Figure 1 MC ATC. Demand. Dr. John Stewart April 2, 2002 ECONOMICS Exam 2

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1 ECONOMICS Exam 2 Dr. John Stewart April 2, 2002 Instructions: Mark the letter for the best answer for each question on the computer readable answer sheet. Please note that some questions have four choices, others have five choices. On the answer sheet make sure that you have written your name and coded in your student ID number and the number of the recitation section you attend (A list of recitations shown on the screen will help you identify your section number). All questions are weighted equally. Information for Questions 1-5: Figure 1 shows the market demand, marginal revenue curve and the marginal and average cost curves for a monopoly firm in the market. $ 1. In Figure 1, profit-maximization would occur when: a) P=15 and Q=10 b) P=10 and Q=13 c) P=9 and Q=15 d) P=5 and Q=10 e) P=5 and Q=13 2. Which of the following is true for the profit-maximizing monopolist in Figure 1? a) economic profit is 100 b) total revenue is 50 c) price is 5 d) all of the above e) only b and c above Figure 1 MC ATC Demand Q MR 3. In the long run the monopolist in Figure 1 can anticipate: a) lowering its price in the long run as firms enter its market b) maintaining its profit level in the long run if the demand doesn't change c) ignoring lower cost technological improvements because competition doesn't exist d) raising its price if demand becomes smaller e) none of the above 4. A Monopoly is often described as "inefficient" because: a) potential customers who are willing to pay more than the marginal cost of producing the product are unable to buy it b) management is unable to combine its inputs in such a way as to minimize the costs of production c) it tends to buy too much plant and equipment, so that its fixed costs are excessively large d) it spends a lot of money on advertising e) it is unable to maximize profits 5. A regulator who wished to ensure that the monopolist in Figure 1 made zero economic profits would likely: a) set the price at 15 b) set the price at 10 c) set the price at 9 d) set the price at 5 e) set the price at 0 6. Which of the following characteristics of perfect competition does not apply in monopolistic competition? Econ Exam 2 - Page 1 of 8

2 a) free entry and exit b) homogeneous products c) numerous participants d) perfect information 7. In the long run the prices charged by a firm in monopolistic competition will be a) high enough to provide profits to the firm. b) so low that many firms will drop out of the industry. c) equal to marginal cost. d) equal to average cost, including the opportunity cost of capital. Information for Questions 8-10: Buford sells cookies in a perfectly competitive market where the current market price for the cookies is $2.00 per cookie. The following table shows the number of cookies that his store can produce along with the revenue consequences. MPP L is the marginal physical product of labor. You may want to now fill in the Marginal Revenue Product of Labor (MRP L ) column to help you answer the following questions. # of Bakers # of cookies per day MPP L Total Revenue MRP L $ $ $ $ $ According to the chart above, if the price of cookies is $2.00, the marginal revenue product of labor for the second baker is: a) 140 b) 160 c) 170 d) 180 e) Assume the price of cookies is $2.00 and the bakers are paid $110 per day. Please help Buford figure how out many bakers to hire (assume that he must hire full time bakers). Buford should hire bakers a) 2 b) 3 c) 4 d) 5 e) zero 10. If the price of cookies suddenly drops to $1.75 and bakers are still paid $110 per day, how many bakers will Bufford lay off? a) none b) 1 c) 2 d) 3 e) In any competitive factor market, the marginal revenue product of the last unit of the factor purchased will equal: a) the price of the factor b) the average cost of the product c) average product of the factor d) the price of the product Econ Exam 2 - Page 2 of 8

3 12. If the substitution effect dominates in your labor supply decision, you a) increase your hours worked as your wage rate rises b) decrease your hours worked as your wage rate rises c) increase your hours worked no matter what d) change jobs whenever you find a new one 13. If the production of a good results in external social costs, an unregulated competitive market will not efficiently allocate resources because a) consumers have no incentive to pay for the products produced with a negative externality b) firms produce too little because they are concerned for the well-being of society c) consumers buy too little of the product to punish the firm for the negative externality d) firms ignore the external costs and produce more than is optimal for society. 14. Consider a perfectly competitive market for a good that generates a positive consumption externality (People not consuming the good benefit when others consume. Examples might be vaccinations or deodorant.) In such a market, the equilibrium price will be and an equilibrium quantity will be to be socially optimal. a) Too low, too low b) Too low, too high c) Too high, too low d) Too high, too high 15. In the GDP accounts of the United States, which of the following would not be included in the Investement (I) category. a) the purchase of a newly manufactured drill press purchase by a US manufacturing firm b) the purchase of a newly constructed three bedroom house by a school teacher in Carrborro. c) the purchase of stock in Compaq Corporation by Hewlett Packard Corporation d) both b) and c) Information for Questions 16-19: The table below shows the price of food and clothing in the years 1999, 2000 and 2001 and the quantity of those goods that are purchased by a typical consumer in You may assume that these are the only goods in the economy. Use the information from this table to answer questions 16 to 19. Good Quantity 1999 Price 1999 Price 2000 Price 2001 Work Space Clothing 200 $1.00 $1.10 $1.50 Food 100 $1.50 $1.65 $ If we use 1999 as the base year, the Consumer price index for this economy in 2000 is a) 100 b) 110 c) 120 d) 125 e) Over the two year period 1999 and 2001 the price level experienced a total a) inflation of 10% b) inflation of 25% c) inflation of 40% d) deflation of 20% e) no change in the price level 18. In 1999 the typical consumer in this economy had a nominal income of $350. In 2001 the typical consumer had a nominal income of $560. Compared to 1999, the typical consumer s real income (measured in 1999 dollars) had shown Econ Exam 2 - Page 3 of 8

4 by 2001 a) a gain of $50. b) a loss of $50. c) a gain of $210 d) a gain of$ 200 e) no change. 19. From the in formation provide we can conclude that over the time period 1999 to 2001 a) the rate of inflation slowed b) the rate of inflation accelerated. c) the rate of inflation was constant. d) nothing. There is not enough information to draw a conclusion on the rate of inflation. 20. If in an economy 8 million people are employed and 1 million are unemployed and looking for jobs and another million is unemployed, but has no intention to work, the unemployment rate is a) 10% b) 11.1% c) 12.5% d) 20.0% 21. Which of the following groups would most likely suffer a loss from unanticipated inflation? a) borrowers b) lenders c) pensioners on fixed incomes d) both b) and c) 22. Frictional unemployment a) is unemployment that is due to normal turnover in the labor market. b) refers to unemployed workers whose skills don't match the jobs available. c) is the part of unemployment that is attributable to a decline in the economy's total production. d) is all of the above. 23. The difference between potential and actual GDP is a) the inflationary gap. b) the recessionary gap. c) the current unemployment rate. d) either a) or b) depending on whether actual GDP is larger or smaller than potential GDP. 24. Disposable income is national income, adjusted for a) Transfer payments. b) Taxes. c) Both a and b d) Neither a nor b 25. The current inflation rate is 2.5% per year. The nominal interest rate on a passbook savings account is 2.1% per year. The real interest rate on passbook savings in a bank is a) 2.1% b).4% c) -.4% d) 5.25% Econ Exam 2 - Page 4 of 8

5 Information for questions Consider a simple macro economy with no foreign trade (you can ignore exports and imports, so total expenditure = C + I + G ). You may also assume that the price level is fixed. The consumption function can be described by the equation C = (Y-T), where Y is income and T is the amount of tax payments the government collects from consumers. Assume initially that government taxes (T) total $ 100 million and that taxes are autonomous "lump sum" taxes), government spending is autonomous (G) and is equal to $ 130 million and autonomous investment (I) is $ 170 million. You may use the blank table below to help answer the questions that follow. GDP Gross Domestic Product = National Income DI Disposable Income C Consumption Expenditure I Investment Expenditure G Government Expenditure TE Total Expenditure all numbers are in millions of dollars per year. 26. In the economy described above, the marginal propensity to consume is a).75 b).8 c).9 d) can t be determined 27. Given the numbers above, the equilibrium GDP for this economy will be. a) 800 b) 1200 c) 1600 d) 2000 e) Given the numbers above, the government expenditure multiplier is a).8 b) 1.0 c) 4.0 d) 5.0 e) If the potential GDP for this economy is 1800 and assuming taxes and investment do not change, the government could achieve full employment by a) increasing government spending by 200 b) increasing government spending by 100 c) increasing government spending by 40 d) decreasing government spending by 50 e) there is no level of government spending that will achieve full employment. 30. A one dollar increase in government spending will a) have the same effect on equilibrium GDP as would a one dollar tax cut b) have a larger effect on equilibrium GDP than would a one dollar tax cut c) have a smaller effect on equilibrium GDP than would a one dollar tax cut d) have a smaller effect on equilibrium GDP than would a one dollar increase in investment spending, Econ Exam 2 - Page 5 of 8

6 31. If the government replaces the lump sum tax with a 10% tax on income (T =.1Y) a) equilibrium income will increase and the government expenditure multiplier will rise. b) equilibrium income will increase and the government expenditure multiplier will fall. c) equilibrium income will fall and the government expenditure multiplier will rise. d) equilibrium income will fall and the government expenditure multiplier will fall. e) equilibrium income will stay the same and the government expenditure multiplier will fall. 32. If the government replace the lump sum tax with a 10% income tax as described in question 31, the government expenditure multiplier will be a) 4.0 b) 5.0 c) 4.5 d) approximately 3.6 e) approximately Consider a government program that had no other effect but to transfer income from the poor to the rich (e.g. cut welfare payments to the poor and decrease taxes to the rich by an equal amount). In a macro model such as the one used in the above questions, such a program would a) Increase equilibrium GDP if rich and poor people have the same marginal propensity to consume. b) Increase equilibrium GDP if rich people have a higher marginal propensity to consume than do poor people. c) Increase equilibrium GDP if rich people have a lower marginal propensity to consume than do poor people. d) Increase equilibrium GDP now matter what the relative sizes of poor and rich peoples marginal propensities to consume. e) Decrease equilibrium GDP in all cases. 34. A change in which of the following would not lead to a shift in the aggregate supply curve? a) output prices b) the wage rate c) technology and productivity d) available supplies of labor and capital 35. The aggregate demand curve shifts upward when a) There is an decrease in government expenditure b) There is an increase in the tax rate c) There is an increase in autonomous investment spending d) There is an increase in income e) both c) and d) Econ Exam 2 - Page 6 of 8

7 Questions Consider the economy shown in Figure 2. For simplicity you may ignore the foreign sector. The economy is currently in full employment equilibrium at Real GDP = Y 0 and price level P OPEC has recently increased crude oil production which has resulted in a substantial decrease in the price of oil. How would this change be reflected in Figure 2? a) the total expenditure curve will shift up and the aggregate demand curve will shift out to the right. b) the total expenditure curve will not shift but the aggregate demand curve will shift in out to the right. c) the aggregate supply curve will shift out to the right. d) the aggregate supply curve will shift back to the left. 37. What is the most likely effect on the economy of the oil price decrease? a) the economy will experience more inflation and higher unemployment b) the economy will experience higher inflation but lower unemployment. c) inflation and unemployment will both fall d) there will be no effect on prices and output. Figure 2 Econ Exam 2 - Page 7 of 8

8 When you have completed your exam: Print your Name Write your Student ID number (PID) Print your recitation section number (A list of recitation will be on the screen) Section Sign the honor Pledge affirming that you have neither given nor received aid on this exam and have complied with all of the rules of this exam. Signature Tear this form off the back of you exam and turn it in with your answer sheet. You may keep the rest of the exam. Econ Exam 2 - Page 8 of 8