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    Understanding Economic Principles

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    Hi, I am trying to get a full understanding of the economic principles below.

    1. Problem-solving question: Use the following data for a pure monopoly to calculate the firm's: (a) total revenue, marginal revenue, marginal costs, and average total cost; (b) its profit-maximizing output level and produce price; (c) its profit. (d) Use the price-cost formula to determine whether or not the firm's operations are productively-efficient. (e) Use the price-cost formula to determine whether or not the firm's operations are allocatively efficient.

    Q (P = AR) TR MR TC MC ATC

    0 $120 $100
    1 119 200
    2 118 280
    3 117 340
    4 116 380
    5 115 400
    6 114 460
    7 113 560
    8 112 665

    2. (a) Identify three types of competition that most firms encounter other than competition from other firms in their industry in their home country. (b) Is it good for the economy to have more competitive markets? Explain. (c) If government industry regulators underestimate the degree of competition in an industry are they likely to over-regulate the industry? Explain.

    3. (a) Economically, when is it best for a firm to outsource or contract-out some part of its production? (b) Provide an example of a business task or operation that it would make sense to outsource.
    (c) Provide an example of a government task that it would be economically efficient to contract-out. (d) Is there any risk to outsourcing? Explain. (e) For a task that is already outsourced, could it make sense to bring it back in-house at some future time? Explain.

    4. (a) Identify two market structures in which product development and product differentiation is an important type of competition for firms operating in those market conditions. (b) Provide examples of three types of product differentiation that could help make a firm in a particular industry more competitive.

    5. (a) Would a minimum-wage law help entry-level workers in some market structure; while hurting them in another market structure? Explain. (b) Would a labor union help workers in some market structure; while hurting them in another market structure? Explain.

    6. (a) Identify and describe four causes (i.e., types of unemployment). (b) Are some workers more likely than others to be laid off and have a harder time finding another satisfactory job? Explain.

    7. (a) Identify three economic variables that create differences in market interest rates on assets and/or liabilities. (b) For most companies, are business loan interest rates lower than the interest rates on personal loans for most U.S. households. Explain (c) Is the interest rate paid by the U.S. government on its short-term Treasury bills (T-bills) usually less than a comparable commercial paper loan to most corporations in the U.S.? Explain.

    8. (a) Recommend some U.S. fiscal policy change in business taxes or government spending that would reduce the U.S. government's budget deficit and also help improve the U.S. economy? Explain. (b) Would reducing the federal budget deficit also reduce the national debt? Explain. (c) What's wrong with raising taxes in a recession?

    9. (a) State two economic principles of taxation. (b) Which principle best justifies the excise tax on gasoline, when the tax revenue is used to maintain or improve the roads? Explain. (c) Which principle best justifies the progressive U.S. taxation of corporate profits? Explain.

    10. (a) Define the inflation rate. (b) Explain how the CPI differs from the PPI, as a measure of the U.S. inflation rate. (c) Why is inflation risk a business management risk? (d) Which would be better, for the U.S. economy, a low stable inflation rate or deflation? Explain. (e) What U.S. government organization is primarily responsible for controlling the U.S. inflation rate, while helping to reduce cyclical unemployment and increase the U.S. economic growth rate?

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    Solution Preview

    0 120 0 0 100 100 0
    1 119 119 119 200 100 200
    2 118 236 117 280 80 140
    3 117 351 115 340 60 183.33
    4 116 464 113 380 90 95
    5 115 575 111 400 20 80
    6 114 689 109 460 60 76.67
    7 113 802 107 560 100 80
    8 112 914 105 665 105 83.13

    B. Q=8, P=112

    C. Profit = TR-TC (maximizes at Q8)

    D. MC = MR (Q=8, P=112)

    E. MB = MC (allocative efficiency occurs when there is optimal distribution of goods and services --- involves taking into account the preferences of consumers. Monopolies can increase price above the marginal cost of production, resulting in allocative inefficiencies.


    A = three types of competition: Internet, Globalization, Monopolistic/Oligopoly

    B. Yes. One measure of the welfare that society receives is the relation between consumer surplus and producer surplus (W= CS+PS). This measures the wellbeing of producers and consumers equally. Thus, one of the most significant results in economics is that competitive markets maximize the welfare to society. If either more or less output than the competition level is produced, then welfare to society falls.

    C. Yes. If competition is underestimated, then the market will place additional pressure on firms to respond with products and services which provide welfare. An excellent example is telecommunications where the barriers to enter are low in populous areas. In less populated areas (rural) competition in the market has not really occurred, leaving a large gap in welfare, while providing high returns to the existing provider of services --- not considering the preferences of consumers.


    A - When it can be done at a lower cost per unit or when the reduction in costs allows a firm to become more competitive, thus increasing consumer welfare.

    B - Service related function now in use for many firms which use call centers to handle client issues, to process requests for service changes, and to proactively contact consumers with the goal of increasing utility.

    C - Security related services and products now being handles to a large extent by several laboratories throughout the U.S., where both efficiency and production are required which again increases consumer welfare and where outsourcing ...

    Solution Summary

    These questions apply to economic issues which are current in terms of business management. The answers provide insight into minimum wage issues, business management issues, finance issues, and how markets are structured.