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Question 1 (5 points)
Assume
a perfectly competitive firm is currently producing 5,000 units of output and
is earning $15,000 in total revenue. The marginal cost of the 5,000th unit of
output is $3. The corresponding average total cost is $3.50 and total fixed
costs equal $1250. Based on this information, should this firm continue to
operate in the short run? Why or why not?

Question 2 (5 points)
Consider total cost and total revenue
given by the following table ((5 points)

Quantity

Total Cost

Marginal Cost

Total Revenue

Marginal Revenue

Profits

0

8

0

1

9

8

2

10

16

3

11

24

4

13

32

5

20

40

6

27

48

7

37

56

(a). Calculate marginal revenues,
marginal costs and profits for each quantity.
(b). How much should the firm produce
to maximize profits?
Question 3 (5 points)
Assume
the market for a good produced by perfectly competitive firms is currently in
equilibrium (economic profit = 0). Now assume there is a decrease in market
demand for the good. Analyze the short-run effects of the decrease in demand on
equilibrium market price and output. What has happened to the profits of each
of the firms in the industry? Over time, what will happen to the number of
firms in the industry? Why?

Question 4 (5 points)
Suppose
the demand curve for a monopolist is Q = 1000 ? P, and the marginal
revenue function is MR = 1000 ? 2Q. The monopolist has a constant marginal and
average total cost of $100 per unit.
(A). Find the monopolist’s
profit-maximizing output and price.
(B). Calculate the monopolist’s
profit.

Question 5 (5 points)
Compare
and contrast the outcomes with respect to price and output in a
monopolistically competitive market and a perfectly competitive market. In
which situation are consumers better off? Why?

Question
6 (5 points)
Assume the market shares of the six
largest firms in an industry are 12 percent each. Calculate the six-firm
concentration ratio and Herfindahl-Hirschman index for this industry. What does
each of these measures have to say about the degree of concentration in the
industry? Explain.

Question 7 (5 points)
The
situation in which the long-run average cost curve exhibits economies of scale
over the entire range of output is called a “natural monopoly.”
Explain why, in the case of a natural monopoly, it would be cost efficient to
have a single firm serve the entire market.

Question 8 (5 points)
The Bureau of Labor Statistics announced that in October 1996, of all
adult Americans, 127,587,000 were employed, 7,221,000 were unemployed, and 66,645,000
were not in the labor force. How big was
the labor force? What was the
labor-force participation rate? What was
the unemployment rate?

Question 9 (5 points)
Suppose the following table records the total output and prices of rice
and wheat for an entire economy. Further
suppose the base year is 1996. [10 points]

Year Price of Rice Quantity of Rice Price of wheat
Quantity of wheat
1996 $1 20 $3 70
1997 $2 35 $5 90

(a). Compute nominal GDP
for 1996 and 1997.
(b). Compute real GDP for
1996 and 1997.
(c). Compute GDP deflator
for 1996 and 1997
(d). Compute inflation
rate between 1996 and 1997.

Question 10 (5 points)
The following table shows the prices and quantities consumed in the
country known as the United States.
Suppose the base year is 1996. The fixed basket is determined by 1996
quantities. 1996 is also the base year.

Year Price of Books Quantity of Books
Price of Pencils Quantity of
Pencils
1996 $2 40 $5 100
1997 $4 50 $8 120
(a). What are the costs of
the basket in 1996 and 1997?
(b). What are the values
of the CPI in 1996 and 1997?
(c). What is the inflation
rate between 1996 and 1997?

Question 11 (5 points)
The
following data summarize the expenditures for the country of XYZ during 2003 in
millions of alphabet, the currency of country XYZ.

Gross
Private Domestic Investment

$300

Business
Fixed Investment

$200

Change
in Inventories

$100

Exports

$200

Imports

$200

Personal
Consumption Expenditures

$800

Government
Consumption Expenditures and Gross Investment

$500

Statistical
Discrepancy

$10

Depreciation
Expenditures

$50

a.
Calculate net exports
b.
Calculate GDP
c.
Calculate national income
d.
Assume that the GDP deflator is 120 and calculate real GDP for 2003.

Question 12 (5 points)
You
are given the following information on the macroeconomy:
Consumption: 200 + 0.75Y
Investment: 100 + 0.10Y
Government Spending 500
Exports 100
Imports 50 + 0.25Y

Compute
the equilibrium level of income, the size of the multiplier, and the change in
equilibrium income for an increase in autonomous consumption of $50 million.

Question 13 (5 points)
Autonomous
aggregate expenditures decreases by $200 million, the marginal propensity to
consume is 0.50, marginal propensity to invest is 0.25, and the marginal
propensity to import is 0.10. Calculate the change in income.

Question 14 (5 points)
During
the recession of 2007-2009, the U.S. economy was experiencing a decrease in
home prices and consumer wealth, a credit crisis in the financial markets, and
declining consumer and business confidence. What components of aggregate demand
were affected and what was the impact on real output? What were the policy
options?

Question 15 (5 points)
Suppose the entire economy contains $5000 worth of one-dollar bills.
(a) If people fail to deposit any of the
dollars but instead hold all $5000 as currency, how large is the money supply?
(b) If people deposit the entire $5000 worth
of bills in banks that are required to observe a 100% reserve requirement, how
large is the money supply?
(c) If people deposit the entire $5000
worth of bills in banks that are required to observe a 20% reserve requirement,
how large is the money supply?

Question 16 (5 points)
You are
given the following information on the banking system.
Reserve requirement rr = 0.08
Currency-deposit ratio c = 0.10
Excess reserve ratio e = 0.05
Compute
the simple deposit and money multipliers.
Question 17 (5 points)
Summarize the
arguments for having a central bank that is independent from government.
Question 18 (5 points)
Why is it that calculated income multipliers are often overestimated?
Question 19 (5 points)
Which Fed policy is easier to implement, targeting the Federal funds rate or
targeting the money supply? Elaborate on why this is.
Question 20 (5 points)
Which do you think is a more effective macroeconomic tool to manage the
economy, fiscal policy or monetary policy? Why?