AP_Krugman_Textbook

Module 68

Check Your Understanding

1. a.This type of advertising is likely to be useful because it
   provides new information on an important product.
   b.This type of advertising is likely to be wasteful because
   it is focused on promoting Bayer aspirin over a rival’s
   aspirin despite the two products being medically
   indistinguishable.
   c.This is useful because the longevity of a business gives a
   potential customer information about its quality.


2. A successful brand name indicates a desirable attribute,
   such as quality, to a potential buyer. So, other things
   equal—such as price—a firm with a successful brand
   name will achieve higher sales than a rival with a com-
   parable product but without a successful brand name.
   This is likely to deter new firms from entering an
   industry in which an existing firm has a successful
   brand name.

Tackle the Test:

Multiple-Choice Questions

1. e


2. d


3. a


4. e


5. d

Tackle the Test:

Free-Response Questions

2. Product differentiation is efficient when it conveys useful
   information to consumers and the marginal benefit of
   the product differentiation exceeds the marginal cost. It
   is not efficient from a societal standpoint if it does not
   convey useful information or other benefits worth more
   than the resources devoted to it. This is likely to be the
   case, for example, if it misleads consumers or creates
   undesirable market power.

Module 69

Check Your Understanding

1. Many college professors will depart for other lines of
   work if the government imposes a wage that is lower
   than the market wage. Fewer professors will result in
   fewer courses taught and therefore fewer college
   degrees produced. It will adversely affect sectors of the
   economy that depend directly on colleges, such as the
   local shopkeepers who sell goods and services to stu-
   dents and faculty, college textbook publishers, and so
   on. It will also adversely affect firms that use the “out-
   put” produced by colleges: new college graduates. Firms
   that need to hire new employees with college degrees
   will be hurt as a smaller supply results in a higher mar-
   ket wage for college graduates. Ultimately, the reduced
   supply of college-educated workers will result in a lower
   level of human capital in the entire economy relative to

what it would have been without the policy. And this

will hurt all sectors of the economy that depend on

human capital. The sectors of the economy that might

benefit are firms that compete with colleges in the hir-

ing of would-be college professors. For example,

accounting firms will find it easier to hire people who

would otherwise have been professors of accounting,

and publishers will find it easier to hire people who

would otherwise have been professors of English (easier

in the sense that the firms can recruit would-be profes-

sors with a lower wage than before). In addition, work-

ers who already have college degrees will benefit; they

will command higher wages as the supply of college-

educated workers falls.

2. a.The demand curve for labor shifts to the right.
   b.The demand curve for labor shifts to the left.

Tackle the Test:

Multiple-Choice Questions

1. b


2. e


3. d


4. b


5. a

Tackle the Test:

Free-Response Questions

2. a.

b.

Quantity of labor

Wage

rate

Original Labor

Demand

New Labor

Demand

Original Labor

Demand

New Labor

Demand

Quantity of labor

Wage

rate

SOLUTIONS TO AP REVIEW QUESTIONS S-43