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Basic micoreconomics

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Question One

What is the most important determinant of price elasticity of demand? Why is this so?

Give an example of a firm that price discriminates for its product or service.

Question Two

Give an example of the income effect and the substitution effect in regards to the supply of labor. What is the opportunity cost of work in this case?

Question Three

Give a business or political example of the prisoner's dilemma from the field of game theory. What is the payoff for each participant in your example?

Question Four

Choose one of the three types of market failure and give a real world example of it. Do you believe the government has the ability to solve this problem?

Question Five

Define the concept of comparative advantage. How can a country gain or lose its comparative advantage in the production of a good?


Solution Preview

The most important determinant of price elasticity of demand is the necessity of the good. If a good is essential for a person's survival or happiness because no other good can fill a particular need, demand for the good will be price inelastic. This is because people will cut back on other purchases in order to pay the higher price for the good that is more critical to their well being. Examples of such goods are patented medications and addictive drugs.

Price discrimination is common at movie theaters. Adults with incomes are willing to pay more for movies than anyone else, and so have the higher ticket rates. They may not be willing to bring their kids, though, if they had to pay full price for them. So children's tickets are less. Senior citizens have limited income and would also tend not to go if they had to pay full price, so they also get a discount. Also, bargain hunters are willing to see movies at off-peak times, so theaters offer lower prices during the day.

When the price of a good changes, the change in its demand ...

Solution Summary

Questions related to prisoner's dilemma, substitution effect, comparative advantage, and related concepts.