Figure 1 MC ATC. Demand. April 1, Exam 2

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1 ECONOMICS Exam 2 Dr. John Stewart April 1, 1999 Instructions: Mark the letter for your chosen answer for each question on the computer readable answer sheet. On the answer sheet make sure that you have written your name and coded in your student ID number and the number of the recitation section you attend (The list at the end of the exam will help you identify your section number). All questions are weighted equally. (Questions 1-5) Figure 1 shows the market demand, marginal revenue curve and the marginal and average cost curves for a monopoly firm in the market. 1. In Figure 1, profit-maximization would occur when: a. P=15 and Q=10 b. P=10 and Q=13 c. P=9 and Q=15 d. P=5 and Q=10 e. P=5 and Q=13 2. Which of the following is true for the profit-maximizing monopolist in Figure 1? a. economic profit is 100 b. total revenue is 50 c. price is 5 d. all of the above e. only b and c above $ MC ATC MR Demand Q 3. In the long run the monopolist in Figure 1 can anticipate: Figure 1 a. lowering its price in the long run as firms enter its market b. maintaining its profit level in the long run if the demand doesn't change c. ignoring lower cost technological improvements because competition doesn't exist d. raising its price if demand becomes smaller e. none of the above 4. A Monopoly is often described as "inefficient" because: a. potential customers who are willing to pay more than the marginal cost of producing the product are unable to buy it b. management is unable to combine its inputs in such a way as to minimize the costs of production c. it tends to buy too much plant and equipment, so that its fixed costs are excessively large d. it spends a lot of money on advertising e. it is unable to maximize profits 5. A regulator who wished to ensure that the monopolist in Figure 1 made zero economic profits would likely: a. set the price at 15 b. set the price at 10 c. set the price at 9 d. set the price at 5 e. set the price at 0 Econ , Exam 2, Page 1 of 6

2 6. A monopolistically competitive firm in the long run will a. have a demand curve tangent to its ATC. b. have a demand curve below its ATC. c. have a demand curve above its ATC. d. operate where excessive profit can be achieved. 7. The monopolistically competitive firm in the short run equilibrium a. faces a downward-sloping demand curve. b. has a marginal revenue curve which lies below its demand curve. c. maximizes profit where MR=MC. d. All of the answers above are correct. 8. The monopolistically competitive firm differs from a monopolist in that a. its market has free entry. b. its demand curve slopes downward. c. its MR curve lies below its demand curve. d. its profit is maximized where MR=MC. 9. The force that leads to zero economic profits for monopolistically competitive firms in the long run is a. excess capacity. b. price wars among firms. c. ease of entry and exit. d. excessive advertising. Setup for Questions 10 to 13: Guglhupf, the German Bakery in Durham is a major success and the owners consider expanding their business by hiring more bakers from Germany. As the only supplier of quality pretzels Guglhupf is a monopolist in this market. The following table gives you information about production and revenue # of Bakers # of pretzels per Price of pretzels TR MRPL day in $ $ $ $ $ $ According to the chart above, the marginal revenue product of labor for the third baker is: a. 710 b. 220 c. 450 d The total revenue is $ if they hire bakers a. 710, 3 b. 2160, 4 c. 450, 3 d. 2380, 4 Econ , Exam 2, Page 2 of 6

3 12. Assume the bakers are paid $190 per day. How many bakers should Guglhupf hire? a. 2 b. 3 c. 4 d. 5 or more 13. How much profit will Guglhupf make per day when they hire the optimal number of bakers at $190 per day (assume all non-labor costs of production are $500 per day)? a. $1620 b. $1880 c. $1120 d. they loose $ Assume that the current equilibrium market wage for unskilled labor is $5.75. Congress decides to raise the minimum wage from $5.25 to $5.50. Which effects do you expect on the labor market? a. Nothing will happen. b. The demand for labor will decrease and unemployment will rise. c. More people will want to work for $5.50 than for $5.25 and thus the labor force will increase and unemployment will rise. d. Both b. and c. will happen. 15. In a competitive labor market, the wage paid by a company to its employees will equal a. the marginal product of the last worker hired. b. the average product of all workers employed. c. the marginal revenue product of the last worker hired. d. None of the above. 16. If leisure is a normal good, the income effect of an increase in wage will a. increase the quantity of labor supplied. b. decrease the quantity of labor supplied. c. decrease demand for leisure. d. increase demand for labor. 17. Marginal social costs of the production of automobile tires are a. the direct costs of production and the cost imposed on the society due to the pollution created in the production process. b. the direct costs of production, but not the cost imposed on the society due to the pollution created in the production process. c. only the cost imposed on society due to the pollution created in the production process d. none of the above. 18. Neglecting external effects from production leads to inefficient market outcomes because all firms maximize profits according to the rule while the outcome for the entire society would be optimal at a production level where. a. average private costs = price, marginal social costs = marginal social benefits b. private costs = price, social costs = social benefits c. marginal private costs = marginal revenue, marginal social costs = marginal social benefits d. private costs = private revenue, social costs = social revenue 19. A perfectly competitive market that has a negative production externality such as pollution will result in and equilibrium price that is and an equilibrium quantity that is to be socially optimal a. Too high, too high b. Too low, too high c. Too high, too low d. Too low, too low Econ , Exam 2, Page 3 of 6

4 20. Which of these activities is not counted in GDP? a. the production of a car which is not sold in the year it is built. b. the work done by a broker who buys and sells used cars. c. the work done by the chief executive of the country's largest polluter. d. the work done by the volunteer board of the local YMCA. 21. Bob quits his job in Minnesota because he is tired of the snow, drives to Arizona and looks for work. Which type of unemployment would Bob fall under? a. cyclical unemployment. b. frictional unemployment. c. structural unemployment. d. none of the above. 22. If nominal interest rates are fixed, an increase in inflation: a. lowers real interest rates. b. raises real interest rates. c. helps people who are unemployed. d. helps people on fixed incomes. (Questions 23-28) Figure 2 shows the standard income/expenditure diagram for a macro economy. In this economy there are no taxes and no foreign trade. Real Expenditure O C + I + G 23. In Figure 2, the marginal propensity to consume is a..2 b..5 c..8 d C 24. In Figure 2, the equilibrium level of GDP would be a. 500 b c d Real GDP 25. In Figure 2, the total spending multiplier would be a. 5 b. 4 c. 2.5 d. 2 Figure In Figure 2, the amount of autonomous investment would be a b. 500 c. 200 d. not enough information given Econ , Exam 2, Page 4 of 6

5 27. In the economy described in Figure 2, the government estimates that the full-employment GDP is In order to reach full employment, the government will have to increase government spending by a. 0 b. 100 c. 200 d If the government in the economy depicted in Figure 2 were to introduce a 10% income tax on the population a. The total expenditure curve would make a parallel shift down. b. The total expenditure curve would make a parallel shift up. c. the slope of the total expenditure curve would increase to.6 d. the slope of the total expenditure curve would decrease to.45 e. the slope of the total expenditure curve would decrease to Consider a government program that had no other effect but to transfer income from the poor to the rich (e.g. cut welfare payments to the poor and decrease taxes to the rich by an equal amount). In a macro model such as Figure 2 such a program would a. Increase equilibrium GDP if rich and poor people have the same marginal propensity to consume. b. Increase equilibrium GDP if rich people have a higher marginal propensity to consume than do poor people. c. Increase equilibrium GDP if rich people have a lower marginal propensity to consume than do poor people. d. Increase equilibrium GDP now matter what the relative sizes of poor and rich peoples marginal propensities to consume. e. Decrease equilibrium GDP in all cases. 30. You are given the following information: the CPI was 30 in 1992 and increased to 42 in 1998 and nominal GDP in 1998 was Based on this information, real GDP in 1998 in terms of 1992 prices was and the rate of inflation was from 1992 to a and 40 percent b and 42 percent c and 12 percent d and 12 percent 31. According to Figure 3, if government spending is increased, we would expect a. the AD curve to shift up and employment to fall. b. the AS curve to shift up and prices to rise. c. the AD curve to shift up and prices to rise. d. the AS curve to shift down and employment to rise. Prices Aggregate Supply (AS) Aggregate Demand (AD) Figure 3 GDP Econ , Exam 2, Page 5 of 6

6 32. You are given the following information: C = (DI), I = 400, G = 500, (X - IM) = 0, and initial equilibrium GDP = If the government decides to implement a lump-sum-tax of 200, what is the change in equilibrium GDP? a b c. 200 d (Questions 33-34) The table below shows the price of two goods (x, y) in 1990, the quantity of those two goods that are purchased by consumers in the economy in 1990, and the total expenditure on those good in You may assume that these are the only two consumer goods in the economy. For 1990 Price Quantity Expenditure Good X P =$1.00 Qx = 1000 $1000 x Good Y P =$2.00 Qy = 500 $1000 y 33. If the data in the above table is used as the base year to calculate a consumer price index, what will the consumer price index be for 1992 when the price of x is $1.25 and the price of y is $3.00? a. 100 b. 125 c d. 150 e Using the information in question 33 above and the additional information that nominal consumer spending in 1992 was $3000, the available information would allow us to a. conclude that real consumption was higher in 1990 than in b. conclude that real consumption was lower in 1990 than in c. conclude that real consumption the same in 1990 as it was in d. draw no conclusions about real consumption in 1990 relative to * *Please remember to bubble in the recitation section number where you would like to pick up your test results on your answer sheet so that we can get your test back to you as quickly as possible. Section Time & Day TA 801 T 3:30 Volker Grzimek 802 T 4:30 Volker Grzimek 803 W 9:00 Meg (Airu) Cheng 804 W 10:00 Meg (Airu) Cheng 805 W 11:00 Tim Goodger 806 W 12:00 Meg (Airu) Cheng 807 W 1:00 Volker Grzimek 808 W 4:00 Tim Goodger Econ , Exam 2, Page 6 of 6