1.Dr. D. is a critic of standard microeconomic analysis. In one of his frequent tirades he was heard to say “Take the argument for upward sloping long-run supply curves. This is a circular argument if I ever heard one. Long-run supply curves are said to be upward sloping because input price rise when firms hire more of them. And that occurs because the long-run supply curves for these inputs are upward sloping. Hence the argument boils down to ‘long-run supply curves are upward sloping.’ What nonsense!” Does Dr. D. have a point? How would you defend the analysis in this chapter?
2. The long-run supply curve for gem diamonds is positively increase the wages of diamond cutters. Explain why a decision by people to no longer buy diamond engagement rings would have disastrous consequences for diamond cutters but why such a trend would not really harm the owners of firms in the perfectly competitive gem diamond business.
3. Dr. E. is an environmentalist and a critic of economics. On the Charlie Rose Show he attacks a book “That text is typical –it includes all of this nonsense about long-run supply elasticities for natural resources like oil or cola. Any idiot knows that because the earth has a finite size all supply curves for natural resources are perfectly inelastic with respect to price. How can a rise in price for say oil lead to more oil when all of our was created eons ago? Focusing on these ridiculously high elasticity numbers just detracts from studying our real need—the need to conserve” How would you defend the analysis in this book against this tirade?
4. “The existence of the decreasing cost case ultimately de pends on the availability of inputs that also have negatively sloped supply curves. If firms themselves took actions that reduced costs they would appropriate these cost reductions for themselves and they would not spread to other firms.” Do you agree? Or may some cost reductions not be fully appropriable by the firm that causes them?
5. Each day 1,000 fishing boats return to port with the fish that have been caught. These fish must be sold within a few hours or they will spoil. All of the fish are brought to a single marketplace and each fisher place a price on the fish he or she has for sale.
a. How would a fisher know that his or her price was too high?
b. How would a fisher know that his or her price was too low?
c. As the day progresses what would you expect to happen to the prices posted by the fishers?
6. Many of the Figure in this chapter firm. How an entire market and a single typical firm. How do these graphs reflect the assumption that firms are price takers for this good?
7. Why is the price for which quantity demanded equals quantity supplied called an “equilibrium price”? Suppose instead we viewed a demand curve as showing what price consumers are willing to pay and a supply curve as showing what price firms want to receive. Using this view of demand and supply how would you define an “equilibrium quantity”?
8. “For markets with inelastic demand and supply curves most short-run movements will be in prices not quantity. For markets with elastic demand and supply curves most movements will be in quantity not price. “Do you agree? Illustrate your answer with a few simple graphs.
9. If long-run equilibrium in a perfectly competitive industry involves zero profits why would anyone ever start a new business? What does an entrepreneur hope to achieve by starting a new firm? How might his or her initial success undermine this goal in the long term?
10. In long-run equilibrium in a perfectly competitive market each firm operates at minimum average cost when such markets are out of equilibrium in the short run? Wouldn’t firms make more in short-run profits if they opted always to produce that output level for which average costs were as small as possible?