Download CHAPTER 1 It is often said that a good theory is one that can be

CHAPTER 1
1. It is often said that a good theory is one that can be refuted by an empirical, data-oriented study.
Explain why a theory that cannot be evaluated empirically is not a good theory.
2. Suppose that the Japanese yen rises against the U.S. dollar—that is, it will take more dollars to buy a
given amount of Japanese yen. Explain why this increase simultaneously increases the real price of
Japanese cars for U.S. consumers and lowers the real price of U.S. automobiles for Japanese
consumers.
CHAPTER 2
1. Explain why for many goods, the long-run price elasticity of supply is larger than the short-run
elasticity.
2. Are the following statements true or false? Explain your answers.
a. The elasticity of demand is the same as the slope of the demand curve.
b. The cross-price elasticity will always be positive.
c. The supply of apartments is more inelastic in the short run than the long run.
3. Suppose the demand curve for a product is given by Q  10  2P  PS, where P is the price of the
product and PS is the price of a substitute good. The price of the substitute good is $2.00.
a. Suppose P  $1.00. What is the price elasticity of demand? What is the cross-price elasticity of
demand?
b. Suppose the price of the good, P, goes to $2.00. Now what is the price elasticity of demand?
What is the cross-price elasticity of demand?
CHAPTER 3
1. What happens to the marginal rate of substitution as you move along a convex indifference curve? A
linear indifference curve?
2. Explain why an MRS between two goods must equal the ratio of the price of the goods for the
consumer to achieve maximum satisfaction.
3. Upon merging with the West German economy, East German consumers indicated a preference for
Mercedes-Benz automobiles over Volkswagens. However, when they converted their savings into
deutsche marks, they flocked to Volkswagen dealerships. How can you explain this apparent
paradox?
CHAPTER 4
1. Explain the difference between each of the following terms:
a. a price consumption curve and a demand curve
b. an individual demand curve and a market demand curve
c. an Engel curve and a demand curve
d. an income effect and a substitution effect
2. Which of the following combinations of goods are complements and which are substitutes? Can they
be either in different circumstances? Discuss.
a. a mathematics class and an economics class
b. tennis balls and a tennis racket
c. steak and lobster
d. a plane trip and a train trip to the same destination
e. bacon and eggs
3. Explain which of the following items in each pair is more price elastic.
a. The demand for a specific brand of toothpaste and the demand for toothpaste in general
b. The demand for gasoline in the short run and the demand for gasoline in the long run
CHAPTER 5
1. Why does production eventually experience diminishing marginal returns to labor in the short run?
2. You are an employer seeking to fill a vacant position on an assembly line. Are you more concerned
with the average product of labor or the marginal product of labor for the last person hired? If you
observe that your average product is just beginning to decline, should you hire any more workers?
What does this situation imply about the marginal product of your last worker hired?
3. Isoquants can be convex, linear, or L-shaped. What does each of these shapes tell you about the
nature of the production function? What does each of these shapes tell you about the MRTS?
CHAPTER 6
1. Please explain whether the following statements are true or false.
a. If the owner of a business pays himself no salary, then the accounting cost is zero, but the
economic cost is positive.
b. A firm that has positive accounting profit does not necessarily have positive economic profit.
c. If a firm hires a currently unemployed worker, the opportunity cost of utilizing the worker’s
services is zero.
2. Suppose a chair manufacturer finds that the marginal rate of technical substitution of capital for labor
in her production process is substantially greater than the ratio of the rental rate on machinery to the
wage rate for assembly-line labor. How should she alter her use of capital and labor to minimize the
cost of production?
3. Assume that the marginal cost of production is greater than the average variable cost. Can you
determine whether the average variable cost is increasing or decreasing? Explain.
CHAPTER 7
1. Why would a firm that incurs losses choose to produce rather than shut down?
2. At the beginning of the twentieth century, there were many small American automobile
manufacturers. At the end of the century, there were only three large ones. Suppose that this situation
is not the result of lax federal enforcement of antimonopoly laws. How do you explain the decrease in
the number of manufacturers? (Hint: What is the inherent cost structure of the automobile industry?)
3. An increase in the demand for movies also increases the salaries of actors and actresses. Is the longrun supply curve for films likely to be horizontal or upward sloping? Explain.
CHAPTER 8
1. We write the percentage markup of prices over marginal cost as (P  MC)/P. For a profit-maximizing
monopolist, how does this markup depend on the elasticity of demand? Why can this markup be
viewed as a measure of monopoly power?
2. Why is there no market supply curve under conditions of monopoly?
3. Why is there a social cost to monopoly power? If the gains to producers from monopoly power could
be redistributed to consumers, would the social cost of monopoly power be eliminated? Explain
briefly.
CHAPTER 9 AND 10
1. What are the characteristics of a monopolistically competitive market? What happens to the
equilibrium price and quantity in such a market if one firm introduces a new, improved product?
2. Some experts have argued that too many brands of breakfast cereal are on the market. Give an
argument to support this view. Give an argument against it.
3. Why has the OPEC oil cartel succeeded in raising prices substantially while the CIPEC copper cartel
has not? What conditions are necessary for successful cartelization? What organizational problems
must a cartel overcome?