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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? 1 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). 2