Solution Manual for Microeconomics, 8th Edition

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Online Instructor’sResourceManualByLeonie StoneState University of New York College at GeneseoForMicroeconomicsEighthEditionJeffrey M.PerloffUniversityof California, Berkeley

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ContentsChapter 1Introduction................................................................................................................1Chapter 2Supply and Demand...................................................................................................5Chapter 3Applying the Supply-and-Demand Model..................................................................27Chapter 4Consumer Choice.......................................................................................................45Chapter5Applying Consumer Theory.......................................................................................66Chapter 6Firms and Production.................................................................................................94Chapter 7Costs...........................................................................................................................109Chapter 8Competitive Firms and Markets.................................................................................129Chapter 9Applying the Competitive Model...............................................................................151Chapter 10General Equilibrium and Economic Welfare.............................................................173Chapter 11Monopoly...................................................................................................................186Chapter 12Pricing and Advertising..............................................................................................207Chapter 13Oligopoly and Monopolistic Competition..................................................................228Chapter 14Game Theory..............................................................................................................247Chapter 15Factor Markets............................................................................................................272Chapter 16Interest Rates, Investments, and Capital Markets.......................................................283Chapter 17Uncertainty.................................................................................................................295Chapter 18Externalities, Open-Access, and Public Goods..........................................................311Chapter 19Asymmetric Information............................................................................................326Chapter 20Contracts and Moral Hazards.....................................................................................339

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Chapter 1IntroductionChapter Outline1.1Microeconomics: The Allocation of Scarce ResourcesTrade-OffsWhich goods and services to produce.How to produce.Who gets the goods and services.Who Makes the DecisionsPrices Determine AllocationsApplication: Twinkie Tax1.2ModelsApplication: Income Threshold Model and ChinaSimplifications by AssumptionTesting TheoriesMaximizing Subject to ConstraintsPositive Versus Normative1.3Uses of Microeconomic Models

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2Perloff •Microeconomics,Eighth EditionTeaching TipsYou might begin the first class by discussing with the students the role of the intermediate microeconomicsclass in the larger curriculum. Encourage the students to be interactive by asking questions, bringing inexamples from the newspaper, and questioning concepts that seem untrue or unrealistic. For manyprofessors, a primary goal of the course is to get them to think like economists. The material in Chapter 1should help the students to understand what is required to do so. You might want to ask your students thepolicy questions listed below as a kind of pre-test. Simply ask them to write down the best answer they canfor now, and then put their answers away. You can then return to these answers later in the semester.Some suggested policy questions (be sure to ask only questions that you will address later in the course):1.How do minimum wages affect wages, employment, and unemployment?2.Is the CPI a good measure of inflation?3.Why do stores offer coupons instead of simply reducing the price by the value of the coupon?4.Why is the price of electricity regulated in most areas?5.Why do some workers prefer set wages rather than commissions, even if they might make moreworking on commission?6.Agree or disagree: We should strive to be a zero-pollution society.On a more pragmatic level, I stress to the students that success in the class is heavily dependent on theirapproach to the material. Specifically, I emphasize that memorization is an extremely ineffective tool forstudying economics, and that students who memorize material are very prone to confusion and “drawing ablank” on exams. I try to persuade them that a much better approach is to press for understanding. I alsostress that understanding usually comes only through active engagement with the material, both in classand out. The problems in the text, as well as the additional problems available in this manual and the StudyGuide, will benefit the students in this regard. The conceptual and technical questions throughout theseproblem sets are designed to facilitate student understanding.I also emphasize the importance of coming to class regularly. Paul Romer’s article, “Do Students Go toClass? Should They?” in theJournal of Economic Perspectives(vol. 7, no. 3, Summer 1993:167–74)shows that perfect class attendance is worth between one and two grade points, and attendance at all ratherthan half of classes is worth between 0.67 and 1.24 grade points. Referring to this evidence might addsome weight to your argument.Finally, I recommend that all students bring a protractor and a few colored pencils to class to aid theirnote taking. One of the most frequent problems of students who are struggling is sloppy lecture notes. Aprotractor is great for drawing lines and curves and has the added benefit of being transparent. Coloredpencils are a big help when students are taking notes on graphs with many different lines, such as incomeand substitution effects and long- and short-run cost.Chapter 1 serves as an introduction to the text as well as a refresher on some basic economic concepts anddefinitions. This is a good chapter to get started on during the first day, as most students willnothaveread it before class. It will give you the opportunity to get a feeling for the students’ recall of these basicconcepts.I usually start by asking the class for a definition of economics. If you get several suggestions that do notinclude the concept of scarcity, consider writing them on the board. Ask the class if they can think of

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Chapter 1Introduction3what central idea is missing from the definitions given. The discussion of scarcity and the questions ofwhat, how, and for whom to produce should lead you directly into a discussion of the role of prices as anallocation mechanism.In the discussion of prices and markets, I try to get the students to offer examples from recent eventswhere prices have risen or fallen sharply. Another possibility is to ask the students why some prices are sohigh (e.g., professional athletes’ salaries), and others are so low (computer disks). Ideally, you will end upin a discussion of the demand-driven nature of a market economy and the ways in which supply anddemand interact to allocate resources. I also like to talk briefly about market failure and why the UnitedStates is a mixed economy rather than a pure market economy. A discussion on the benefit of interventionmight encourage the students to consider when a mixed economy might be beneficial. You could use anexample, such as primary education, to discuss what would happen in the absence of intervention, and whythe government might intervene.When discussing allocation of goods and services, an effective counterpoint to the market system isconsideration of the centrally planned economy and the changes in Eastern Europe. Many students havevery little knowledge of how centrally planned economies operate, the difficulties they face in meetingthe demands of their citizens, and how these difficulties relate to the current political changes.The discussion of economic models is very important. Most students do not have a sound understanding ofthe construction and purpose of an economic model. Stress the point that economic models are allegoriesused to describe behaviors and outcomes that would otherwise be unnecessarily complicated. Rather thantry to duplicate the actual phenomenon, economists use models to make predictions about the behavior offirms and individuals. Perhaps the most important point to make regarding models is that they are simplifiedthrough the use of assumptions. You might choose a typical market and describe the wide variety ofcomplex interactions that would have to be quantified in order to produce a complete model. Then describethe circumstances under which a very simple economic model can make satisfactory predictions (where“satisfactory” can be defined a number of ways, such as the coefficient of determination in a regressionmodel). You may also want to discuss interactions that are too difficult to model, and why. For example,modeling behavior in unstable political climates is difficult because of the large influence of events thatcannot be forecast. Finally, you might discuss the use of models to test theories and make predictions.Often students have a somewhat jaded view of economists and their predictions. I like to point out thatwhile predictions often turn out to be incorrect, the error can often be traced to incorrect assumptions madeat the time of the prediction. For example, suppose a forecasting model is constructed to predict baseballgame attendance. Assuming a bright sunny day, attendance at a baseball game is predicted to be 40,000.If only 10,000 fans show up on game day, it could be that the model is bad, but it could also be that theweather is cool with a steady rain. In this case the assumption, not the model, was flawed.The application in the text considers the income threshold model in China. Students are often facing largeincreases in income upon graduation. I would ask them what large purchases they plan to make followinggraduation and apply that back to the China example. If a large portion of the economy had a large incomeshock, either positive or negative, what would happen to the demand for consumer durables? I woulddiscuss how this change in demand might be disproportionate to the change in income due to the incomethreshold model.Chapter 1 also introduces the difference between positive and normative economics. It does not take longto cover, and a brief discussion of this point is worth the time. You might begin by asking students thedistinction between positive and normative problems. I often find that students either do not know at all orare very unsure about their responses. To get the class thinking, use current societal problems as discussionpoints. Ask the class what would be a fair price for an AIDS vaccine. The variety of responses shows thenormative nature of the question, but there is no disagreement that the vaccine should be produced inthe least costly way possible regardless of how the gains are shared. Note that most problems have both

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4Perloff •Microeconomics,Eighth Editionpositive and normative aspects and that by separating objective issues from subjective ones, we can moreeasily understand and approach the problems and find effective solutions. The text example of the wisdomof food price controls in Africa during droughts makes this point well.When covering Section 1.3 (Uses of Microeconomic Models), you might draw on examples from yourown experience or current events that require the use of models. I like to draw the distinction betweenstructural models that may be used, for example, to determine an elasticity and forecasting models thatemphasize predictive power over theoretical correctness. If students have a weak background in statistics,you may have to keep this discussion at a broad conceptual level. This section provides a great opportunityto make the subject matter come alive for the students.Discussion Questions1.If water is needed to survive and diamonds are simply for jewelry, then why are diamonds soexpensive and water so inexpensive?2.Discuss the positive and normative aspects of the economics of the Food Stamp program.3.Are prices the best way to allocate pharmaceutical products?4.Suppose you wanted to build a model to predict hurricanes. Which would be better, a model thatresulted in more false positive predictions (storm is predicted but does not occur) or more falsenegatives (storm occurs but is not predicted)? Why?5.What assumptions might you make to simplify the task of building an economic model of the grapemarket?6.Think of a market the government currently intervenes in. What is an economic rationale for theintervention?7.Economists often have differing opinions on what house prices will do over the next five years. Whatfeature of economic models might explain these differing opinions?

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Chapter 2Supply and DemandChapter OutlineChallenge:Quantities and Prices of Genetically Modified Foods2.1DemandThe Demand CurveEffect of Prices on the Quantity DemandedEffect of Other Factors on DemandApplication: Calorie CountingThe Demand FunctionSolved Problem 2.1Summing Demand CurvesApplication: Aggregating Corn Demand Curves2.2SupplyThe Supply CurveEffect of Price on SupplyEffect of Other Variables on SupplyThe Supply FunctionSumming Supply CurvesHow Government Import Policies Affect Supply CurvesSolved Problem 2.22.3Market EquilibriumUsing a Graph to Determine the EquilibriumUsing Math to Determine the EquilibriumForces That Drive a Market to Equilibrium2.4Shocking the EquilibriumEffects of a Shock to the Supply CurveSolved Problem 2.3Effects of a Shock to the Demand Curve

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6Perloff •Microeconomics,Eighth Edition2.5Effects of Government InterventionsPolicies That Shift Supply CurvesLicensing LawsApplication: Occupational LicensingQuotasSolved Problem 2.4Policies That Cause the Quantity Demanded to Differ from the Quantity SuppliedPrice CeilingsApplication:Venezuelan Price Ceilings and ShortagesPrice FloorsSolved Problem 2.5Why the Quantity Supplied Need Not Equal the Quantity Demanded2.6When to Use the Supply-and-Demand ModelTeaching TipsThis chapter reviews basic supply-and-demand concepts from the principles level. Your interactions withthe class from the first session or two should give you a good indication of how much class time to spendon it. If it has been some time since their principles course, students may need fairly consistent promptingto recall the basic supply-and-demand model. For example, many will remember that there is a Law ofDemand but will not remember the law itself. Encourage students in the strongest terms to read the chaptercarefully. It is well worth the time spent at this stage to make sure everyone has solid recognition of thesebasic tools and concepts.A good way to motivate the chapter is by beginning with the genetically modified food example found inthe Challenge. Try to keep the conversation focused on possible effects of entry or of the ban. Let studentsbrainstorm about which parties might be in favor of a ban and who would be opposed and why.When reviewing demand, be sure students are clear on the difference between movement along the curveand a shift of the entire curve. Two points should be helpful. First, note to them that both in Equation 2.1and on the graph in Figure 2.1, price is the only independent variable present. Thus, only price can cause amovement along the curve. Second, underscore the role of other variables. After compiling a list of thefactors that can shift the demand curve (once they get started, the class as a group should be able to provideyou with this list), I ask what factors are held constant along a single demand curve. Surprisingly, this questionis often greeted by a protracted silence. By realizing that it is the same factors that shift the curve whenthey change, students develop a more solid understanding. The text makes this point well in Equations 2.2and 2.3.The introduction of demand curves and equations is a good opportunity to review the basic geometric conceptsof slope and intercept. This does not take much time, as most students can recognize slope and intercept ofa written equation, but there is sometimes a surprising lack of connection between what appears in an equationand the resulting graph. Draw a demand curve and tell the class that the slope of this curve is–2. Then ask the students what will happen in the graph if the slope changes to−4. Although it is likelythat several, perhaps most students will know immediately, some will not.Rather than referring to the slope increasing or decreasing, I tend to refer to it as becoming steeper orflatter, and thus this way I can talk about the shift in supply and demand curve slopes the same way (anincreasein slope would cause the demand curve to become flatter and the supply curve to become steeper,

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Chapter 2Supply and Demand7which can be confusing for students). I try to use the simple algebra and geometry in these early chaptersto help me to gauge what portion of the class is likely to struggle when the material gets tougher.Assigning some of the quantitative problems at the end of the chapter and collecting them (even if you donot intend to collect homework throughout the term) is another good diagnostic. Alternatively use fiveminutes of lecture time to ask students to answer two or three basic quantitative questions and collect theirresponses. Assure the students that their answers will not be graded and will simply be used to gaugecomprehension. This will allow you to adjust your next lecture if necessary, and by walking around whilestudents are working, you can answer any basic questions they might have.It is also valuable to discuss the inverse demand curve and the process of inversion. I usually motivate thisreview by noting that this process will be needed later when formulating a total revenue equation from ademand equation. I combine this with the discussion of the problem of the reversed axes. At this point, youcan refer back to the graph and show how to find the intercept and slope from Equation 2.3I try to keep the discussion of supply parallel to that of demand. For factors that can shift the entire supplycurve, note that they can all be lumped together under the broader heading of costs, government rules andregulations, and other variables (as is done in the text). The text notes that there is no “Law of Supply,”and most students have learned this in their principles course. Be aware, however, that some principlesinstructors refer to the upward slope of supply curves in the short run as the “Law of Supply.” Adopting auniform taxonomy and vocabulary reduces confusion. This includes uniformity with the text with respectto symbols and upper- versus lower-case labeling.When combining supply and demand in the discussion of equilibrium, press the students for a usabledefinition of the term. You will likely receive the suggestion of “where supply equals demand.” Thoughincorrect, this definition is useful in the introduction of price floors and ceilings where the quantity supplieddoes not equal demanded at the equilibrium quantity. An important point regarding equilibrium solutionsof supply-and-demand problems is that they are typically stable and self-correcting. To illustrate this point,use examples of commonly purchased items such as discounted clothing where reduced prices reflectexcess supply.Now that students have an idea of what a market looks like in equilibrium, I might ask for examples ofmarkets that are not in equilibrium. This leads in to the discussion of government interventions and howthey distort the market. This is also a good place to use a news article to show students how to use graphsto explain effects mentioned in the article.When discussing floors and ceilings, I stress the definitions using simple graphs as illustrations. Althoughit seems counterintuitive to some students that an effective floor must beabovethe equilibrium price andan effective ceiling must bebelow,suggest that they use this as a mnemonic device. In this section, I try toengage the class in a discussion of unintended or secondary effects of government intervention. This issuedeserves significant class discussion time. Most students have not thought much about the consequences ofceilings and floors beyond the simple price effects. The text has a good description of the unintendedeffects of price controls in Zimbabwe. A discussion on the initial reaction to the price controls, and thenthe actual effect of the controls, would lead students to realize the importance of looking beyond the initialeffect and using economic models to predict outcomes.Another good example for discussing secondary effects is rent control. On the supply side, landlords’incentives to provide efficient levels of upkeep and safety measures in rent-controlled buildings aredistorted. On the demand side, time spent searching and undesired doubling-up reduce consumersatisfaction. Secondary effects of floors are also worth noting. I recommend that you discuss the text’sexample of the possible negative effects of minimum wages. Again, students are likely to view minimumwages as strictly a benefit to workers because they have not considered that job loss will mean that someworkers are harmed rather than helped by the establishment of minimums or increases in their level.

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8Perloff •Microeconomics,Eighth EditionThese policy issues provide an opportunity to use current affairs in class. Using an article from anewspaper or online source, I often break down the predictions in the article and use the theory learned inclass to determine their veracity.In the section on when to use the supply-and-demand model, be sure to define and discuss transactioncosts. Most students will not be familiar with this term from principles, and it has important implicationson the functioning of thin markets and markets where there is substantial uncertainty.At the end of the chapter, you can return to the discussion of genetically modified foods (or anotherappropriate example) and use the supply and demand model to analyze the effects of entry.Discussion Questions1.Can you think of any reasons why the Law of Demand might not hold?2.Would you expect most supply curves to have an upward slope? Why or why not?3.What are some examples of markets that are competitive?4.In which markets that would otherwise be competitive would you expect transaction costs to bevery high?5.Can you think of situations where the government would want to take actions that cause shortages?6.In what markets and situations would you expect that the quantity demanded would not equalthe quantity supplied?7.Can you think of an example where a good is sold below equilibrium price without governmentintervention causing excess demand? Which property of perfect competition is violated?Additional Questions and Problems1.Suppose you are planning to conduct a study of the running shoe market. List the factors that youbelieve would cause changes in the demand for running shoes. In each case, note whether therelationship would be positive (direct) or negative (inverse). Also list the factors that you believewould affect the supply, again noting the nature of the relationship.2.In each case below, identify the effect on the demand curve for steak (a normal good).a.An increase in the price of lambb.A decrease in the populationc.An increase in consumer incomed.A decrease in the price of steak saucee.An increase in advertising by chicken producers3.In each case below, identify the effect on the supply curve for coal.a.The development of a new, lower cost mining techniqueb.An increase in wages paid to coal minersc.The imposition of a $2 per ton tax on coald.A government ban on all imports of coale.A new government regulation requiring air purifiers in all work areas

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Chapter 2Supply and Demand94.In a competitive labor market, demand for workers isQD=10,000 – 100W, and supply isQS=2,000+1,900W, whereQis the quantity of workers employed andWis the hourly wage. What is the initialequilibrium wage and employment level? Suppose that the government decides that $5 per hour is theminimum allowable wage in any market. How would this new minimum wage alter this market?What would the new employment level be? What would happen to total payments to labor? Wouldthere be any excess supply of labor? If so, how much?5.For each of the following sentences describing changes in the tangerine market, note whether thestatement is true, false, or uncertain, and explain your answer. You will find it helpful to draw a graphfor each case.a.If consumer income increases and worker wages fall, quantity will rise, and prices will fall.b.If orange prices decrease and taxes on citrus fruits decrease, quantity will fall, and prices willrise.c.If the price of canning machinery (a complement) increases and the growing season is unusuallycold, quantity and price will both fall.6.If demand for show tickets is described by the equationQD=100 –p, and supply isQS=20+p,find the equilibrium price and quantity. How would your answer change if the supply curve shiftedto10SQp′ =+due to increases in actor salaries? What would the supply curve look like if thecapacity of the theatre was 50 people?7.Suppose the demand for onion ice cream was described by the equationQD=20 –pand the supplywas described byQS=–40+p. What are the equilibrium price and quantity? Show your answerusing a graph.8.If demand for toy drums is described by the equationQD=300 – 5pand supply isQS=60+3p, findthe equilibrium price and quantity. How would your answer change if a decrease in consumer incomeshifted the demand curve to2205?DQp′=−9.Suppose the United States does not produce any baseball hats domestically but imports them fromforeign producers. Initially, demand is10002,DQp=−and supply (from foreign producers) is100SQp=+. Determine the equilibrium price and quantity. The government then decides that nomore than 300 baseball hats should be imported per period and imposes a quota at that level. Howdoes this quota affect the equilibrium price and quantity? Show the solution using a graph andcalculate the numerical answer. How might this quota affect the market for cowboy hats (a substitutegood)?10.Demand for park visits is*010,000100.QP=−If park visits are free, how many visitors will attend?How will your answer change if the park adds a $20.00 admission fee? Show using a graph.11.A firm introduces a new model of MP3 player that can play both audio and video files. The price isthe same as that of a previous model that can only play audio files. What would happen to the market ofthe previous model? What if the new model is more expensive than the previous one?12.In a competitive labor market, demand for workers isQD=9,900−100W, and supply isQS=2,000+1,900W, whereQis the quantity of workers employed andWis the hourly wage. Suppose thegovernment decides to impose a wage ceiling of $3 per hour. What would the equilibrium be in thislabor market?

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10Perloff •Microeconomics,Eighth Edition13.New York requires all taxis to be licensed and limits the number of licenses available. Suppose themarket is currently in equilibrium. If the city no longer requires licenses, what will happen to theequilibrium price and quantity supplied? Why?Answers to Additional Questions and Problems1.Possible responses include:Demand:The price of running shoes (–)Sock prices (–)Prices of other sneaker types (+)Number of people who are regular runners (+)Income (+)Supply:Worker wages (–)Increases in leather prices (–)Removal of import tariffs (+)A unit tax on running shoes (–)2.a.The demand curve shifts to the right.b.The demand curve shifts to the left.c.The demand curve shifts to the right.d.The demand curve shifts to the right.e.The demand curve shifts to the left.3.a.The supply curve shifts to the right.b.The supply curve shifts to the left.c.The supply curve shifts to the left.d.The supply curve shifts to the left.e.The supply curve shifts to the left.4.Without minimum wages, the equilibrium is**10,0001002,0001,90049,600.WWWQ−=+==With the new minimum wage of $5, employment will equal the amount of labor demanded at theminimum wage.10,000100(5)9,500.dQ=−=Total payments to labor would increase from $38,400 to $47,500. Excess supply of labor would equal2,000=2,000+1,900(5)−9,500. Thus, in addition to the 100 people who would lose jobs that theyhad before the minimum, an additional 1,900 would now want jobs that would be unobtainable at thehigher wage rate.5.In each case, you must draw a graph that shows the original supply and demand curves, plus the newcurves after the changes. You must then consider whether it matters or not how far the curve shifts inresponse to the change in the parameter indicated.

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144Perloff •MFigureA quotcowboequilib10.WhenentranFigure11.The dethe dem12.WithouwhereWith temployMicroeconomics,e 2.5ta on baseballoy hats. As abrium price fopark visits arce fee quantite2.6emand curve omand curve fout the wage che wage ceiliyed will be 7Eighth Editionl hats would iresult, demanor cowboy hare free, the eqty falls to 8,00of the previoufor the previouceiling, the eq10ing of $3 per h,700.© 2018 Pearsonincrease the pnd for cowboyts would incrquilibrium qua00. See Figurus model shifus model stillquilibrium is g0,000100W−W=4 andhour, the marn Education, Inc.price of baseby hats wouldrease.antity is 10,00re 2.6.fts to the rightl shifts to thegiven by2,0001,9=+dQ=9,600.rket wage rateball hats, whicincrease (shif00=10,000 –t. If the new mright, but wit900,We will beW=ch are a substft upwards), a– 100(o). Withmodel is moreth a smaller m3, and the amtitute forand theh a $20.00e expensive,magnitude.mount of laboor

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16Perloff •Microeconomics,Eighth Edition1.4Substituting in the price of tomatoes and the original level of income givesQ =160 – 40porp= 4– 0.025Q. With the new level of income,Q= 170 – 40porp= 4.25 – 0.025Q.The demand curveshifts to the right.1.5We know thatΔp= –0.05ΔQ.IfΔQ= –2 (a reduction of 2 million kg of pork per year),Δp=–0.05×–2 = 0.10. Thus, a 10 cent per kg increase in price will result in a 2 million kg drop indemand.1.6The total demand curve is the horizontal sum of the individual demand curves for food and feed:Q=Qfood+Qfeed.SinceQfeed= 0 at prices above $27.56, forp> 27.56;Q = 1,487 – 22.1pand forp< 27.56Q = 7,735 – 248.8p.1, 48722.1,27.567,734.5 –248.8,27.56ppQpp−≥⎧= ⎨<⎩1.7Q=Q1+Q2= (120 –p) + (60 – 1/2p) = 180 – 1.5p.1.8The total demand function isQ=Qs+Ql= 15.6p–0.563+ 16p–0.296.1.9The total demand function isQ=23.71.41.4.pp−−+At a price of $1.00, Apple Store customersdemand21.4 *11.4appsAQ−==, and Google Play customers demand3.71.4 *11.4appsAQ−==,for a total of 2.8 million apps.2.1Supply:Q=178+40p−60ph. Replacingphwith $3 per kg gives us a supply functionQ=178+40p−60×$3=40p−2. That is, the slope of the supply curve does not change from Equation 2.7,but the whole supply curve shifts to the left.2.2The change in avocadoes supplied with respect to a change in the price of fertilizer is20fQpΔ= −Δ.Thus a $1.10 increase in income results a 22 unit decrease in avocadoes supplied. Graphically, thiswould be a leftward shift of the supply curve.2.3The world supply is:Q=Qa+Qr= (a + bp)+(a + cp) = 2a + (b+c)p.

Solution Manual for Microeconomics, 8th Edition - Page 20 preview image

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2.42.2In the followU.S. domesforeign suppcurve under.pAt priceforeign suppwith the quoequals the qforeign suppshiftedQuprices less tthe same asthanS, indithan withouThe effect oThus, an incwing figure, tstic supply cupliers want tor the quota,Ses above,pfply curve witota,,Sis thequota plus theply is,fQsounits to the rigthan or equalsS. At pricescating that a gut one.of a change increase in the p© 20the no-quota trve,Sd, and tho supply quan,fSis the samforeign supplith a quota,fSehorizontal sue domestic supo the total supght. As a resuto,pthe samabove,plesgiven increasnpfonQisprice of fertil018 Pearson Eductotal supply che no-quota fntities less thame as the no-qiers want to su,fis verticalum ofSdandpply. For exapply is*dQQ+ult, the portionme quantity isss is suppliede in price raisfQpΔΔ= –20fQpΔΔ= –20(fQpΔΔ= –22 uizer will shiftcation, Inc.curve,Sin panforeign supplyan the quota,quota foreignupply more batQfor pric.fSAt any pample, atp*, t.fQAbovepn ofSaboves supplied witwith the quotses the quanti0pf1.10)units.ft the avocadoChapter 2nel c, is the hy curve,Sf. At.QAs a resulsupply curvebut are limitedces above.pprice abovepthe domestic,pSis the domephas the sth and withouta than withouity supplied bo supply curveSupply and Dehorizontal sumt prices less thlt, the foreigne,Sf, for priced to.QThusThe total sup,pthe total susupply is*dQmestic supplyame slope asut the quota, sut one, soSby less with ae to the left.emand17m of thehan,pn supplys less thanthepply curveupply, and they curveSd. AtsoSisis steeperquota

Solution Manual for Microeconomics, 8th Edition - Page 21 preview image

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18Perloff •Microeconomics,Eighth Edition3.1The statement “Talk is cheap because supply exceeds demand” makes sense if we interpret it tomean that the quantity supplied of talk exceeds the quantity demanded at a price of zero. Imagine adownward-sloping demand curve that hits the horizontal, quantity axis to the left of where theupward-sloping supply curve hits the axis. (The correct aphorism is “Talk is cheap until you hire alawyer.”)3.2a.We know that the town consumes 9000 gallons per day at no cost; thus, there is a point on thedemand curve atp= 0,q= 9,000. Thus (becauase we assume there is no negative demand), alinear demand curve would be along the horizontal axis, wherep= 0.b.The supply curve is drawn along the horizontal axis from the point whereq= 0 untilq=10,000. To the right of whereq= 10,000, the supply curve is upward sloping.c.Quantity supplied and demanded reach an equilibrium at any point underq= 10,000, wherep=0.3.3The supply curve is upward sloping and intersects the vertical price axis at $6. The demand curve isdownward sloping and intersects the vertical price axis at $4. When all market participants are ableto buy or sell as much as they want, we say that the market is in equilibrium: a situation in whichno participant wants to change its behavior. Graphically, a market equilibrium occurs where supplyequals demand. An equilibrium does not occur at a positive quantity because supply does not equaldemand at any price.3.4Set quantity demanded equal to quantity supplied:171−20p+20pb+3pc+2Y= 178 + 40p– 60phSolving forpyields:71116032030bchpppYp= −++++Solving forqyields:520404220333bchqppYp=+++−Inserting prices of other goods yieldsP= $3.30 andQ= 220.

Solution Manual for Microeconomics, 8th Edition - Page 22 preview image

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Chapter 2Supply and Demand193.5In equilibrium, the quantity demanded,Q=a–bp, equals the quantity supplied,Q=c+ep, soa–bp=c+ep. By solving this equation forp, we find that the equilibrium price isp= (a–c)/(b+e).By substituting this expression forpinto either the demand curve or the supply curve, we find thatthe equilibrium quantity isQ= (ae-bc)/(b+e).3.6The demand for processed tomatoes is0.20.15ln()2.60.2ln()0.15ln()or13.46.DttQppQPP−=−+=WhenPt= 110,0.20.150.213.46(110)27.24DQPP−−==.To find the equilibrium, we equate the right sides of the original logarithmic supply and demandfunctions and using algebra, we find3.20.20.20.75ln()2.40.15ln()ln()3.20.2ln()*24.53.ttttpppppepp=+=+==We then setpt= 110, solve forp= $62.80/ton.Or, we can find the supply function:0.55ln()0.20.55ln()or1.22SQpQP=+=.Equating the right side of the supply and demand functions, we find0.550.20.751.2227.2422.33$62.80.PPPP−==⇒=Substituting the price in either the supply or the demand function yields a quantity at equilibrium ofabout 11.9 million tons.4.1The supply shock is unusually good luck or an unexpected increase in the number of lobsters in theocean. The supply curve shifts to the rights, and thus the price falls.4.2Because it is now more attractive to rent an apartment (because you can more easily sublet for shortperiods of time), demand for apartments increases, which, all other things equal, increase theequilibrium rental price and quantity of apartments rented. (Note that an alternative answer mightbe that it reduces the supply of apartments on the market because if owners of apartments can makemore money through Airbnb than through renting conventionally, they may withhold apartmentsfrom the market. In this case, supply decreases as well, reinforcing the rental price increase butmaking the effect on the quantity indeterminate.

Solution Manual for Microeconomics, 8th Edition - Page 23 preview image

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20Perloff •Microeconomics,Eighth Edition4.3The demand curve shifts to the left fromD1toD2by 30 percent, which is the distance betweenQ0andQ4. For supply curveS1, the price drops fromp0top1, a change of less than 30 percent. For asteeper supply curveS2, the price decreases top2, a larger decrease, yet still smaller than 30 percent.Accordingly, the equilibrium quantity changes less than 30 percent as well. (See figure below.)4.4A decrease in the supply of eggs increases the equilibrium price of eggs and reduces theequilibrium quantity.4.5Health benefits from eating avocados shift the demand curve for avocados to the right becausemore avocados are now demanded at each price. The new market equilibrium is where the originalsupply curve intersects the new avocado demand curve, at a higher price and larger quantity.Imports shift the supply curve for avocados to the right because more avocados are now supplied ateach price. The new market equilibrium is where the original demand curve intersects the newavocado supply curve, at a lower price and higher quantity.

Solution Manual for Microeconomics, 8th Edition - Page 24 preview image

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Chapter 2Supply and Demand21A recession shifts the demand curve for avocados to the left because fewer avocados are nowdemanded at each price. The new market equilibrium is where the original supply curve intersectsthe new avocado demand curve, at a lower price and lower quantity.New technologies increasing yields shift the supply curve for avocados to the right because moreavocados are now supplied at each price. The new market equilibrium is where the original demandcurve intersects the new avocado supply curve, at a lower price and higher quantity.4.6The Internet shifts the demand curve for newspaper advertising to the left because fewer companiesdemand newspaper advertising with online advertising available. The Internet may force somenewspapers out of business, so the supply curve for newspaper advertising will shift to the leftsome. The new market equilibrium is where the new demand curve intersects the new supply curve.At the new equilibrium, there is less newspaper advertising.4.7The increased use of corn for producing ethanol will shift the demand curve for corn to the right.This increases the price of corn overall, reducing the consumption of corn as food.

Solution Manual for Microeconomics, 8th Edition - Page 25 preview image

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22Perloff •Microeconomics,Eighth Edition4.8Setting quantity supplied equal to quantity demanded givesp= 40 + 4r. As the price of capitalincreases, the equilibrium price rises. Likewise, inverting the demand and supply curves andsolving now for quantity,Q= 140 – 8r. The equilibrium quantity falls as the price of capitalincreases. (The increase in the price of capital reduces supply.)4.8The supply for processed tomatoes isln(Q) = 0.2 + 0.55ln(p)orQS= 1.22P0.55.The demand for processed tomatoes isln(Q) = 2.6 – 0.2 ln(p) + 0.15 ln(pt)orQD= 13.46–0.20.15.tPGiven our equilibrium condition,QS=QDand solving forP:1.22P0.55= 13.46P–0.20.15tPP0.75= 11.0330.15tPP* = 24.560.2tPandQ* = 7.0950.11.tPIf the price of tomato paste falls by 10%, the new price will bePt= 99. Therefore,P* = 24.56(99)0.2andQ* = 7.095(99)0.11orP* = 61.59andQ* = 11.76.(Answers will vary slightly with rounding)5.1An increase in demand due to higher quality professionals will shift the demand curve to the right,further raising prices. The equilibrium quantity could be more, less, or the same as before thelicensing restriction, depending on whether the supply or the demand effect is greatest. However, itwill be more than the quantity would be with only the licensing change in place.5.2A ban has no effect if foreigners supply nothing at the pre-ban equilibrium price. Thus, if importsoccur only at prices above those actually observed, a ban has no practical effect.5.3When the ban on legal imports went into effect, the demand for imports in the United States fell tozero. Given that the United States represents 60% of the market, it would have caused a dramaticdrop in prices. If the drop in prices made caviar harvesting unprofitable and fishermen turned to otheractivities, it would help the fish population. If a black market developed, price and quantity soldwould not drop as much as with a totally effective ban. If exporters simply shipped the caviar toother countries, but at lower prices, it could make problems with the sturgeon population even worseas exporters increase output to maintain income levels.5.4The quota causes the supply curve to become steeper at the price where foreign imports areimpacted by the quota, above which foreign imports cannot be increased and the foreign supply

Solution Manual for Microeconomics, 8th Edition - Page 26 preview image

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Chapter 2Supply and Demand23curve becomes vertical. Below that price, the supply curve is unaffected. If the demand curveintersects the supply curve at a price below the kink, the equilibrium is unaffected, and the quotadoes not bind. If the quota is binding (the demand curve intersects supply above the kink), theequilibrium price will be higher and the quantity will be lower than without the quota.5.5The quota on foreign-trained physicians would alter the supply curve. In the following figure, theunregulated supply curve,S, becomes more inelastic once the quota on foreign doctors is reached.The new supply curve,S1, results in higher prices for medical services due to higher salaries forphysicians if the demand curve intersects the supply curve above the “kink.” In that case, Americanphysicians are better off with the quota because of the increase in wages. Consumers are harmedbecause of the increase in price and decrease in quantity. If demand intersects supply below thekink, a quota will have no effect on equilibrium supply and demand.5.6With a binding price ceiling, such as a ceiling on the rate that can be charged on loans, someconsumers who demand loans at the rate ceiling will be unable to obtain them. This is because thedemand for bank loans is greater than the supply of bank loans to low-income households with theusury law.5.7a.The minimum wage raises the wage above the equilibrium level. This reduces the quantity oflabor demanded (where the Bt300 minimum wage intersects the labor demand curve) andincreases the quantity of labor supplied (where the Bt300 minimum wage intersects the laborsupply curve).Unemployment equals excess labor. That is, unemployment equals the quantity of laborsupplied minus the quantity of labor demanded:Ls–Ld.

Solution Manual for Microeconomics, 8th Edition - Page 27 preview image

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24Perloff •Microeconomics,Eighth Editionb.The minimum wage shifts the supply curve up, as production costs increase, until the pointwhere the demand curve intersects the new supply curve is at a price of Bt40 for ready-to-eatmeals.c.The price controls lower the price of meals below the equilibrium level. This increases thequantity demanded (where the maximum price with the price controls intersects the demandcurve) and decreases the quantity supplied (where the maximum price intersects the supplycurve).d.As the price of meals demanded decreases, owners of restaurants will demand fewer workers,shifting the labor demand curve to the left.5.8With the binding rent ceiling, the quantity of rental dwellings demanded is that quantity where therent ceiling intersects the demand curve (QD). The quantity of rental dwellings supplied is thatquantity where the rent ceiling intersects the supply curve (QS). With the rent control laws, thequantity supplied is less than the quantity demanded, so there is a shortage of rental dwellings.5.9The law would create a price ceiling (at the pre-emergency price). Because the supply curve shiftssubstantially to the left during the emergency, the price control will create a shortage: A smallerquantity will be supplied at the ceiling price than will be demanded.

Solution Manual for Microeconomics, 8th Edition - Page 28 preview image

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Chapter 2Supply and Demand255.10At $65 per ton, calculate the firm’s supply curve: ln(Q) = 0.2 + (0.55) ln(65) = 2.5,Q= 12.18 million tons.The demand for tomatoes isln(Q) = 2.6 – (0.2) ln(65) = (0.15) ln(110) = 2.47.Q= exp(2.47) = 11.82 million tons.Therefore, the government buys 12.18 – 11.82 = 0.36 million tons.5.11In the Venezuelan corn flour market, there is a price ceiling, and thus there is a shortage (graph isthe same as the rent ceiling graph in Question 5.8). If corn flour is smuggled to Columbia, thesupply of corn flour increases there, resulting in a lower price and higher quantity sold.6.1The supply-and-demand model is useful for making predictions in perfectly competitive markets.That is, the supply-and-demand model is applicable in markets in which everyone is a price taker,firms sell identical products, everyone has full information about the price and quantity of goods,and the costs of trading are low.Markets in which the supply-and-demand model has proven useful include agriculture, finance,labor, construction, services, wholesale, and retail—markets with many firms and consumers andwhere firms sell identical products.a.The market for apples is a competitive, agricultural market.b.The market with convenience stores is a competitive, retail market.c & d. The supply-and-demand model is not appropriate in markets in which there are only one ora few sellers (such as electricity), firms produce differentiated products (such as music CDs),consumers know less than sellers about quality or price (such as used cars), or there are hightransaction costs (such as nuclear turbine engines). Electronic games are differentiatedproducts supplied by three dominant firms.7.1When Japan banned U.S. imports, the supply curve of beef in Japan shifted to the left fromS1toS2in panel (a) of the figure. (The figure shows a parallel shift, for the sake of simplicity.) Presumably,the Japanese demand curve,D,was unaffected as Japanese consumers had no increased risk ofconsuming tainted meat. Thus, the shift of the supply curve caused the equilibrium to move alongthe demand curve frome1toe2. The equilibrium price rose fromp1top2, and the equilibriumquantity fell fromQ1toQ2. U.S. beef consumers’ fear of mad cow disease caused their demandcurve in panel (b) of the figure to shift slightly to the left fromD1toD2. In the short run, total U.S.production was essentially unchanged. Because of the ban on exports, beef that would have beensold in Japan and elsewhere was sold in the United States, causing the U.S. supply curve to shift tothe right fromS1toS2. As a result, the U.S. equilibrium changed frome1(whereS1intersectsD1) toe2(whereS2intersectsD2). The U.S. price fell 15% fromp1top2=0.85p1, while the quantity rose43% fromQ1toQ2=1.43Q1.Note:Depending on exactly how the U.S. supply and demand curves had shifted, it would havebeen possible for the U.S. price and quantity to have both fallen. For example, ifD2had shifted farenough left, it could have intersectedS2to the left ofQ1, so that the equilibrium quantity wouldhave fallen.

Solution Manual for Microeconomics, 8th Edition - Page 29 preview image

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267.7.6Perloff •M.2If the deequilibrincreasein suppl.3Both thsupplygreaterMicroeconomics,emand curverium quantitye, given the dily work togethe demand andshifted downthan the increEighth Editionhad shifted toy would haveirection of thether to lower td supply of guto the right. Hease in supply© 2018 Pearsono the left morfallen. Undere shifts, becauthe equilibriuuns have incrHowever, they and this ledn Education, Inc.re than the supr no circumstause the leftwarum price.reased; that ise results suggeto an increaspply curve shances could thrd shift in dems, demand shifest that the inse in both equhifted to the rihe equilibriummand and thefted up to thencrease in demuilibrium pricight, then them pricerightward shie right andmand wase and quantityfty.

Solution Manual for Microeconomics, 8th Edition - Page 30 preview image

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Chapter 3Applying the Supply-and-Demand ModelChapter OutlineChallenge: Who Pays the Gas Tax?3.1How Shapes of Supply and Demand Curves Matter3.2Sensitivity of the Quantity Demanded to PricePrice Elasticity of DemandSolved Problem 3.1Application:The Demand Elasticities for Google Play and Apple AppsElasticity Along the Demand CurveDownward-Sloping Linear Demand CurveHorizontal Demand CurveVertical Demand CurveDemand Elasticity and RevenueSolved Problem 3.2Application:Amazon PrimeDemand Elasticities over TimeOther Demand ElasticitiesIncome ElasticityCross-Price ElasticityApplication:Anti-Smoking Policies May Reduce Drunk Driving3.3Sensitivity of the Quantity Supplied to PriceElasticity of SupplyElasticity Along the Supply CurveSupply Elasticities over TimeApplication:Oil Drilling in the Arctic National Wildlife RefugeSolved Problem 3.33.4Effects of a Sales TaxEffects of a Specific Tax on the EquilibriumThe Equilibrium Is the Same No Matter Whom the Government TaxesSolved Problem 3.4Firms and Customers Share the Burden of the TaxTax IncidenceTax Effects Depend on ElasticitiesApplication:Taxes to Prevent ObesitySolved Problem 3.5

Solution Manual for Microeconomics, 8th Edition - Page 31 preview image

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28Perloff •Microeconomics,Eighth EditionAd Valorem and Specific Taxes Have Similar EffectsSolved Problem 3.6SubsidiesApplication:Subsidizing EthanolTeaching TipsChapter 3 continues work with the supply-and-demand model from Chapter 2. Some of this material,however, may be new to students rather than review. Two main topics are in the chapter: elasticities andtax effects. Although own-price elasticities are covered in principles, income and cross-price elasticitiesgenerally are not. Thus, you should budget significant class time to discuss them. The presentation on taxincidence may also require significant class time, as students are sometimes confused as to why, for example,the resulting equilibrium is independent of whether the demand curve or the supply curve shifts to showthe tax.It may be difficult for students to understand why elasticities are important (at least to economists). Adiscussion of the gas tax outlined in the Challenge may be a good place to start. By discussing who wouldbenefit from a gas tax holiday and by how much, you can introduce the need for elasticities in order tomeasure policy implications. You might also explain that an entire demand curve can be difficult toestimate empirically, but elasticities are easier to measure. Estimating elasticities at a given point alloweconomists to predict the implications of a given policy without having to estimate the entire demandcurve.When discussing own-price elasticities, students need to understand that several formulas yield an elasticity,and the choice of formula is driven mostly by the information that is given. When talking about the formula assimply a ratio of percentage changes, you might try to find a current newspaper piece that has a percentagechange in prices and the percentage change in quantity that results. If you are using calculus, you may want todemonstrate that when demand curves are linear, their answers using the derivative formula in Footnote 1 willbe the same as those derived using Equation 3.2, but there will be differences when demand relationships arenonlinear. Be sure to point out Footnote 2 regarding signs. It may be the case that your students learned theelasticity formula with a (–) sign imbedded in it, making elasticities appear as positive numbers. Note thateven when the sign is not imbedded in the formula, economists often do not say, “the elasticity is –2”, butrather, “the elasticity is 2” with the minus sign implicit.When discussing elasticities, two points require significant attention. The first is to get the students to makethe connection between a verbal description of an elasticity, the slope of the demand curve, the elasticityformulas, and the graph of a demand curve. You can give the students information in different forms andask them to compute an elasticity in each case. Some students are good at computing elasticities only ifthey are given certain information to work with, such as two prices and their associated quantities. Thesecond area of confusion is that linear demand curves are not of constant elasticity (except when perfectlyelastic or inelastic). I demonstrate using an equation and a graph that although the slope is constant, theprice-to-quantity ratio is changing, which changes the elasticity as price falls. I also show what theresulting curve is if elasticity is constant.When covering income and cross-price elasticities, if your students have had a statistics course or if youcovered the Appendix 2A on regressions, consider using the following approach. Choose a product andask the students what factors might influence demand (choose something that has clear substitutes andcomplements, such as a computer or a food item). Once you get a list, put a hypothetical demand equationon the board. If you have a computerized classroom, you can bring in data and estimate a demand equationfor the class, which seems to take some of the abstraction out of demand analysis. Either way, once you havean equation, review how an own-price elasticity can be determined from this equation, and use that as aspringboard into the cross-price and income elasticities. It is useful to change the units of one of the

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