Technical Questions - Farnham, Economics for Managers, 3/e, Global Ed...

Solutions to End of Chapter Problems Farnham, Economics for Managers, 3/e, Global Edition Chapter 1 Technical Questions

• Microeconomics focuses on the behavior of individual consumers, firms, and

industries as they operate in a market economy. It analyzes how these various groups respond to changes in prices that affect their consumption, production, and selling decisions. It also describes how firms and consumers interact in various types of markets and can be used as a basis for determining competitive strategies.Macroeconomics focuses on the overall economic environment in which businesses operate. It analyzes the spending decisions of different sectors of the economy—the household, business, government, and foreign sectors.Macroeconomic policy deals with the issues of inflation, unemployment, and economic growth. Changes in the macroeconomic environment influence firms through the microeconomic issues of demand, cost, revenues, and profits.

• It is because output prices influence a firm’s revenue, while input prices influence

its costs of production. The difference between its total revenue and total cost determines its profit.

• The four major types of markets are perfect competition, monopolistic

competition, oligopoly, and monopoly. The key characteristics that distinguish these markets are (1) the number of firms competing with each other, (2) whether the products sold in the markets are differentiated or undifferentiated, (3) whether entry into the market by other firms is easy or difficult, and (4) the amount of information available to market participants.

• No, even if a monopolist is the only firm in a market, it cannot sell any amount of

its product at a given market price. If a monopolist raises the price of their product, consumers will buy less. Therefore, their revenue might decrease.

• In macroeconomics, the five major categories of spending are consumption (C),

investment (I), government (G), export (X), and import (M). GDP = C + I + G + X – M. The first four categories are added together, while import spending is subtracted because it represents a flow of expenditure out of the domestic economy to the rest of the world.(Economics for Managers 3e (Global Edition) Paul Farnham) (Solution Manual all Chapters) 1 / 4

• Fiscal policies are implemented by the national government and involve changing

taxes (T) and government expenditure (G) to stimulate or slow the economy.These decisions are made by the political institutions in the country. Monetary policies are implemented by a country’s central bank—the Federal Reserve in the United States. These policies focus on changing the money supply in order to influence interest rates, which then affect real consumption, in-vestment spending, and the resulting level of income and output.

Application Questions

• Microeconomic factors facing the global automobile industry include consumer

demand for increased automobile quality and additional features, the increased preferences for sport utility vehicles, the differing preferences of Chinese versus U.S. consumers, and the continued need to redesign production processes to lower production costs. Macroeconomic factors include the continuing weak recovery in global economic activity especially in Europe and the fluctuations in currency exchange rates.

2.

• This is a description of a perfectly competitive market. It discusses factors

influencing the demand and supply of corn, where the focus is on the price and quantity in the entire market, not the decisions of individual producers. The drought decreased the supply of corn in the U.S., which caused prices to increase. Countries such as China, Japan, and South Korea then turned to find substitute sources of corn in Argentina and Brazil.

• Staples, OfficeMax, and Office Depot operate in an oligopoly market with

interdependent behavior. All three companies have been forced to close stores, downsize their existing stores, and increase their online operations.

• This discussion describes the attempt by the U.S. wireless telecommunications

industry to gain monopoly or market power through mergers of independent firms. The federal government prohibited T-Mobile from merging with AT&T, given concerns over the market power of that combined firm.T-Mobile then announced a merger with its smaller rival, MetroPCS, that would still allow it to cut costs and expand its operations.

• Chinese restaurants represent monopolistic competition. There are 36,000

Chinese restaurants, most of them small, family operations. No national chain dominates these restaurants, largely due to the use of the wok for cooking. 2 / 4

Specialized stoves and chefs are required for this type of cooking, which has limited the expansion of these firms into large-scale production.

• No. Profit is the difference between a firm’s total revenue and its total cost. If the

decrease in HSBC’s cost in 2013 is larger than the decrease in its revenue, it could still have made a higher profit in 2013 than in 2012.

• When the US economy recovers, consumers in the US will increase their spending

on both domestic and imported goods and services. This will translate into an increase in the export of my home country. This will make for higher revenue for firms and increased consumer income in my country. With higher income, consumers will both consume as well as save more. The increase in savings will raise the amount of funds available for business investment.Higher consumer income and higher revenue of firms will increase government revenue received from personal and business taxes, allowing the government to increase its spending. Finally, due to the increase in consumption spending, investment spending and government spending, the import of my home country will increase as well. However, the change in net export spending remains uncertain.Chapter 2 Technical Questions 1.

• Demand increases (assuming that computers are a normal good).
• There is a decrease in the quantity demanded of computers (and no change in

the demand curve).

• Demand increases, as the price of a complementary good has fallen.
• There is no change in demand, as semiconductors are an input to computer

production and thus a determinant of supply.

• Demand decreases in October, as consumers wait to buy at a lower price in

December.

2.

• Supply increases.
• Supply decreases.
• There is a decrease in the quantity supplied of computers (and no change in

the supply curve). 3 / 4

• Supply decreases (because costs of production have increased).
• There is no change in supply, as consumer incomes are a determinant of

demand.

3.

• X is a normal good. We know this because there is a positive relationship

between income and the quantity demanded of good X.

• X and Y are substitutes. We know this because there is a positive relationship

between the price of good Y and the demand for good X (thus, as the price of Y rises, consumers buy more X).

• X and Z are complements. We know this because there is a negative

relationship between the price of good Z and the demand for good X (thus, as the price of Z rises, consumers buy less X).

• Q

D = 500 – 5P X + 0.5I + 10PY – 2P Z

= 500 – 5P

X + 0.5(30) + 10(10) – 2(20)

= 575 – 5P

X

• Price intercept = $115; Quantity intercept = 575; Slope = –0.2.
• The quantity demanded is 500.
• The equation of the demand curve is Q

D = 625 – 5 P X

Price intercept = $125; Quantity intercept = 625; Slope = –0.2.

4.

• X and Z are complements in production. We know this because there is a

positive relationship between the price of good Z and the supply of good X (thus, as the price of Z rises, producers produce more X).

• Q

S = –200 + 20PX – 5P I + 0.5P Z

= –200 + 20P

X – 5(10) + 0.5(20)

= –240 + 20P

X

• Price intercept = $12; Slope = 0.05. See text answers for graph.
• Set Q

S = 0. The minimum price is $12.00.

• Q

S = –240 + 20(25) = 260.

• Q

S = –200 + 20PX – 5(5) + 0.5(20) = –215 + 20PX; Price intercept = $10.75; Slope = 0.05.

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