Download a. Complete the table.

ECONOMICS 100.13
STUDY GUIDE
FINAL EXAMINATION 2005
Note that 1/3 of the final examination will be multiple choice questions drawn from the text book
test bank. The study guide and the web site multiple choice questions will give you practice with
similar questions, although some will be on topics we have not emphasized.
Chapters required:
Micro text: chs. 11, 12, 13
Macro text: chs 6, 7, 9 (this chapter introduces the core model), 10 concepts required are the
consumption function, the mpc, mps and the concept of the multiplier, the calculation of the
multiplier and the impact of the multiplier on the AD curve. You are not required to be able to use
the aggregate expenditure diagram. ch. 11 pp. 261 to 271. ch. 12 pp. 284 to 287, ch. 13 pp. 305320, ch. 14, concepts required: structure of the Bank of Canada, the importance of monetary
policy, open market operations, monetary policy in the AS AD model
1. Explain the differences between perfectly competition, monopoly, monopolistic
competition, and oligopoly, giving an example of each.
a. Complete the following table indicating the costs of a firm.
OUTPUT
0
20
40
60
80
100
120
TC MC ATC AFC AVC
20
30
35
45
60
80
105
b. The maximum loss this firm ever needs take is _______.
c. The shut-down point for this firm is _______.
d. Indicate the output this firm would produce and the profit it would make at each of the prices
given below if this firm were operating in a perfectly competitive market.
PRICE OUTPUT TOTAL REVENUE PROFIT (LOSS)
.30
1.00
1.25
e. The price of this product when the industry is in long-run equilibrium is ________. Explain
your answer.
f. Assume the price in the industry is currently $1.25 and the industry is in short-run equilibrium.
Explain the adjustment process which will move the industry to long-run equilibrium price and
quantity.
2. The Gourmet Chocolate Factory has the following costs for each box of chocolates. It
operates in a perfectly competitive industry. The data is for each hour’s output.
OUTPUT
TC
MC
ATC
AVC
0
19
1
27
2
33
3
37
4
42
5
50
6
61
7
75
a.
b.
c.
d.
e.
f.
g.
Complete the table.
Fixed costs are _______.
The shut down point is _________ quantity and ________price.
If the price is 5.00, the firm will produce ________ units and make a profit (loss) of ______.
If the price is 9.00, the firm will produce ________ units and make a profit (loss) of ______.
If the price is 13.00, the firm will produce ________ units and make a profit (loss) of ______.
When the industry is in long-run equilibrium, the price of chocolate will be _________ and this
firm’s output will be ______ and its economic profits will be ________.
h. Given the following industry demand schedule, _________ firms will be in the industry in the
long run.
PRICE QUANTITY
6
300
8
400
10
500
12
600
14
700
16
800
3. Draw the cost curves of a firm in a competitive industry in long-run industry equilibrium.
Show the equilibrium price and output of the firm. (You do not need to use specific
numbers on your diagram, just draw the appropriately shaped curves and indicate the
equilibrium points.) Discuss the conditions which must prevail for this industry tend to use
resources efficiently. Refer to your diagram as you explain your answer.
4. Draw the cost curves of a firm in a monopolistically competitive industry in long-run
industry equilibrium. Show the equilibrium price and output of the firm. (You do not need
to use specific numbers on your diagram, just draw the appropriately shaped curves and
indicate the equilibrium points.) Does this industry tend to use resources efficiently?
Discuss and explain why we might prefer to have industries that are monopolistically
competitive rather than perfectly competitive. Refer to your diagram as you explain your
answer. (Note to students studying: I’m referring to the advantages of variety that this
industry provides.)
5. Draw the cost curves of a firm in a monopoly. Show the equilibrium price, output and
profits of the firm. (You do not need to use specific numbers on your diagram, just draw
the appropriately shaped curves and indicate the equilibrium points.). Will this industry
tend to use resources efficiently or inefficiently? Refer to your diagram as you explain your
answer. Will consumer surplus be larger or smaller in a monopolized industry than in a
competitive industry with similar costs and industry demand? Explain your answer. Use a
supply and demand diagram in your explanation.
6. Many industrial processes impose external costs on the environment. Will a perfectly
competitive firm achieve an efficient allocation of resources in these circumstances?
Explain your answer, using a supply and demand curve. Suggest how government taxes
on the industry could improve efficiency.
1.
10 points
George has a license from the local town council which allows him, and only him, to sell ice cream
at a beach. The following table shows the demand and cost curves.
a. Complete the table:
Total Marginal Total
Marginal
Average
Quantity
Price Revenue Revenue
Cost
Cost Total Costs
cones per hour
0
$10 _______
$10
_______
_______
_______
2
$8 _______
$12
_______
_______
_______
4
$6 _______
$18
_______
_______
_______
6
$4 _______
$26
_______
b. The profit maximising price of this firm is ________ and the profit maximising output of this
firm is _________? The profit this firm earns at that output is $______.
c. Does the profit maximising result achieve allocative efficiency? Explain your answer.
d. Does the profit maximising result achieve productive efficiency? Explain your answer.
e. Suppose the town council removed the licensing restriction and allowed anyone (who met
health department standards) to sell ice cream on the beach. Soon there are many stands, each
with its own location, selection of flavours and levels of service. What market structure now
prevails? What will the profits of these stands be in the long-run? Explain your answer.
7.
Assume that in the town of Mobilia, Will Bates has bought up all the taxi licenses and his firm
Mono Cabs provides the only taxi cab service in town. No one regulates the prices he can charge.
a. Using the cost curves of a firm, and assuming that all customers pay the same price, show the
profits of the firm and the price and quantity he will charge in order to maximise his profits.
b. Will this industry achieve productive and allocative efficiency? Explain.
c. Assume that Will Bates observes two types of customers: 1. rich business people who use cabs
going to and from business meetings in order to avoid spending time finding parking places. 2.
Poor senior citizens who use cabs for shopping and visiting friends. Explain how Mono Cabs
can increase its profits by using price discrimination.
8. Pepsi and Coca Cola advertise their products extensively but rarely engage in price
competition. Describe the market structure of the soft drink industry and explain why they
compete as they do.
9. If firms in an oligopoly form a cartel and adhere to its rules they could earn monopoly
profits. Explain what a cartel is and how it could work to the advantage of the firm’s
involved. Explain why cartels are difficult to maintain, even if government does not
intervene.
10. OPEC formed a cartel in the 1970s. Explain what a cartel is and how it influenced the
price of oil.
11. Explain the role of barriers to entry in permitting firms to earn more than normal profits.
12.
a.
i.
ii.
iii.
iv.
Working Age Population
36,000
Employed
24,000
Unemployed
3,000
Labour force
_________
Complete the preceding table and calculate:
The unemployment rate. ________
The employment to population ratio. ________
The participation rate. ________
b.
Explain the differences between frictional, cyclical and structural unemployment,
giving an example of each. Discuss the type of government action which government
should undertake to reduce each of them
13.
c. Complete the following table with 2005 as the base year:
YEAR
2005
2006
2007
COST OF
BASKET
$1,000
$1,050
$1,155
PRICE
INDEX
RATE OF
INFLATION
Not app.
d. A wage contract specifies that the workers will receive a wage increase equal to the
increase in the Cost of Living that year. If a worker’s wage was $10 per hour in
2005, the wage be $_______ in 2006. Will the wage increase improve the workers’
standard of living? Explain your answer.
e. If nominal GDP rose by 7% between 2005 and 2006, how much did real GDP rise?
Explain your answer.
14.
Define the four phases of the business cycle and explain what happens to the unemployment rate,
the participation rate, and the inflation rate in each of them.
15.
Given the following information (in
millions):
Total Population
60
Population 15 years and older 40
Labour force
30
Unemployed
5
Calculate the following:
Participation rate
Unemployment rate
Employment rate
_____
_____
_____
16.
disposable income consumption
expenditure
savings average
average
propensity to propensity to
consume
save
0
200
500
600
1000
1000
1500
1400
2000
1800
2500
2200
a. Complete the table.
b. The marginal propensity to consume is ______.
c. The marginal propensity to save
is ______.
17. Are unemployment insurance payments and old age pensions included in government
expenditures when GDP is calculated? Briefly explain why or why not.
18. List and explain three reasons why the aggregate demand curve slopes down.
19. Explain why the short run aggregate supply curve slopes up.
20. Explain what causes the short run aggregate supply curve to shift up or to shift down.
21. Explain what causes the aggregate demand curve to shift in or out.
22. Draw an Aggregate demand and Aggregate supply diagram and explain how the multiplier
influences the slope of the aggregate demand curve and the size of shifts in aggregate
demand as the result of autonomous changes in C, I, G or X-M.
23. On the following diagram, draw in the flows through the goods market required to show
the total aggregate demand for the output of firms. Add the financial markets to the
diagram.
f. Referring to the preceding diagram, describe the difference between the expenditure
and the income approach to measuring GDP, and explain why the two approaches
give the same result.
g. Referring to the preceding diagram explain why an increase in government
spending, (or changes in investment, exports, imports or taxes) will have a
multiplied increase on aggregate demand.
24. Given the following information:
GOOD
QUANTITY
PRICE
1996
SHOES
5 $ 50.00
HATS
3 $ 25.00
BEEF
20 $ 2.00
BREAD
40 $ 0.50
COST OF BASKET
PRICE
1997
$ 55.00
$ 20.00
$ 2.50
$ 0.75
PRICE
1998
$ 60.00
$ 25.00
$ 2.25
$ 0.75
PRICE
1999
$ 60.00
$ 30.00
$ 2.50
$ 1.00
a. Compute the Consumer price index for the following years.
YEAR INDEX
1996
1997
1998
1999
b. Calculate the rate of inflation between 1998 and 1999. Show your work.
25. Describe the stages of the business cycle and explain the changes in the rate of growth of
GDP and the unemployment rate in each stage.
26. Explain why high inflation rates are undesirable.
27. Explain why high unemployment rates are undesirable.
28. Gross Domestic Production has a number of weaknesses as a measure of economic welfare.
Give three weaknesses of GDP as a measure of economic well being. Is this measure better
used to determine the state of the business cycle or as a means of comparing the level of
economic welfare in two nations? Explain your answer.
29.
Explain the impact of the following changes on aggregated demand, indicating the
element(s) of AD that changes, and the direction that AD shifts
a. Interest rates rise
b. Income taxes fall
c. The GST rebate (a government transfer payment) increases.
30.
Assume that the chartered banks wish to hold 10% of their deposits as reserves.
Describe an open market operation intended to expand the money supply by $100 million.
Explain why the open market operation results in a larger money supply.
31.
An economy is in long-run equilibrium with full employment and real GDP is 1000.
Assume that exports rise by $60. The marginal propensity to consume is .7.
a.
Calculate the multiplier and indicate the new equilibrium income that will result
from the increase in exports, if prices do not change.
b.
Draw an aggregate demand aggregate supply diagram and show the initial
equilibrium of this economy and the change in equilibrium as a result of the increase in
exports. Indicate the quantity of goods and services people would be willing to buy at
the initial price level after exports rise.
c.
Will the equilibrium income reached after prices have adjusted be greater than, less
than, or the same as that predicted with the multiplier? Explain your answer.
32.
a. Draw an aggregate demand aggregate supply diagram showing an economy in equilibrium
with an inflationary gap.
b. Explain how the Bank of Canada can return the economy to full employment, using a diagram
of the supply and demand for bonds in your answer.
c. Explain the advantages and disadvantages of having the the Bank of Canada to return the
economy to full employment, rather than to wait for the economy to adjust itself in the longrun. Be sure to indicate why we wish to avoid high rates of inflation and unemployment.
d. Show the impact of the Bank’s actions on the aggregate demand, aggregate supply diagram.
Explain the impact of the Bank’s actions on equilibrium GDP and the price level.
33.
a. Using an aggregate demand aggregate supply diagram show an economy which begins in longrun equilibrium with full employment. Assume that investment falls dramatically. Show the
change in short run equilibrium which results. Briefly explain the diagram.
b. Explain the adjustment process which will occur in the long-run if no governmental
intervention occurs.
c. Suggest actions the government could take if it used fiscal policy to restore full employment.
What impact will these actions have on the government’s budget? Explain your answer.
34.
a. Explain what automatic stabilizers are and how they can reduce the swings of a business cycle.
b. Suppose a nation passed a law requiring its government to maintain a balanced budget at all
times. Would such a law result in smaller or larger changes in GDP over the course of a
business cycle? Explain your answer.
35.
Given the following information:
GDP rises by
$1,100
Taxes rose by
$100
Consumption rises by
$900
The marginal propensity to consume is _______ the marginal propensity to save is ______ .The
multiplier is _________.
36.
a. Describe two fiscal policy interventions which could be used to restore full
employment to an economy in a recession.
b. Discuss the disadvantages of using fiscal policy to manage the economy.