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CSUF ECON 315 - Exercises and Practice Problems Microeconomics for Business Decisions

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Chapter 1 PreliminariesChapter 2 The Economic ProblemExercises and Practice ProblemsMicroeconomics for Business DecisionsVictor Brajer and Eric SolbergCalifornia State University, FullertonTo the StudentThis exercise manual has been designed to be used with Eric Solberg’s Microeconomics for Business Decisions, but it can be used independently. The first thing you’ll notice about this workbook is that it is different from the typical study guide. There are no true-false questions, no multiple choices, and no simple fill-in-the-blank questions. Instead, we have constructed a series of exercises, practice problems, and questions that lead you through a step-by-step analysis of problems or hypothetical cases. Some of the situations are whimsical, and some are real. In all cases the lessons to be learned are important. What we feel is most important is learning to do micro-economic analysis by working problems that stress basic ideas and methods, not memorizing definitions, key phrases, or specific examples.It is our belief that to learn economics you have to do economics. At this stage in your training, this means setting up basic models, solving these models for equilibrium or optimal values, and performing comparative static analyses and similar exercises. A wide variety of topics are discussed in Microeconomics for Business Decisions, and you may not have time to cover everything in a single course. Nonetheless, for each major idea presented in the textbook, we have tried to develop at least one exercise that leads you through the important points and implications involved. For the most part, the exercises appear in the same order as their corresponding topics appear in the textbook. If you conscientiously work through the exercises and questions provided here, you’ll learn a lot more about microeconomic analysis than you’d learn from an ordinary study guide.For each problem or question, you will find a complete solution or answer at the end of this manual. Since you often learn more from your mistakes than from your successes, we strongly encourage you to think about, and work through the problems on your own before you turn to the back of the manual. It is all too easy to trick yourself into thinking that you could do a problem more easily if you “cheat” by looking at the answer first. Maybe so, but you won’t retain as much. Think of each exercise as a way to “test” yourself. Who knows? Your instructormay decide to include some of these exercises on examinations.Chapter 1 Preliminaries1.1 Indicate whether the following statements represent positive or normative thinking, and whether they involve microeconomic or macroeconomic issues:(a) Wage-price controls should be used to control inflation: (positive, normative); (micro, macro).(b) Tariffs and import quotas raise prices to consumers and reduce general economic welfare: (positive, normative); (micro, macro).(c) Fiscal policy can have a significant stimulative impact on a less than fully employed economy: (positive, normative); (micro, macro).(d) Antitrust laws should be used vigorously to reduce monopoly power from its current level: (positive, normative); (micro, macro).(e) The Fed should be instructed to increase the money supply at a fixed rate: (positive, normative); (micro, macro).(f) A minimum wage increases unemployment among young and unskilled workers: (positive,normative); (micro, macro).(g) The proportion of U.S. GNP devoted to national defense increased throughout the 1980s: (positive, normative); (micro, macro).(h) National defense expenditures should be reduced from their present levels: (positive, normative); (micro, macro).(i) Effluent (pollution) taxes, not direct regulations, should be used to control pollution: (positive, normative); (micro, macro).(j) The distribution of income in the United States became more unequal during the 1980s: (positive, normative); (micro, macro).1.2 Many universities, hospitals, and charities are chartered as nonprofit organizations. Would such firms be interested in maximizing profits? Would they still be interested in maintaining an efficient level of operation? Explain. 1.3 A key step in using the scientific method is the formulation of a hypothesis. Suppose that forten years, a farmer observed that every morning his rooster crowed, and shortly thereafter, thesun rose. He formed the following hypothesis: “The rooster’s crowing causes the sun to rise!” Comment on the validity of the farmer’s hypothesis. How could you test this hypothesis?Chapter 1 Exercises 31.4 For over fifty years, there was a strong, positive correlation between U.S. stock prices and women’s hemlines. In the late 1920s and the 1960s, for example, hemlines were high, and so were stock prices. On the other hand, when hemlines were low, so too were stock prices — as during the Great Depression of the 1930s. Some investors came to base their stock purchasing decisions on whether fashion designers planned to raise or lower hemlines. Was this a good model to use? Why or why not? 1.5 One of the most often used economic model is the simple supply-demand model. Would youagree that this model is characterized by both its explanatory power and its predictive ability? Give an example to support your answer. ________________________________________________________________________________________________________________________.1.6 Distinguish between pure, perfect, and effective competition. ________________________ _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________.1.7 In the United States, approximately two billion baseball cards are produced each year. Card collecting is a hobby for several million individuals. Many people have argued that the market for buying and selling baseball cards can be characterized as a perfectly competitive market. What are the characteristics of a perfectly competitive market? Does this characterization seem applicable to the market for baseball cards1.8 What would happen to New York City’s taxicab industry if the barriers to entry were removed? What would probably happen to the price of a medallion?2 Chapter 1 Exercises1.9 An issue receiving much attention in the western United States is whether water should be allocated


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CSUF ECON 315 - Exercises and Practice Problems Microeconomics for Business Decisions

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