# Microeconomics problem set

1.  What is
diminishing marginal productivity?  Why
does it exist?  Provide a real world
example of this and a live link to an internet source.  (In other words, dont use an example from
the text, find an example of your own.)
2.  Complete the
following table.  What output is the
profit maximizing level of output.  Using
proper economic terminology why is this the case?

Output

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Price

Total Revenue

MR

TVC

AVC

TFC

AFC

TotalCost

ATC

MC

0

10

0

\$0

\$100

1

10

10

\$100

160

2

10

20

100

\$100

3

10

30

125

\$100

4

10

40

140

\$100

5

10

50

250

6

10

60

170

\$100

7

10

70

200

\$100

8

10

80

340

MR = Marginal Revenue
TVC = Total Variable Cost
AVC = Average Variable Cost
TFC = Total Fixed Cost
AFC = Average Fixed Cost
ATC = Average Total Cost
MC = Marginal Cost
3.  A local hardware
store is trying to decide whether to stay open.
They have found that their industry is extremely competitive and profits
have shrunk considerably.  Knowing that
explain the shut down decision.  Assume
that the store is losing money; however, explain why they may want to stay open
for a little while longer.  (NOTE: Your
4.  Monopolies can
sometimes find themselves in difficult financial situations that lead to
losses.  Suppose Mr. Burns power company
has a monopoly for providing electricity in Springfield.  His costs of upkeep are so high that he is
persistently losing money.  Show this
outcome in a completely labeled graph.
Clearly identify all parts of your graph including the best price and
output for the firm as well as the losses.

What happens to
the market when Mr. Burns raises the price he charges?
Will this stop
his losses?  Why or why not?

5.  Movies are
distributed in a variety of forms, not just first run theatrical
presentations.  What other ways are
movies distributed? (HINT:  Distribution
has nothing to do with how old a movie patron is.)  What are the different price points?  Using this information, draw a fully labeled
graph of the market for movies in which the distributor of the film price
discriminates.  (NOTE:  This should not be perfect price
discrimination.)
6.  What combination
of the two goods below allows you to maximize your utility with a budget
constraint of \$14?  Show how you arrived
at your conclusion in the space provided below.
PRICE = \$0.50 per pint

Pints of Butter Beer

Total Utility (Utils)

1

15

2

23

3

30

4

35

5

38

6

40.5

PRICE = \$2.00 per box

Boxes of Bertie Botts Every-flavor Beans

Total Utility (Utils)

1

10

2

22

3

36

4

52

5

70

6

90

Pints of Butter Beer: _________________________
Boxes of Beans: ____________________________
7.  Assume the
following game is played one time only.
Based on the information in the payoff matrix, PNC Bank and Citizens
Bank are considering an implicit collusive agreement on interest rates.  Payoffs to the two firms are represented in
terms of profits in thousands of dollars:

Citizens Bank

Collude: Raise
Rates

Defect: Keep Rates
where they are

PNC

Collude: Raise
Rates

(900, 600)

(700, 800)

Defect: Keep Rates
where they are

(1100, 300)

(800,400)

a.  Does PNC have a
dominant strategy?  What is it?  Does Citizens have a dominant strategy?  What is it?
b.  Solve for the Nash
equilibrium.
c.  Does the result of
your answer change if the game is played an infinite number of times?  Why or why not.  Properly use game theoretic terminology in
8.  Suppose that the national four-firm
concentration ratio in NAICS code 7131102 is 71.8. What is NAICS code 7131102,
and should authorities be concerned about the exercise of monopoly power based
(You will need to find the NAICS title for industry code 7131102 to
answer this question.  Yes, you can find
it on the internet.)
9. Illustrate in a fully labeled graph the market for
information security specialists.  Show
the market equilibrium wage and quantity (you may just note this in your graph
with a w and q or you may make up a price and amount).  Due to a recent increase in the number of
cyber attacks from unfriendly nations firms and the U.S. government are trying
to hire more people to help protect their information.  Assuming it takes a few years to adequately
train someone to protect this information, what would you expect to see happen
to price and quantity in this market?
Show this change in your graph.
PROBLEM SET .doc
problem_set_.doc

Unformatted Attachment Preview

1. What is diminishing marginal productivity? Why does it exist? Provide a real
world example of this and a live link to an internet source. (In other words, dont
use an example from the text, find an example of your own.)
2. Complete the following table. What output is the profit maximizing level of
output. Using proper economic terminology why is this the case?
Output Price
Total
Revenue
0
10
0
1
10
10
2
10
20
100
\$100
3
10
30
125
\$100
4
10
40
140
\$100
5
10
50
6
10
60
170
\$100
7
10
70
200
\$100
8
10
80
MR
MR = Marginal Revenue
TVC = Total Variable Cost
AVC = Average Variable Cost
TFC = Total Fixed Cost
AFC = Average Fixed Cost
ATC = Average Total Cost
TVC
\$0
AVC
TFC
AFC
Total
Cost
\$100
\$100
160
250
340
ATC
MC
MC = Marginal Cost
3. A local hardware store is trying to decide whether to stay open. They have found
that their industry is extremely competitive and profits have shrunk considerably.
Knowing that you have taken an economics course the owners have asked for your
opinion. Draw a completely labeled graph to help you explain the shut down
decision. Assume that the store is losing money; however, explain why they may
want to stay open for a little while longer. (NOTE: Your answer should be a written
4. Monopolies can sometimes find themselves in difficult financial situations that
lead to losses. Suppose Mr. Burns power company has a monopoly for providing
electricity in Springfield. His costs of upkeep are so high that he is persistently
losing money. Show this outcome in a completely labeled graph. Clearly identify all
parts of your graph including the best price and output for the firm as well as the
losses.
a. What happens to the market when Mr. Burns raises the price he charges?
b. Will this stop his losses? Why or why not?
5. Movies are distributed in a variety of forms, not just first run theatrical
presentations. What other ways are movies distributed? (HINT: Distribution has
nothing to do with how old a movie patron is.) What are the different price points?
Using this information, draw a fully labeled graph of the market for movies in which
the distributor of the film price discriminates. (NOTE: This should not be perfect
price discrimination.)
6. What combination of the two goods below allows you to maximize your utility
with a budget constraint of \$14? Show how you arrived at your conclusion in the
space provided below. Place your final answers on the lines at the bottom of this
page.
PRICE = \$0.50 per pint
Pints of Butter Beer
Total Utility (Utils)
1
15
2
23
3
30
4
35
5
38
6
40.5
PRICE = \$2.00 per box
Boxes of Bertie Botts Every-flavor Beans
Total Utility (Utils)
1
10
2
22
3
36
4
52
5
70
6
90
Pints of Butter Beer: _________________________
Boxes of Beans: ____________________________
7. Assume the following game is played one time only. Based on the information in
the payoff matrix, PNC Bank and Citizens Bank are considering an implicit collusive
agreement on interest rates. Payoffs to the two firms are represented in terms of
profits in thousands of dollars:
Citizens Bank
PNC
Collude: Raise
Rates
Defect: Keep
Rates where they
are
Collude: Raise
Rates
(900, 600)
(700, 800)
Defect: Keep
Rates where they
are
(1100, 300)
(800,400)
a. Does PNC have a dominant strategy? What is it? Does Citizens have a dominant
strategy? What is it?
b. Solve for the Nash equilibrium.
c. Does the result of your answer change if the game is played an infinite number of
times? Why or why not. Properly use game theoretic terminology in your answer.
8. Suppose that the national four-firm concentration ratio in NAICS code
7131102 is 71.8. What is NAICS code 7131102, and should authorities be
concerned about the exercise of monopoly power based on that 71.8 figure?
Explain your answer. (You will need to find the NAICS title for industry code
7131102 to answer this question. Yes, you can find it on the internet.)
9. Illustrate in a fully labeled graph the market for information security specialists.
Show the market equilibrium wage and quantity (you may just note this in your
graph with a w and q or you may make up a price and amount). Due to a recent
increase in the number of cyber attacks from unfriendly nations firms and the U.S.
government are trying to hire more people to help protect their information.
Assuming it takes a few years to adequately train someone to protect this
information, what would you expect to see happen to price and quantity in this
market? Show this change in your graph.

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