Download Practice Exam

Name ________________________
Final Exam
Economics 503
Fundamentals of Economic Analysis
October 28, 2006
2:30-5:30PM
Write all of your answers on this white exam paper. Do not hand in the blue books.
Multiple Choice (2 points each)
1.
The demand and supply for a product both increase (i.e. both curves shift up and
out. Which of the following statements is true:
a. the equilibrium price of the product must increase; the equilibrium
quantity of the product must increase.
b. the equilibrium price of the product may or may not increase; the
equilibrium quantity of the price must increase.
c. the equilibrium price of the product must increase; the equilibrium
quantity of the product may or may not increase.
d. the equilibrium price of the product may or may not increase; the
equilibrium quantity of the price may or may not increase.
_________________
2.
A country’s long-term development strategy focuses on accumulating more
capital equipment without increasing the efficiency of production technology or the
education level of workers. We would expect to see:
a. Increasing returns to capital; Increasing ICOR levels
b. Decreasing returns to capital; Increasing ICOR levels
c. Increasing returns to capital; Decreasing ICOR levels
d. Decreasing returns to capital; Decreasing ICOR levels
_________________
3.
China’s GDP per capita is $2000 while in Japan it is $32,000. China’s GDP per
capita is growing at a rate of 7% per year, while in Japan it is growing at 1% per year. If
this continues indefinitely, China will have caught up within
a. 10 years
b. 20 years
c. 40 years
d. 70 years
_________________
4.
A firm is termed a natural monopoly when its:
a. average variable costs are initially falling.
b. average fixed costs continue to decline at outputs beyond those sustainable in
the market.
c. average total costs of production continue to decline at outputs beyond those
sustainable in the market.
d. Marginal revenue is less than price.
_________________
5.
A monopoly faces a ________________; a perfectly competitive firm faces a
_________________.
a. perfectly elastic demand curve for which marginal revenue is less than
price; perfectly elastic demand curve for which marginal revenue equals
price.
b. Perfectly elastic demand curve for which marginal revenue equals price;
downward sloping demand curve for which marginal revenue is less than
price.
c. Downward sloping demand curve for which marginal revenue is less than
price; perfectly elastic demand curve for which marginal revenue is less
than price.
d. Downward-sloping demand curve for which marginal revenue equals
price; perfectly elastic demand curve for which marginal revenue is less
than price.
e. Downward-sloping demand curve for which marginal revenue is less than
price; perfectly elastic demand curve for which marginal revenue equals
price.
_________________
6.
Marginal revenue is
a. the revenue that a firm receives from selling its output
b. the excess of revenue over cost.
c. The extra revenue that firm receives from selling an additional unit.
d. The excess of revenue over fixed costs.
_________________
7.
The following figure shows a competitive firm’s marginal revenue, marginal cost,
and average cost curves. If the firm were producing Q3, in the short run it should:
P
MC
ATC
Price
Q
Q1
a.
b.
c.
d.
e.
Q2
Q3
Q4
reduce output to Q1 to maximize profit.
reduce output to Q2 to maximize profit
increase output to Q4 to maximize profit
expand output beyond Q4 to maximize profit
continue to produce Q3, which is profit maximizing output
_________________
8.
Which of the following transactions would be included as part of the expenditure
method of calculating GDP in Japan.
a.
b.
c.
d.
e.
a German expatriate sells a used Toyota to his neighbor in Tokyo
a Japanese fisherman sells fresh fish to a sushi shop in Kyoto
a Japanese miller sells flour to a bakery in Los Angeles
a German expatriate buys shares in Toyota Motor Co.
none of the transactions would be counted.
_________________
9.
The breakeven point is defined as occurring at a price level equal to the point
where price is equal to
a. the level where the marginal cost curve crosses the average variable cost
curve
b. the highest level of average fixed costs.
c. the lowest level where average total cost
d. all of the above.
10.
Discretionary counter-cyclical fiscal and monetary policy will both take some
time to affect the economy. We can say that:
a. with fiscal policy the lag occurs before policy is formulated; with
monetary policy the lag occurs after the policy is formulated.
b. with fiscal policy the lag occurs after policy is formulated; with monetary
policy the lag occurs after the policy is formulated.
c. with fiscal policy the lag occurs before policy is formulated; with
monetary policy the lag occurs before the policy is formulated.
d. with fiscal policy the lag occurs after policy is formulated; with monetary
policy the lag occurs before the policy is formulated.
Calculation
1. (5 points) As an experiment, McDonalds raises the price of two of its sandwiches.
The following chart shows the sales per restaurant per week. Calculate the
elasticity of demand for each sandwich using the midpoint method. Will a raise in
the price of either or both sandwiches lead to an increase in revenue? If so,
which?
Before
After
P
Q
P
Q
Big Mac
$12
1200
$15
800
Filet o’ Fish
$20
500
$24
450
2. (5 points) The GDP deflator index is 116 in 2001. Assuming year 2000 was the
base year, what was the average inflation rate over the period 2000-2001?
Assuming constant velocity and a money growth rate of 15%, what was the
growth rate of real GDP?
3. (7 points) The marginal propensity to consume is .8 and the tax rate is 25% so
that disposable income is .75*Y. Assume that the marginal propensity to import is
zero.
a. Calculate the expenditure multiplier. How much would expenditure increase, if
government spending increases by 100?
b. Assume that output increases to match the increase in the expenditure. Calculate
the increase in tax collection that occurs as a result of the increase in spending.
What is the total impact on the budget deficit that occurs if government spending
increases by 100?
4. (3 points) From the following table, what is the money multiplier (i.e. the ratio of
the M1 money supply to the monetary base) in this economy?
Cash
Reserves
Deposits
100
20
600
5. (5 points) The following table shows a cost schedule and a revenue schedule for a
monopolist which can increases production in batches of 200. Find the profit
maximizing level of output. Calculate the average total cost, the average fixed
cost and the average variable cost at that level of production.
Quantity
0
200
400
600
800
1000
1200
1400
1600
1800
Revenue
0
18000
32000
42000
48000
50000
48000
42000
32000
18000
Total Cost
20000
25000
30000
35000
40000
45000
50000
55000
60000
65000
6. (5 points) The velocity rate is constant over time at V = .5. The growth rate of real
GDP is 5% per year and the growth rate of the money supply is 7% per year.
Calculate the level of the real inflation tax when Real GDP is HK$1 trillion
dollars.
Short Answer
1. (5 points) Assume that the newspaper market in Hong Kong is characterized by
monopolistic competition. The marginal cost of producing South China Morning
Post and Ming Pao are approximately equal. SCMP sells at a price of HK$8 per
copy while Ming Pao sells at a price of $6 per copy. In the long run, would we
expect that SCMP was earning higher profits or lower profits than Ming Pao?
Explain why or why not?
2. (5 points) Consider two industries: gravel and gourmet restaurants. The first
produces an undifferentiated product while there are a large number of potential
types of cuisine, each with its own particular qualities. There are not large barriers
to entry into either industry. Explain in which industry firms will be operating at a
scale closest to an efficient level. Why?
3. (2 points) Yao Ming, makes $10 million per year playing center for the Houston
Rockets of the National Basketball Association, discovers that he could spend a
year operating a lemonade stand in his hometown. He can sell 100 glasses of
lemonade at $10 per glass and buy lemon, sugar, water, and paper cups for $1.
Calculate Yao’s accounting profit. What is his economic profit?
4. (3 points) List the 3 roles of money
5.
(6 points) Americans feel very optimistic and their high animal spirits increase
demand in that country. The US Federal reserve follows a policy of countercyclical monetary policy.
a. Would the central bank in the USA respond with an open market purchase or an
open market sale of government bonds?
b. Compare the effects of these events on the sales of two firms in Hong Kong. Firm
A is a real estate developer which builds residential housing. Firm B is a company
that makes watches for sale at the best department stores across the world. Which
type of firm is likely to experience the strongest increase in demand as a result of
the two events in the US? Explain the difference in 5 sentences or less.
Graphing Questions (5 points each)
1. The following table shows information on the Long run average total cost curve
and the demand curve. Plot the following data on a graph. Show the areas of
economies and diseconomies of scale and constant returns to scale. What is the
minimum efficient scale? What is the scale of production in this economy if the
firm is monopolistically competitive?
Quantity
LR ATC
1
33
2
27
3
25
4
25
5
30
6
38
7
50
Price
Quantity
Demanded
50
1
43
2
36
3
29
4
22
5
15
6
8
7
2. Some economists argue that the savings behavior is not very responsive to the
interest rate. Other economists argue that savings is strongly affected by the
interest rate. Use the loanable funds framework for a large or closed economy.
Compare the effect of expansionary fiscal policy on the interest rate and
investment in A) an economy in which the supply of loanable funds was inelastic
with respect to the interest rate; with the effect in B) an economy in which the
supply of loanable funds is very elastic. Draw a graph of each theory to show
under which theory there is a bigger impact on investment and under which
theory there is a bigger impact on the interest rate.
3. Use the AS-AD model to describe what happens to output and the price level in
the short-run and the long-run in Hong Kong when US interest rates rise. Show
alternate paths for the economy when 1) the HK government engages in countercyclical fiscal policy; 2) the government does not engage in counter-cyclical
policy.
4. Diamonds are discovered in Australia. Foreigners want to buy these diamonds and
need Australian dollars to do so. Draw two graphs of the Forex market: 1)
Demonstrate the effect on the Australian dollar exchange rate if Australian
monetary policy remains unchanged; 2) Demonstrate the effect on the market if
the Reserve Bank of Australia conducts monetary policy to keep the exchange
rate from changing.
Draw that Curve [3 points each]
1. The graph below shows the cost schedule of a monopolistically competitive firm.
Draw a demand curve which would make this graph describe the long-run
equilibrium of a firm in a monopolistically competitive market. Label the level of
output, Q*, and the level of prices, P*.
P
MC
ATC
Q
2. The graph below shows potential output, the aggregate demand curve and the
short run aggregate supply curve of the economy. Draw the position of the SRAS
in the long-run in the absence of countercyclical policy.
P
YP
AD
Q
3. Draw a money demand curve representing the situation in Japan in 2005.
i
Money
Supply
Money