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Economics
Final Test (Open Book)
Instructor: Shanti
April 23, 2007
Instruction: You may share the books but do not discuss with
your class mates.
Duration: 2 Hrs. Total Marks: 50. Answer All Questions.
1. The chart below shows the demand curve for dog food at Charlie’s dog factor
and the total cost of producing various quantities:
a. Fill in the rest of the chart.
b. How much dog food should Charlie sell, and what price should he charge?
Quantity Price
Total Revenue TC MR MC Profit
1
$15/lb
$3
2
13
8
3
11
15
4
9
24
5
7
35
6
5
48
c. If Charlie is required to pay a $5 license fee to operate his factory, what
happens to his total cost numbers? What happens to his marginal cost
numbers? What happens to the amount of dog food he sells and the price
he charges?
d. If Charlie is required to pay an excise tax of $6 per pound of dog food,
what happens to his total cost numbers? What happens to the amount
of dog food he sells and the price he charges?
2. Kites are manufactured by identical firms. Eac firm’s long-run average and
marginal costs of production are given by
AC= Q + 100/Q and MC=2Q
where Q is the number of kites produced.
a. In long-run equilibrium, how many kites can each firm produce?
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b. Suppose that the demand for kites is given by the formula:
Q=8000-50P
where Q is the quantity demanded and P is the price. How many kites
will be sold? How many firms will be in the kite industry?
c. Suppose that the demand for the kites unexpectedly goes up to
Q=9000-50P
In the short-run it is impossible to manufacture any more kites than those
already in existence. What will be the price of kites be? How many firms
will be there in the kite industry? How much profit can a kitemaker earn?
d. In the long-run, (assuming that the production of kites can be changed in
the long-run) what will be the price of kites be? How many firms will be
there in the kite industry? How much profit will they earn?
3. Given below is a simple national income determination Model:
C=50+0.8 YD
YD=Y-T+TR
T=tY, where t=0.2
G=200
I=70
TR=100
(Recall: Y=C+I+G+(X-M). IN this case we introduce the notion of disposable income which is Y-taxes paid+transfers received from govt.)
a. Calculate the equilibrium level of income and the multiplier for this model
b. Calculate the budget deficit
c. Suppose t increases to 0.25, what is the new equilibrium income? The
new multiplier?
d. What is the multiplier when t=1? Can you explain why the multiplier in
this case is what it is?
e. Suppose now additionally, exports X=100 and imports, M=0.1Y, calculate
the equilibrium level of income and the multiplier for the same model
presented above (t=0.2).
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