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...

Negative Externalities In Production

Now let's suppose that aluminum factories emit pollution For each unit of aluminum produced, a certain amount of smoke enters the atmosphere. Because this smoke creates a health risk for those who breathe the air, it is a negative externality. How does this externality affect the efficiency of the market outcome Because of the externality, the cost to society of producing aluminum is larger than the cost to the aluminum producers. For each unit of aluminum produced, the social cost includes the...

Why The Shortrun Aggregatesupply Curve Might Shift

The short-run aggregate-supply curve tells us the quantity of goods and services supplied in the short run for any given level of prices. We can think of this curve as similar to the long-run aggregate-supply curve but made upward sloping by the presence of misperceptions, sticky wages, and sticky prices. Thus, when think ing about what shifts the short-run aggregate-supply curve, we have to consider all those variables that shift the long-run aggregate-supply curve plus a new variable the...

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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...

Case Study 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...

The Shortrun Tradeoff Between Inflation And Unemployment

Learn why policymakers face a short-run tradeoff between inflation and unemployment Consider why the inflation-unemployment tradeoff disappears in the long run See how supply shocks can shift the inflation-unemployment tradeoff Two closely watched indicators of economic performance are inflation and unemployment. When the Bureau of Labor Statistics releases data on these variables each month, policymakers are eager to hear the news. Some commentators have added together the inflation rate and...

Public Policy And Job Search

Even if some frictional unemployment is inevitable, the precise amount is not. The faster information spreads about job openings and worker availability, the more rapidly the economy can match workers and firms. The Internet, for instance, may help facilitate job search and reduce frictional unemployment. In addition, public policy may play a role. If policy can reduce the time it takes unemployed workers to find new jobs, it can reduce the economy's natural rate of unemployment. Government...

Case Study Two Ways To Reduce The Quantity Of Smoking Demanded

Two Ways Demand Curve

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...

The Effects Of A Shift In Aggregate Supply

Short Run Aggregate Supply Curve Shifts

Imagine once again an economy in its long-run equilibrium. Now suppose that suddenly some firms experience an increase in their costs of production. For example, bad weather in farm states might destroy some crops, driving up the cost An Adverse Shift in Aggregate Supply. When some event increases firms' costs, the short-run aggregate-supply curve shifts to the left from AS to AS2. The economy moves from point A to point B. The result is stagflation Output falls from Y1 to Y2, and the price...

Political Instability And Capital Flight

Capital Flight Impact Interest Rates

In 1994 political instability in Mexico, including the assassination of a prominent political leader, made world financial markets nervous. People began to view Mexico as a much less stable country than they had previously thought. They decided to pull some of their assets out of Mexico in order to move these funds to the United States and other safe havens. Such a large and sudden movement of funds out of a country is called capital flight. To see the implications of capital flight for the...

Hint The Government Took Such An Action In The 1980s

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...

The Cost Of Producing Stereo Systems Has Fallen Over The Past Several Decades

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...

The Various Measures Of Cost

Thirsty Thelma Lemonade Stand

Our analysis of Hungry Helen's Cookie Factory demonstrated how a firm's total cost reflects its production function. From data on a firm's total cost, we can derive several related measures of cost, which will turn out to be useful when we analyze production and pricing decisions in future chapters. To see how these related measures are derived, we consider the example in Table 13-2. This table presents cost data on Helen's neighbor Thirsty Thelma's Lemonade Stand. The first column of the table...

Catherines Demand Curve

Catherine Demand Curve

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. 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...

The Effects Of An Import Quota

Deadweight Loss Imports

The Isolandian economists next consider the effects of an import quota a limit on the quantity of imports. In particular, imagine that the Isolandian government distributes a limited number of import licenses. Each license gives the license holder the right to import 1 ton of steel into Isoland from abroad. The Isolandian economists want to compare welfare under a policy of free trade and welfare with the addition of this import quota. Figure 9-7 shows how an import quota affects the Isolandian...

Shifts In The Demand Curve

Shifts The Demand Curve

Suppose that the American Medical Association suddenly announces a new discovery People who regularly eat ice cream live longer, healthier lives. How does this announcement affect the market for ice cream The discovery changes people's tastes and raises the demand for ice cream. At any given price, buyers now want to purchase a larger quantity of ice cream, and the demand curve for ice cream shifts to the right. Whenever any determinant of demand changes, other than the good's price, the demand...

Pat And Kris Are Roommates. They Spend Most Of Their Time Studying Of Course But They Leave Some Time For Their

Will a nation tend to export or import goods for which it has a comparative advantage Explain. Why do economists oppose policies that restrict trade among nations 1. Consider the farmer and the rancher from our example in this chapter. Explain why the farmer's opportunity cost of producing 1 pound of meat is 2 pounds of potatoes. Explain why the rancher's opportunity cost of producing 1 pound of meat is 1 8 pound of potatoes. 2. Maria can read 20 pages of economics in an hour. She can also read...

Little Kona Is A Small Coffee Company That Is Considering Entering A Market Dominated By Big Brew

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...

Case Study Monopoly Drugs Versus Generic Drugs

According to our analysis, prices are determined quite differently in monopolized markets from the way they are in competitive markets. A natural place to test this theory is the market for pharmaceutical drugs because this market takes on both market structures. When a firm discovers a new drug, patent laws give the firm a monopoly on the sale of that drug. But eventually the firm's patent runs out, and any company can make and sell the drug. At that time, the market switches from being...

Why The Longrun Supply Curve Might Slope Upward

So far we have seen that entry and exit can cause the long-run market supply curve to be horizontal. The essence of our analysis is that there are a large number of potential entrants, each of which faces the same costs. As a result, the long-run market supply curve is horizontal at the minimum of average total cost. When the demand for the good increases, the long-run result is an increase in the number of firms and in the total quantity supplied, without any change in the price. There are,...

If You Were Johnny S Agent What Recording Fee Would You Advise

100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 1,000,000 The author is paid 2 million to write the book, and the marginal cost of publishing the book is a constant 10 per book. a. Compute total revenue, total cost, and profit at each quantity. What quantity would a profit-maximizing publisher choose What price would it charge b. Compute marginal revenue. Recall that MR ATR AQ. How does marginal revenue compare to the price Explain. c. Graph the marginal-revenue,...

You Were Planning To Spend Saturday Working

Describe some of the tradeoffs faced by the following a. a family deciding whether to buy a new car b. a member of Congress deciding how much to spend on national parks c. a company president deciding whether to open a new factory d. a professor deciding how much to prepare for class 2. You are trying to decide whether to take a vacation. Most of the costs of the vacation airfare, hotel, forgone wages are measured in dollars, but the benefits of the vacation are psychological. How can you...

Hi-tech Printing Company Invents A New Process That Sharply Reduces The Cost Of Printing Books. What Happens To Hi-tech

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...

Case Study Rent Control In The Short Run And Long

Partial Rent Control Quantities

One common example of a price ceiling is rent control. In some cities, the local government places a ceiling on rents that landlords may charge their tenants. The goal of this policy is to help the poor by making housing more affordable. Economists often criticize rent control, arguing that it is a highly inefficient way to help the poor raise their standard of living. One economist called rent control the best way to destroy a city, other than bombing. The adverse effects of rent control are...

Externalities In Consumption

Positive Consumption

The externalities we have discussed so far are associated with the production of goods. Some externalities, however, are associated with consumption. The consumption of alcohol, for instance, yields negative externalities if consumers are more likely to drive under its influence and risk the lives of others. Similarly, the consumption of education yields positive externalities because a more educated population leads to better government, which benefits everyone. The analysis of consumption...

Comparative Advantage And Trade

Differences in opportunity cost and comparative advantage create the gains from trade. When each person specializes in producing the good for which he or she has a comparative advantage, total production in the economy rises, and this increase in the size of the economic pie can be used to make everyone better off. In other words, as long as two people have different opportunity costs, each can benefit from trade by obtaining a good at a price lower than his or her opportunity cost of that...

Recent Study Found That The Demand And Supply Schedules For Frisbees Are As Follows

Lovers of classical music persuade Congress to impose a price ceiling of 40 per ticket. Does this policy get more or fewer people to attend classical music concerts The government has decided that the free-market price of cheese is too low. a. Suppose the government imposes a binding price floor in the cheese market. Use a supply-and-demand diagram to show the effect of this policy on the price of cheese and the quantity of cheese sold. Is there a shortage or surplus of cheese b. Farmers...

Our Second Model The Production Possibilities Frontier

Quantity Computers Produced

Most economic models, unlike the circular-flow diagram, are built using the tools of mathematics. Here we consider one of the simplest such models, called the production possibilities frontier, and see how this model illustrates some basic economic ideas. Although real economies produce thousands of goods and services, let's imagine an economy that produces only two goods cars and computers. Together the car industry and the computer industry use all of the economy's factors of production. The...

Principle 6 Markets Are Usually A Good Way To Organize Economic Activity

For 5 a week you can watch baseball without being nagged to cut the grass For 5 a week you can watch baseball without being nagged to cut the grass The collapse of communism in the Soviet Union and Eastern Europe may be the most important change in the world during the past half century. Communist countries worked on the premise that central planners in the government were in the best position to guide economic activity. These planners decided what goods and services were produced, how much was...

Case Study Why The Cow Is Not Extinct

Throughout history, many species of animals have been threatened with extinction. When Europeans first arrived in North America, more than 60 million buffalo roamed the continent. Yet hunting the buffalo was so popular during the nineteenth century that by 1900 the animal's population fell to about 400 before the government stepped in to protect the species. In some African countries today, the elephant faces a similar challenge, as poachers kill the animals for the ivory in their tusks. Yet...

The Market For Pizza Has The Following Demand And Supply Schedules

Explain each of the following statements using supply- a. When a cold snap hits Florida, the price of orange juice rises in supermarkets throughout the country. b. When the weather turns warm in New England every summer, the prices of hotel rooms in Caribbean resorts plummet. c. When a war breaks out in the Middle East, the price of gasoline rises, while the price of a used Cadillac falls. 2. An increase in the demand for notebooks raises the quantity of notebooks demanded, but not the...

Principle 9 Prices Rise When The Government Prints Too Much Money

In Germany in January 1921, a daily newspaper cost 0.30 marks. Less than two years later, in November 1922, the same newspaper cost 70,000,000 marks. All other prices in the economy rose by similar amounts. This episode is one of history's most spectacular examples of inflation, an increase in the overall level of inflation prices in the economy. an increase in the overall level of Although the United States has never experienced inflation even close to that prices in the economy in Germany in...