FUNDAMENTALS OF BUSINESS ECONOMICS

Answers to Recommended Problems I

Chapter 2

1.  Even though the question says to just deal with demand, it would be helpful if you did a complete supply and demand analysis for each event, including graphical analysis:

a.  Demand increases (assuming a normal good) => P increases, Q increases

b.  This is a movement along the demand curve for computers => decrease in quantity demanded

c.  Price of a complement decreases => demand increases => P increases, Q increases

d.  Decrease in the price of an input => supply increases => P decreases, Q increases

e.  Consumers expect price decrease => demand decreases => P decreases, Q decreases

* * * * * * * * * *

2.  Even though the question says to just deal with supply, it would be helpful if you did a complete supply and demand analysis for each event, including graphical analysis:

a.  Supply increases => P decreases, Q increases

b.  Increase in the price of an input => supply decreases => P increases, Q decreases

c.  This is a movement along the supply curve => decrease in quantity supplied

d.  Increase in the price of an input => supply decreases => P increases, Q decreases

e.  This affects demand => demand increases => P increases, Q increases

* * * * * * * * * *

5.

b.  P = 120, Q = 260

c.  P = 100 => Q_S = 200, Q_D = 300 => shortage of 100; competition among consumers would drive price up to the equilibrium price of 120

d.  P = 150 => Q_S = 350, Q_D = 200 => surplus of 150; competition among producers would drive price down to the equilibrium price of 120

e.  Increase in demand, new equilibrium is P = 140, Q = 320

* * * * * * * * * *

6.  You should show the graphs of each of these

a.  P_Substitute increases => D increases => P increases, Q increases

b.  P_Input increases => S decreases => P increases, Q decreases

c.  EXC increases => D increases => P increases, Q increases

d.  Technological improvement => S increases => P decreases, Q increases

e.  Negative change in tastes => D decreases => P decreases, Q decreases

* * * * * * * * * *

7.  You should show the graph of this

a.  

P_Complement increases => D decreases => P decreases, Q decreases

P_Input decreases => S increases => P decreases, Q increases

=> P decreases, Q uncertain

b.

P_Complement increases => D decreases => P decreases, Q decreases more

P_Input decreases => S increases => P decreases, Q increases less

=> P decreases, Q decreases

* * * * * * * * * *

8.  You should show the graph of this

a.  

Income decreases with inferior good => D increases => P increases, Q increases

Technological improvement => S increases => P decreases, Q increases

=> P uncertain, Q increases

b.

Income decreases with inferior good => D increases => P increases less, Q increases

Technological improvement => S increases => P decreases more, Q increases

=> P decreases, Q increases

Chapter 3

1. 

a.  e_p = -1 => unit elastic

b.  e_p = -5.4 => elastic

c.  e_p = -0.54 => inelastic

* * * * * * * * * *

3. 

a.  Inelastic:  P increase => TR increases

b.  Elastic:  P decrease => TR increases

c.  Unit elastic:  P increase => TR unchanged

d.  Perfectly inelastic:  P increase => TR increases

* * * * * * * * * *

5.  The demand is price elastic, so consumers are very sensitive to price changes.  The product is also a normal good that is a luxury (income elasticity is greater than one).  Finally, the good is also a complement to the related good since the cross-price elasticity is negative. 

* * * * * * * * * *

6.  See the answer on p. 474.

Chapter 5

4. 

a.  Accounting profit = 150,000 - (25,000 + 12,000 + 30,000 + 20,000) = 63,000

b.  Economic profit = 150,000 - (50,000 + 5,000 + 25,000 + 12,000 + 30,000 + 20,000) = 8,000

Chapter 8

5. 

CR₄ (A) = 30 + 25 + 10 + 5 = 70

CR₄ (B) = 15 + 12 + 8 + 4 = 39

=> Industry A is more concentrated

* * * * * * * * * *

6. 

a.  CR₃ (C) = 25 + 25 + 25 = 75, CR₄ (C) = 25 + 25 + 25 + 25 = 100, CR₃ (D) = 80 + 10 + 5 = 95, CR₄ (D) = 80 + 10 + 5 + 5 = 100

b. 

HHI_C = 25² + 25² + 25² + 25²  = 2500

HHI_D = 80² + 10² + 5²  + 5² = 6550

c.  Industry D is more concentrated because it has a higher CR₃ and HHI.

Chapter 9

2. 

a. The dominant strategy for each firm is to price low.

b.  Both firms price low and make 100 each.

c.  This is a prisoners' dilemma because each firm follows their dominant strategy and end up worse off than if they had cooperated.

Reading 2

5.

a.  Network 2's dominant strategy is to put its big show first.  Network 1 has no dominant strategy, but given what Network 2 is going to do, it will put its big show first as well.

b.  If both networks use the maximin strategy, Network 1 will put its big show first, while Network 2 will do the same.

c. 

d.  It is credible because Network 1 has no dominant strategy.  Putting its big show first is a distinct possibility.  Network 2 will respond by putting its big show first as well.

.