Cost Curves And Their Shapes
Just as in previous chapters we found graphs of supply and demand useful when analyzing the behavior of markets, we will find graphs of average and marginal cost useful when analyzing the behavior of firms. Figure 13-5 graphs Thelma's costs using the data from Table 13-2. The horizontal axis measures the quantity the firm produces, and the vertical axis measures marginal and average costs. The graph shows four curves average total cost ATC , average fixed cost AFC , average variable cost AVC ,...
Case Study The Microsoft Case
The most important and controversial antitrust case in recent years has been the U.S. government's suit against the Microsoft Corporation, filed in 1998. Certainly, the case did not lack drama. It pitted one of the world's richest men Bill Gates against one of the world's most powerful regulatory agencies the U.S. Justice Department . Testifying for the government was a prominent economist MIT professor Franklin Fisher . Testifying for Microsoft was an equally prominent economist MIT professor...
Monopoly
See how the monopoly's decisions affect economic well-being If you own a personal computer, it probably uses some version of Windows, the operating system sold by the Microsoft Corporation. When Microsoft first designed Windows many years ago, it applied for and received a copyright from the government. The copyright gives Microsoft the exclusive right to make and sell copies of the Windows operating system. So if a person wants to buy a copy of Windows, he or she has little choice but to give...
Economic Profit Versus Accounting Profit
total revenue minus total cost, including both explicit and implicit costs total revenue minus total explicit cost Now let's return to the firm's objective profit. Because economists and accountants measure costs differently, they also measure profit differently. An economist measures a firm's economic profit as the firm's total revenue minus all the opportunity costs explicit and implicit of producing the goods and services sold. An accountant measures the firm's accounting profit as the...
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1. Why do coal miners get paid more than other workers with similar amounts of education 2. In what sense is education a type of capital 3. How might education raise a worker's wage without raising the worker's productivity 4. What conditions lead to economic superstars Would you expect to see superstars in dentistry In music Explain. 5. Give three reasons why a worker's wage might be above the level that balances supply and demand. 6. What difficulties arise in deciding whether a group of...
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Income and Substitution Effects. The effect of a change in price can be broken down into an income effect and a substitution effect. The substitution effect the movement along an indifference curve to a point with a different marginal rate of substitution is shown here as the change from point A to point B along indifference curve i1. The income effect the shift to a higher indifference curve is shown here as the change from point B on indifference curve I1 to point C on indifference curve I2....
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1. The New York Times Nov. 30, 1993 reported that the inability of OPEC to agree last week to cut production has sent the oil market into turmoil . . . leading to the lowest price for domestic crude oil since June 1990. a. Why were the members of OPEC trying to agree to cut production b. Why do you suppose OPEC was unable to agree on cutting production Why did the oil market go into turmoil as a result c. The newspaper also noted OPEC's view that producing nations outside the organization, like...
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a. If the company were to build the bridge, what would be its profit-maximizing price Would that be the efficient level of output Why or why not b. If the company is interested in maximizing profit, should it build the bridge What would be its profit or loss c. If the government were to build the bridge, what price should it charge d. Should the government build the bridge Explain. 9. The Placebo Drug Company holds a patent on one of its discoveries. a. Assuming that the production of the drug...
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1. Describe the three attributes of monopolistic competition. How is monopolistic competition like monopoly How is it like perfect competition 2. Draw a diagram depicting a firm in a monopolistically competitive market that is making profits. Now show what happens to this firm as new firms enter the industry. 3. Draw a diagram of the long-run equilibrium in a monopolistically competitive market. How is price related to average total cost How is price related to marginal cost 4. Does a...
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1. Give an example of a negative externality and an example of a positive externality. 2. Use a supply-and-demand diagram to explain the effect of a negative externality in production. 3. In what way does the patent system help society solve an externality problem 4. List some of the ways that the problems caused by externalities can be solved without government intervention. 5. Imagine that you are a nonsmoker sharing a room with a smoker. According to the Coase theorem, what determines...
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Once the government imposes a tariff, the domestic price exceeds the world price by the amount of the tariff. Consumer surplus is now area A B. Producer surplus is area C G. Government revenue, which is the quantity of after-tariff imports times the size of the tariff, is the area E. Thus, total surplus with the tariff is area A B C E G. To determine the total welfare effects of the tariff, we add the change in consumer surplus which is negative , the change in producer surplus positive , and...
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a. What is the pizzeria's fixed cost b. Construct a table in which you calculate the marginal cost per dozen pizzas using the information on total cost. Also calculate the marginal cost per dozen pizzas using the information on variable cost. What is the relationship between these sets of numbers Comment. 8. You are thinking about setting up a lemonade stand. The stand itself costs 200. The ingredients for each cup of lemonade cost 0.50. a. What is your fixed cost of doing business What is your...
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e. If the author were paid 3 million instead of 2 million to write the book, how would this affect the publisher's decision regarding the price to charge Explain. f. Suppose the publisher were not profit-maximizing but were concerned with maximizing economic efficiency. What price would it charge for the book How much profit would it make at this price 2. Suppose that a natural monopolist were required by law to charge average total cost. On a diagram, label the price charged and the deadweight...
Case Study Opec And The World Oil Market
Our story about the town's market for water is fictional, but if we change water to crude oil, and Jack and Jill to Iran and Iraq, the story is quite close to being true. Much of the world's oil is produced by a few countries, mostly in the Middle East. These countries together make up an oligopoly. Their decisions about how much oil to pump are much the same as Jack and Jill's decisions about how much water to pump. The countries that produce most of the world's oil have formed a cartel,...
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1. Government spending in the United States has grown as a share of national income over time. What changes in our economy and our society might explain this trend Do you expect the trend to continue 2. In a published source or on the Internet, find out whether the U.S. federal government had a budget deficit or surplus last year. What do policymakers expect to happen over the next few years Hint The Web site of the Congressional Budget Office is www.cbo.gov. 3. The information in many of the...
Deadweight Loss And Tax Revenue As Taxes Vary
Taxes rarely stay the same for long periods of time. Policymakers in local, state, and federal governments are always considering raising one tax or lowering another. Here we consider what happens to the deadweight loss and tax revenue when the size of a tax changes. Figure 8-6 shows the effects of a small, medium, and large tax, holding constant the market's supply and demand curves. The deadweight loss the reduction in total surplus that results when the tax reduces the size of a market below...
Case Study Advertising And The Price Of Eyeglasses
What effect does advertising have on the price of a good On the one hand, advertising might make consumers view products as being more different than they otherwise would. If so, it would make markets less competitive and firms' demand curves less elastic, and this would lead firms to charge higher prices. On the other hand, advertising might make it easier for consumers to find the firms offering the best prices. In this case, it would make markets more competitive and firms' demand curves...
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1. Suppose that the president proposes a new law aimed at reducing heath care costs All Americans are to be required to eat one apple daily. a. How would this apple-a-day law affect the demand and equilibrium price of apples b. How would the law affect the marginal product and the value of the marginal product of apple pickers c. How would the law affect the demand and equilibrium wage for apple pickers Henry Ford once said It is not the employer who pays wages he only handles the money. It is...
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1. An early freeze in California sours the lemon crop. What happens to consumer surplus in the market for lemons What happens to consumer surplus in the market for lemonade Illustrate your answers with diagrams. 2. Suppose the demand for French bread rises. What happens to producer surplus in the market for French bread What happens to producer surplus in the market for flour Illustrate your answer with diagrams. 3. It is a hot day, and Bert is very thirsty. Here is the value he places on a...
Nearempty Restaurants And Offseason Miniature Golf
Have you ever walked into a restaurant for lunch and found it almost empty Why, you might have asked, does the restaurant even bother to stay open It might seem that the revenue from the few customers could not possibly cover the cost of running the restaurant. In making the decision whether to open for lunch, a restaurant owner must keep in mind the distinction between fixed and variable costs. Many of a restaurant's costs the rent, kitchen equipment, tables, plates, silverware, and so on are...
How Price Ceilings Affect Market Outcomes
When the government, moved by the complaints of the Ice Cream Eaters, imposes a price ceiling on the market for ice cream, two outcomes are possible. In panel a of Figure 6-1, the government imposes a price ceiling of 4 per cone. In this case, because the price that balances supply and demand 3 is below the ceiling, the price ceiling is not binding. Market forces naturally move the economy to the equilibrium, and the price ceiling has no effect. Panel b of Figure 6-1 shows the other, more...
In The News
This tongue-in-cheek editorial from The Economist, an international newsmagazine, calls attention to a common externality that is not fully appreciated. Mum's the Word When Children Should Be Screened and Not Heard We live in increasingly intolerant times. Signs proliferate demanding no smoking, no spitting, no parking, even no walking. . . . Posh clubs and restaurants have long had no jeans rules, but these days you can be too smart. Some London hostelries have no suits policies, for fear that...
Suppose The Landlord Lets The Tenants Do Whatever They Want According To The
1. Do you agree with the following statements Why or why not a. The benefits of Pigovian taxes as a way to reduce pollution have to be weighed against the deadweight losses that these taxes cause. b. A negative production externality calls for a Pigovian tax on producers, whereas a negative consumption externality calls for a Pigovian tax on consumers. 2. Consider the market for fire extinguishers. a. Why might fire extinguishers exhibit positive externalities in consumption b. Draw a graph of...
Income Effects On Labor Supply Historical Trends Lottery Winners And The
The idea of a backward-sloping labor supply curve might at first seem like a mere theoretical curiosity, but in fact it is not. Evidence indicates that the labor supply curve, considered over long periods of time, does in fact slope backward. A hundred years ago many people worked six days a week. Today five-day workweeks are the norm. At the same time that the length of the workweek has been falling, the wage of the typical worker adjusted for inflation has been rising. Here is how economists...
B. Do You Think That Republicans Or Democrats Generally Believe That The Bucket
1. Table 20-2 shows that income inequality in the United States has increased during the past 20 years. Some factors contributing to this increase were discussed in Chapter 19. What are they 2. Table 20-4 shows that the percentage of children in families with income below the poverty line is almost twice the percentage of the elderly in such families. How might the allocation of government money across different social programs have contributed to this phenomenon Hint See Chapter 12. 3....
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The Consumer's Optimum. The consumer chooses the point on his budget constraint that lies on the highest indifference curve. At this point, called the optimum, the marginal rate of substitution equals the relative price of the two goods. Here the highest indifference curve the consumer can reach is I2. The consumer prefers point A, which lies on indifference curve I3, but the consumer cannot afford this bundle of Pepsi and pizza. By contrast, point B is affordable, but because it lies on a...
Elasticity And Tax Incidence
When a good is taxed, buyers and sellers of the good share the burden of the tax. But how exactly is the tax burden divided Only rarely will it be shared equally. To see how the burden is divided, consider the impact of taxation in the two markets in Figure 6-9. In both cases, the figure shows the initial demand curve, the initial supply curve, and a tax that drives a wedge between the amount paid by buyers and the amount received by sellers. Not drawn in either panel of the figure is the new...
Opportunity Cost And Comparative Advantage
There is another way to look at the cost of producing potatoes. Rather than comparing inputs required, we can compare the opportunity costs. Recall from Chapter 1 that the opportunity cost of some item is what we give up to get that item. In our example, we assumed that the farmer and the rancher each spend 40 hours a week working. Time spent producing potatoes, therefore, takes away from time available for producing meat. As the rancher and farmer change their allocations of time between...
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b How Trade Increases the Rancher's Consumption b How Trade Increases the Rancher's Consumption produce 4 pounds of potatoes. If you give me 1 of those 4 pounds, I'll give you 3 pounds of meat in return. In the end, you'll get to eat 3 pounds of potatoes and 3 pounds of meat every week, instead of the 2 pounds of potatoes and 1 pound of meat you now get. If you go along with my plan, you'll have more of both foods. To illustrate her point, the rancher shows the farmer panel a of Figure 3-2....
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a. Fill in the column of marginal products. What pattern do you see How might you explain it b. A worker costs 100 a day, and the firm has fixed costs of 200. Use this information to fill in the column for total cost. c. Fill in the column for average total cost. Recall that ATC TC Q. What pattern do you see d. Now fill in the column for marginal cost. Recall that MC ATC AQ. What pattern do you see e. Compare the column for marginal product and the column for marginal cost. Explain the...
Total Revenue And The Price Elasticity Of Demand
When studying changes in supply or demand in a market, one variable we often total revenue want to study is total revenue, the amount paid by buyers and received by sellers the amount paid by buyers and of the good. In any market, total revenue is P X Q, the price of the good times the received by sellers of a good, quantity of the good sold. We can show total revenue graphically, as in Figure 5-2. computed as the price of the good The height of the box under the demand curve is P, and the...
In The N Ews Lxo
Does a Drought Need to Cause a Water Shortage During the summer of 1999, the east coast of the United States experienced unusually little rain and a shortage of water. The following article suggests a way that the shortage could have been averted. By Terry L. Anderson and Clay J. Landry Water shortages are being blamed on the drought in the East, but that's giving Mother Nature a bum rap. Certainly the drought is the immediate cause, but the real culprit is regulations that don't allow markets...
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b. Why do you think the government provides items that are not public goods 3. Charlie loves watching Teletubbies on his local public TV station, but he never sends any money to support the station during their fund-raising drives. a. What name do economists have for Charlie b. How can the government solve the problem caused by people like Charlie c. Can you think of ways the private market can solve this problem How does the existence of cable TV alter the situation 4. The text states that...
Elasticity And Total Revenue Along A Linear Demand Curve
Although some demand curves have an elasticity that is the same along the entire curve, that is not always the case. An example of a demand curve along which elasticity changes is a straight line, as shown in Figure 5-5. A linear demand curve has a constant slope. Recall that slope is defined as rise over run, which here is the ratio of the change in price rise to the change in quantity run . This particular demand curve's slope is constant because each 1 increase in price causes the same...
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If a new customer offers to pay your roommate 300 for one dose, should she make one more Explain. The licorice industry is competitive. Each firm produces 2 million strings of licorice per year. The strings have an average total cost of 0.20 each, and they sell for 0.30. a. What is the marginal cost of a string b. Is this industry in long-run equilibrium Why or why not 4. You go out to the best restaurant in town and order a lobster dinner for 40. After eating half of the lobster, you realize...
The Market Forces Of Supply And Demand
When a cold snap hits Florida, the price of orange juice rises in supermarkets throughout the country. When the weather turns warm in New England every summer, the price of hotel rooms in the Caribbean plummets. When a war breaks out in the Middle East, the price of gasoline in the United States rises, and the price of a used Cadillac falls. What do these events have in common They all show the workings of supply and demand. Supply and demand are the two words that economists use most often and...
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The goal of firms is to maximize profit, which equals total revenue minus total cost. When analyzing a firm's behavior, it is important to include all the opportunity costs of production. Some of the opportunity costs, such as the wages a firm pays its workers, are explicit. Other opportunity costs, such as the wages the firm owner gives up by working in the firm rather than taking another job, are implicit. A firm's costs reflect its production process. A typical firm's production function...
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How an Increase in Demand Affects the Equilibrium. An event that raises quantity demanded at any given price shifts the demand curve to the right. The equilibrium price and the equilibrium quantity both rise. Here, an abnormally hot summer causes buyers to demand more ice cream. The demand curve shifts from D1 to D2, which causes the equilibrium price to rise from 2.00 to 2.50 and the equilibrium quantity to rise from 7 to 10 cones. Supply refers to the position of the supply curve, whereas the...
Calculate Marginal Revenue And Marginal Cost For Each Quantity. Graph Them.
Calculate profit for each quantity. How much should the firm produce to maximize profit b. Calculate marginal revenue and marginal cost for each quantity. Graph them. Hint Put the points between whole numbers. For example, the marginal cost between 2 and 3 should be graphed at 2 1 2. At what quantity do these curves cross How does this relate to your answer to part a c. Can you tell whether this firm is in a competitive industry If so, can you tell whether the industry is in a long-run...
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Catherine's Demand Schedule. The demand schedule shows the quantity demanded at each price. Catherine's Demand Curve. This demand curve, which graphs the demand schedule in Table 4-1, shows how the quantity demanded of the good changes as its price varies. Because a lower price increases the quantity demanded, the demand curve slopes downward. horizontal axis. The downward-sloping line relating price and quantity demanded is called the demand curve.
The Variety Of Demand Curves
Economists classify demand curves according to their elasticity. Demand is elastic when the elasticity is greater than 1, so that quantity moves proportionately more than the price. Demand is inelastic when the elasticity is less than 1, so that quantity moves proportionately less than the price. If the elasticity is exactly 1, so that quantity moves the same amount proportionately as price, demand is said to have unit elasticity. Because the price elasticity of demand measures how much...
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Shifts in the Demand Curve versus Movements along the Demand Curve. If warnings on cigarette packages convince smokers to smoke less, the demand curve for cigarettes shifts to the left. In panel a , the demand curve shifts from D1 to D2. At a price of 2 per pack, the quantity demanded falls from 20 to 10 cigarettes per day, as reflected by the shift from point A to point B. By contrast, if a tax raises the price of cigarettes, the demand curve does not shift. Instead, we observe a movement to a...
In The N Ews Hyg
In competitive markets, strong demand leads to high prices and high profits, which then lead to increased entry, falling prices, and falling profits. To economists, these market forces are one reflection of the invisible hand at work. To the business managers, however, new entry and falling profits can seem like a problem of overinvestment. In Some Industries, Executives Foresee Tough Times Ahead By Bernard Wysocki, Jr. MONTEREY, CALIF. About 20 executives are huddled in a conference room with...
Market Demand Versus Individual Demand
So far we have talked about an individual's demand for a product. To analyze how markets work, we need to determine the market demand, which is the sum of all the individual demands for a particular good or service. Catherine's Demand T Nicholas's Demand Ice-Cream Cones Ice-Cream Cones Ice-Cream Cones Ice-Cream Cones a graph of the relationship between the price of a good and the quantity demanded a Latin phrase, translated as other things being equal, used as a reminder that all variables...
Suppose That Congress Imposes A Tariff On Imported Autos
1. The United States represents a small part of the world orange market. a. Draw a diagram depicting the equilibrium in the U.S. orange market without international trade. Identify the equilibrium price, equilibrium quantity, consumer surplus, and producer surplus. b. Suppose that the world orange price is below the U.S. price before trade, and that the U.S. orange market is now opened to trade. Identify the new equilibrium price, quantity consumed, quantity produced domestically, and quantity...
Graphs Of Two Variables The Coordinate System
Although the three graphs in Figure 2A-1 are useful in showing how a variable changes over time or across individuals, such graphs are limited in how much they can tell us. These graphs display information only on a single variable. Economists are often concerned with the relationships between variables. Thus, they need to be able to display two variables on a single graph. The coordinate system makes this possible. Suppose you want to examine the relationship between study time and grade point...
Principle 10 Society Faces A Shortrun Tradeoff Between Inflation And
If inflation is so easy to explain, why do policymakers sometimes have trouble ridding the economy of it One reason is that reducing inflation is often thought to cause a temporary rise in unemployment. The curve that illustrates this tradeoff Phillips curve between inflation and unemployment is called the Phillips curve, after the econo- a curve that shows the short-run mist who first examined this relationship. tradeoff between inflation and The Phillips curve remains a controversial topic...
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economy were to divide its resources between the two industries, it could produce 700 cars and 2,000 computers, shown in the figure by point A. By contrast, the outcome at point D is not possible because resources are scarce The economy does not have enough of the factors of production to support that level of output. In other words, the economy can produce at any point on or inside the production possibilities frontier, but it cannot produce at points outside the frontier. An outcome is said...
Two Ways To Reduce The Quantity Of Smoking Demanded
Public policymakers often want to reduce the amount that people smoke. There are two ways that policy can attempt to achieve this goal. One way to reduce smoking is to shift the demand curve for cigarettes and other tobacco products. Public service announcements, mandatory health warnings on cigarette packages, and the prohibition of cigarette advertising on television are all policies aimed at reducing the quantity of cigarettes demanded at any given price. If successful, these policies shift...
Tradable Pollution Permits
Returning to our example of the paper mill and the steel mill, let us suppose that, despite the advice of its economists, the EPA adopts the regulation and requires each factory to reduce its pollution to 300 tons of glop per year. Then one day, after the regulation is in place and both mills have complied, the two firms go to the EPA with a proposal. The steel mill wants to increase its emission of glop by 100 tons. The paper mill has agreed to reduce its emission by the same amount if the...