income, yet still experience high rates of poverty. Hint: Look at the Clear It Up 'How do governments measure poverty in low-income countries?' and compare to Table 15.5.The demand for skilled workers in the United States has been increasing. To increase the supply of skilled workers, many argue that immigration reform to allow more skilled labor into the United States is needed. Explain whether you agree or disagree.Explain a situation using the supply and demand for skilled labor 111 which the increased number of college graduates leads to depressed wages. Given the rising cost of going to college, explain why a college education will or will not increase income inequality.What do you think is more important to focus on when considering inequality: income inequality or wealth inequality?To reduce income inequality, should the marginal tax rates on the top 1 be increased?Redistribution of income occurs through the federal income tax and government antipoverty programs. Explain whether or not this level of redistribution is appropriate and whether more redistribution should occur.How does a society or a country make the decision about the tradeoff between equality and economic output? Hint: Think about the political system.Explain what the long- and short-term consequences are of not promoting equality or working to reduce poverty.In country A, the population is 300 million and 50 million people are living below the poverty line. What is the poverty rate?In country B, the population is 900 million and 100 million people are living below the poverty line. What is the poverty rate?Susan is a single mother with three children. She can earn 8 per hour and works up to 2,000 hours per year. However, if she does not earn any income at all, she will receive government benefits totaling 16,000 per year. For every 1 of income she earns, her level of government support will be reduced by 1. Create a table, patterned after Table 15.3. The first column should show Susans choices of how many hours to work per year, up to 2,000 home. The second column should show her earnings from work. The third column should show her level of government support, given her earnings. The final column should show her total income, combining earnings and government support.A group of 10 people have the following annual incomes: 55,000,30,000,15,000,20,000,35,000,80,000,40,000,45,000,30,000,50,000. Calculate the share of total income each quintile of this income distribution received. Do the top and bottom quintile s in this distribution have a greater or larger share of total income than the top and bottom quintiles of the U.S. income distribution for 2005?For each of the following purchases, say whether you would expect the dogma of imperfect information to be relatively high or relatively low: Buying apples at a roadside stand Buying dinner at the neighborhood restaurant around the comer Buying a used laptop computer at a garage sale Ordering flowers over the internet for your friend in a different cityWhy is there asymmetric information in the labor market? What signals can an employer look for that might indicate file traits they are seeking in a new employee?Why is it difficult to measure health outcomes?Why might it be difficult for a buyer and seller to agree on a price when imperfect information exists?What do economists (and used-car dealers) mean by a lemon?What are some ways a seller of goods might reassure a possible buyer who is faced with imperfect information?What are some ways a seller of labor (that is, someone looking for a job) might reassure a possible employer who is faced with imperfect information?What are some ways that someone looking for a loan might reassure a bank that is faced with imperfect information about whether the borrower will repay the loan?What is an insurance premium?In an insurance system, would you expect each person to receive in benefits pretty much what they pay in premiums or is it just that the average benefits paid will equal the average premiums paid?What is an actuarially fair insurance policy?What is the problem of moral hazard?How can moral hazard lead to more costly insurance premiums than one was expected?Define deductibles, copayments, and coinsurance.How can deductibles, copayments, and coinsurance reduce moral hazard?What is the key difference between a fee-for-service healthcare system and a system based on health maintenance organizations?How might adverse selection make it difficult for an insurance market to operate?What are some of the metrics economists use to measure health outcomes?You are on the board of directors of a private high school, which is hiring new tenth-grade science teachers. As you think about hiring someone for a job, what are some mechanisms you might use to overcome the problem of imperfect information?A website offers a place for people to buy and sell emeralds, but information about emeralds can be quite imperfect. The website then enacts a rule that all sellers in the market must pay for two independent examinations of their emerald, which are available to the customer for inspection. How would you expect this improved information to affect demand for emeralds on this website? How would you expect this improved information to affect the quantity of high-quality emeralds sold on the website?How do you think the problem of moral hazard might have affected the safety of sports such as football and boxing when safety regulations started requiring that players wear more padding?To what sorts of customers would an insurance company offer a policy with a high copay? What about a high premium with a lower copay?Using Exercise 16.20, sketch the effects in parts (a) and (b) on a single supply and demand diagram. What prediction would you make about how the improved information alters the equilibrium quantity and price?Answer these three questions about early-stage corporate finance: Why do very small companies tend to raise money from private investors instead of through an IPO? Why do small, young companies often prefer an IPO to borrowing from a bank or issuing bonds? Who has better information about whether a small firm is likely to earn profits, a venture capitalist or a potential bondholder, and why?From a firms point of view, how is a bond similar to a bank loan? How are they different?Calculate the equity each of these people has in his or her home: Fred just bought a house for 200,000 by putting 10 as a down payment and borrowing the rest from the bank. Freda bought a house for 150,000 in cash, but if she were to sell it now, it would sell for 250,000. Frank bought a house for 100,000. He put 20 down and borrowed the rest from the bank. However, the value of the house has now increased to 160,000 and he has paid off 20,000 of the bank loan.Which has a higher average return over time: stocks, bands, or a savings account? Explain your answer.Investors sometimes fear that a high-risk investment is especially likely to have low returns. Is this fear true? Does a high risk mean the return must be low?What is the total amount of interest from a 5,000 loan after three years with a simple interest rate of 6?If you receive 500 in simple interest on a loan that you made for 10,000 for five years, what was the interest rate you charged?You open a 5-year CD for 1,000 that pays 2 interest, compounded annually. What is the value of that CD at the end of the five years?What are the- most common ways for start-up firms to raise financial capital?Why can firms not just use their own profits for financial capital, with no need for outside investors?Why are banks more willing to lend to well-established firms?What is a bond?What does a share of stock represent?When do firms receive money from a stock sale in their firm and when do they not receive money?What is a dividend?What is a capital gain?What is the difference between a private company and a public company?How do the shareholders who own a company choose the actual company managers?Why are banks called financial intermediaries?Name several different kinds of bank account. How are they different?Why are bonds somewhat risky to buy, even though they make predetermined payments based on a fixed rate of interest?Why should a financial investor care about diversification?What is a mutual fund?What is an index fund?How is buying a house to live in a type of financial investment?Why is it hand to forecast future movements in stock prices?What are the two key choices U.S. citizens need to make that determines their relative wealth?Is investing in housing always a very safe investment?If you owned a small firm that had become somewhat established, but you needed a surge of financial capital to cant out a major expansion, would you prefer to raise the funds through borrowing or by issuing stock? Explain your choice.Explain how a company can fail when the safeguards that should be in place fail.What are some reasons why the investment strategy of a 30-year-old might differ flow the investment strategy of a 65-year-old?Explain why a financial investor in stocks cannot earn high capital gains simply by buying companies with a demonstrated record of high profits.Explain what happens in an economy when the financial markets limit access to capital. How does this affect economic growth and employment?You and your friend have opened an account on E-Trade and have each decided to select five similar companies in which to invest. You are diligent in monitoring your selections, tracking prices, current events, and actions the company has taken. Your friend chooses his companies randomly, pays no attention to the financial news, and spends his leisure time focused on everything besides his investments. Explain what might be the performance for each of your portfolios at the end of the year.How do bank failures cause the economy to go into recession?The Darkroom Windowshade Company has 100,000 shares of stock outstanding. The investors in the firm awn the following numbers of shares: investor 1 has 20,000 shares; investor 2 has 18,000 shares; investor 3 has 15,000 shares; investor 4 has 10,000 shares; investor 5 has 7,000 shares; and investors 6 through 11 have 5,000 shares each. What is the minimum number of investors it would take to vote to change the companys top management? If investors I and 2 agree to vote together, can they be certain of always getting their way in how the company will he run?Imagine that a local water company issued 10,000 ten-year bond at an interest rate of 6. You are thinking about buying this bond one year before the end of the ten years, but interest rates are now 9. Given the change in interest rates, would you expect to pay more or less than 10,000 for the bond? Calculate what you would actually be willing to pay for this bond.Suppose Ford Motor Company issues a five year bond with a face value of 5,000 that pays an annual coupon payment of $150. What is the interest rate Ford is paying on the borrowed funds? Suppose the market interest rate rises from 3 to 4 a year after Ford issues the bonds. Will the value of the bond increase or decrease?How much money do you have to put into a bank account that pays 10% interest compounded annually to have 10,000 in ten years?Many retirement funds charge an administrative fee each year equal to 0.25% on managed assets. Suppose that Alexx and Spenser each invest 5,000 in the same stock this year. Alexx invests directly and earns 5 a year. Spenser uses a retirement fund and earns 4.75. After 30 years, how much more will Alexx have than Spenser?