Chapter 17-1
Monopolistic competitors earn zero economic profits in the long run and they produce above-minimum average cost. This categorization tells us that McDonald’s, Burger King, and Wendy’s over the long term will earn zero economic profits, with costs higher than the minimum of average costs.
Monopolistic competitors produce differentiated products. In the eyes of the consumer, a hamburger is not the same at these firms.
Chapter 17-2
Wood is practically the same everywhere as far as building houses is concerned. Windows are a differentiated product. Thick and double-paned windows with various cold-stopping features are manufactured for northern climates. There may be a benefit for an individual firm to advertise differentiated products, unlike similar products such as wood.
Famous athletes’ endorsement of sports products that they use informs us that the product is of superior quality. If the product has nothing to do with sports, the endorsement signals quality rather than providing information.
Chapter 18-1
The marginal product of labor falls as more workers are hired because the first worker will focus on the most important tasks and so the marginal product of labor will be high. The next worker will focus on the next important tasks, but these tasks will not be as important as the first worker tackled, so the marginal product of labor will not be as high as for the first worker. As more workers are hired, they do progressively less important tasks, so their marginal product falls relative to the first workers.
B-14
Chapter 18-2
An individual’s labor supply curve might be backward-bending because at some point, individuals might prefer more leisure to working more, even at a higher wage. In other words, one of the things that people may buy more of when their wage goes up is leisure.
Chapter 18-3
An increase in mine safety would lower the wages of miners because mine workers are paid extra money to undertake their risky jobs. Making the job less risky would increase the number of people willing to be miners and thus would drive down wages.
Firms will pay for human capital improvements if the firm can reap the benefit. Training on a firm’s specific inventory techniques will help the firm, but this is a skill that it is difficult for a worker to take to other firms, so the firm need not pay a higher wage to individuals with specific training. In this sense, the firm reaps the benefit of this training exclusively. In contrast, an MBA provides skills that can be used by many firms, so an individual with an MBA can earn a higher wage at other firms. In order to benefit from training an individual with general skills, the firm must keep the individual around at the lower wage long enough to recover its costs. Thus, the time requirement helps the firm recover a large portion of its investment in the worker.
Chapter 18-4
Employer discrimination is dumb or at least costly from a profit-making perspective because hiring equally good workers at a lower wage increases profit.
Market economies have had the most effect on eliminating discrimination by employers because the profit motive is a powerful incentive—notice that the more employers discriminate against minorities, the greater the profit from hiring a minority worker. Market economies have had some success in mitigating customer discrimination because market transactions bring different groups into regular contact with each other and thereby break down barriers. Market economies have had the toughest time eliminating employee discrimination because this type of discrimination can be self-reinforcing.
Chapter 19-1
If government provides more of national defense than is efficient, it is pulling resources away from other, more valuable goods and having taxpayers bear the burden. People with a very strong preference for national defense would benefit as well perhaps as those involved in providing national defense.
Chapter 19-2
Advertising could be used to pay for the upkeep of public parks. Advertising could be seen in obvious places such as signs by entryways to the park, on garbage cans, or on the sides of refreshment stands. If there is a music bandshell or a stage (in larger parks), advertising could be seen on the sides of these structures. Notice that under the Adopt-a-Highway program, advertising on roads supports road cleanup.
B-15
Airports charge for Wi-Fi because they can make money from it by excluding nonpayers. Since more Wi-Fi users don’t (usually) increase congestion by appreciable amounts, it would be more efficient to allow open access.
Chapter 19-3
Small communities find it easier to deal with common resource problems than states or nations because they have an easier time enforcing norms (standards of behavior) that reduce free riding. Even so, the more unrelated people that have access to a common good, the harder it is to deal with common resource problems.
The establishment of property rights can help solve the tragedy of the commons because people who have property rights have no incentive to overuse a resource. The tragedy of the commons occurs because people have an incentive to overuse common resources: to get theirs before someone else takes it.
Chapter 20-1
National voters have a smaller chance of influencing the election than do local voters, which suggests that people have a greater incentive to be informed about local issues. On the other hand, local issues are less important than national issues and there is less free information (e.g., from Jon Stewart) about local issues than about national issues, which suggests local voters would be even more rationally ignorant than national voters.
Chapter 20-2
Because of the benefits that special interests receive from current programs, they would fight against the establishment of a commission to examine federal waste. If the commission was set up, these special interests would then try to “capture” the commission: argue that their specific programs were needed, and exert political pressure to keep these programs. The bearers of the costs of these programs—the taxpayers— are too large and diverse a group to zero in on any particular program. The commission idea might be popular, but the chance of its success is low.
The beneficiaries of the local history collection at the library are the users of the collection. Ultimately, the taxpayers of the state pay for it. Benefits are concentrated on a small group, while the costs are spread over a large body of people (the taxpayers). Don’t be surprised if the reading room is named after the state senator!
B-16
Chapter 20-3
If voters are myopic, politicians could prefer a policy with small gains now and big costs later (let’s get reelected and maybe someone else will have to deal with the large costs down the road) than a policy with small costs now and large gains later (why jeopardize my chance to get reelected?). For these reasons, dealing with a large potential problem, such as the fiscal sustainability of Medicare, is often put off until the last minute when the solutions are much more difficult and costly.
Chapter 20-4
The free flow of ideas helps democracies function by getting alternatives out and on the table. Voters will always be rationally ignorant to some extent, but the more information that is out there and available at low cost, the more voters will be informed, at least about the big issues. Debate and dissent can improve the quality of ideas. The free flow of information reduces the possibility of corruption. New ideas help democracies adapt to changing conditions.