Exam Which of the following characteristics of perfect competition does not apply in monopolistic competition?

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1 ECONOMICS Dr. John Stewart October 30, 2000 Exam 2 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. 1. What is true for monopoly that is not true for perfect competition? a) The market demand curve is downward sloping. b) Profit is maximized where MR = MC. c). d) Positive economic profits may be earned in the short run. 2. Which of the following characteristics of perfect competition does not apply in monopolistic competition? a) free entry and exit b) c) numerous participants d) perfect information Information for questions 3-5: Figure 1 shows the marginal cost curve and the average total cost curve for a profit maximizing monopolist. It also shows the market demand curve and the marginal revenue curve. 3. What price and quantity combination will the profit-maximizing monopolist in Figure 1 choose? a) P= 5 and Q = 10 b) P= 12 and Q = 14 c) P= 10 and Q = 18 d) the quantity where MR=MC e) P= 10 and Q = From Figure 1, one can tell from the graph that the monopolist will a) earn an economic profit equal to 70 b) 10 x 15 = 150 c) total cost equal to 50 d) a and b are both correct e) b and c are both correct P Figure 1 5. The market shown in Figure 1 would generate the largest amount of social welfare (assume there are no consumption or production externalities) if a) Consumers were charged a price of 5 and the quantity produced was 10. b) Consumers were charged a price of 8 and the quantity produced was 10. c) Consumers were charged a price of 15 and the quantity produced was 10. d) Where P = MC e) Consumers were charged a price of 8 and the quantity produced was 20. MR MC ATC D Q Econ 10 Exam 2a: Page 1 of 7

2 6. In a market where a firm s activity causes detrimental externalities (e.g. pollution), the perfectly competitive market equilibrium will result in a) b) a smaller output quantity would be socially desirable c) marginal social cost being smaller than marginal private cost. d) All of the answers above are correct. Information for Question 7-8: The table shown below shows information about Pepper s Pizza. Pepper has the following estimates on the production and the price he would have to charge to sell each quantity of output he could produce by hiring different numbers of servers. Assume that servers are the only variable input. # of servers Pizza sold per day Price of pizza Total revenue per MRP L day Suppose that the one server s wage rate is $15 per day, then how many servers does Pepper want to hire? a) 2 b) 3 c) highest value where MRP L still greater than P L d) 5 8. Now suppose that the new minimum wage law is enacted that says that the server should be paid by at least $75 per day. How many servers will Pepper hire? a) highest value where MRP L still greater than P L higher P L b) 3 c) 4 d) 5 9. In a competitive factor market, a profit maximizing firm will purchase the input factor until the marginal revenue product of the last unit of the factor purchased equals a) b) the average cost of the product c) average product of the factor d) the marginal product of the factor 10. If the substitution effect dominates in your labor supply decision, you a) 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 11. A public good is a good a) that can only be produced by government. b) c) that will be over produced by a free market. d) both b) and c) Econ 10 Exam 2a: Page 2 of 7

3 Information for questions 12-14: The table below shows the price of two goods in a typical bundle purchased by a typical consumer in The base year is Price in 1991 ($) Price in 2000 ($) Quantity in bundle (in 1991) Expenditure In 1991 Expenditure in 2000 Good A Good B The CPI for 1991 is a) =100(15000/15000) price index of base year is always 100 b) 120 c) 140 d) The CPI for 2000 is a) 100 b) 120 c) = 100(21000/15000) d) A consumer who had a nominal income of $50,000 in 1991 and $70,000 in 2000 experienced a) a gain in real income of $20,000 b) a loss in real income of $20,000 c) to convert $70,000 of nominal income into real income Real = 70000/1.4= 50,000 d) 40% increase in real income 15. An economy could be considered to be at full employment when a) the unemployment rate is at 0%. b) the structural unemployment rate is 0%. c) d) the frictional unemployment rate is 0% e) everyone who wants a job currently has one. 16. If in a economy 46 million people work, 6 million people do not work and are not looking for work, and 4 million people are not working but are actively looking for work, then the unemployment rate is a) 20% b) 4% c) 12% d) Definition of the unemployment rate = number seeking jobs and not working/ labor force = 4m/(46m +4m)= Which is a cost of unexpected inflation? a) lower real incomes for those with fixed incomes b) higher unemployment c) the harm to people who lent money d) harm to people who borrowed money e) Econ 10 Exam 2a: Page 3 of 7

4 18. Amazon.com, an Internet retailer of books, pays $50,000 to buy a shipment of economics textbooks from a publisher. Is the whole $50,000 purchase included in GDP? a) Yes. b). The $50,000 Amazon spends to buy the books is the purchase of an intermediate good GDP is final goods. c) It depends on how the payment is made. d) Yes, in real but not nominal GDP. e) Yes, in nominal but not real GDP. Information for Questions 19-22: Figure 2 shows the graphic representation of the demand side Macro model discussed in class. Variable names follow the conventions used in class and in the book. In this macro economy there is no foreign trade (exports and imports are both zero so TE=C+I+G) and there are no taxes. C= consumption expenditure I= investment expenditure G= government expenditure 2400 Real Expenditures $ per year Quest C+I TE=C+I+G O 45 TE=GDP C 19. From Figure 2, we can see that the Marginal Propensity to Consume is a).5 b) use any two points to get the slope i.e when income goes from 0 to 600; consumption goes from 200 to 600 C/ Y=.667 c).75 d).8 e) Figure 2 Quest Y*=2400 Real GDP $ = DI 20. In Figure 2 above, the investment expenditure multiplier at work in this economy is a) 2 b) 2.5 c) = 1/(1 - MPC) d) 5 e) The model in Figure 2 assumes that this economy has no international trade so that total expenditures are comprised of consumption (C ), investment (I) and government spending (G). Using the diagram we can see that the sum of government and investment spending does not depend on income and is always a) 200 b) 400 c) d) 1800 e) The equilibrium level of GDP for the macro economy shown in Figure 2 is a) 200 b) 400 c) 600 d) 1800 e) point where TE = C+I+G=Y Econ 10 Exam 2a: Page 4 of 7

5 23. With respect to Fiscal Policy, if the government thought unemployment was too high, it could successfully combat this high unemployment by raising equilibrium GDP. The government could raise equilibrium GDP by a) raising taxes or raising government spending. b). c) raising taxes or lowering government spending. d) cutting taxes or lowering government spending. e) cutting transfer payments to social security recipients. 24. 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 and equal amount). In a macro model such as Figure 2 such a program would a) Increase equilibrium GDP if rich and poor people have the same marginal propensity to consume. b) The slope of the consumption function would be the average MPC of all people where the average would be weighted by home much money people of different MPCs have to spend. If you had two people one with a high MPC and one with a low MPC, the MPC of the economy would depend on how much money each had to spend. c) Increase equilibrium GDP if rich people have a lower marginal propensity to consume than do poor people. d) Increase equilibrium GDP no matter what the relative sizes of poor and rich peoples marginal propensities to consume. e) Decrease equilibrium GDP in all cases.. Information for questions 25-29: 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. 25. Given the numbers above, the equilibrium GDP for this economy will be. (Answers in millions of $) a) 800 b) 1200 c) d) 2000 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 (Answers in millions of $) a) increasing government spending by 200 b) increasing government spending by 100 Econ 10 Exam 2a: Page 5 of 7

6 c) The Government expenditure multiplier is 5 [1/(1-.8)]. Since reaching potential GDP will require adding 200 to equilibrium GDP, 40 of added G will produce the 200 of added GDP needed d) decreasing government spending by 50 e) there is no level of government spending that will achieve full employment. 27. A one dollar increase in government spending will a) have the same effect on equilibrium GDP as would a one dollar tax cut b) The Government expenditure multiplier is 1/(1-MPC) the Tax multiplier is -MPC/(1-MPC) which is smaller. Thus a one dollar tax cut will add less to GDP than will a one dollar increase in government spending. 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, 28. 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) The current equilibrium GDP is 1600 with total taxes at 100. A 10% income tax on 1600 would generate 160 of taxes at a GDP of 1600 so disposable income and consumption would be lower so the income tax equilibrium must be below The lump sum tax government expenditure multiplier is 1/(1-MPC) with an income tax the multiplier becomes 1/(1-(MPC-tMPC) where t is the income tax rate. The income tax Government expenditure multiplier is smaller. e) equilibrium income will stay the same and the government expenditure multiplier will fall. 29. If the government replaces the lump sum tax with a 10% income tax as described in question 25, the government expenditure multiplier will be a) 4.0 b) 5.0 c) 4.5 d) Government expenditure multiplier with an income tax rate of t =1/(1-(MPCtMPC) = 1/(1-(.8-.08) = e) approximately Assume an upward sloping aggregate supply curve and a downward sloping aggregate demand curve then. If nothing else in the economy changes, then the recent sudden and substantial increase in oil prices should cause real GDP to and the price level to. a) raise; fall b) raise; raise c) increase in oil price will shift the aggregate supply curve back causing lower output and higher prices d) fall; fall Econ 10 Exam 2a: Page 6 of 7

7 31. President Clinton has benefitted greatly from presiding over an economy that has had substantial growth and little inflation. Which graph in Figure 3 represents the shifts in aggregate supply and aggregate demand that results in such a favorable macroeconomic outcome? a) 1 b) 2 c) 3 d). You have taken FORM A of the exam. Make sure you print A in the upper right hand margin of your answer sheet before you turn it in. Figure 3 Code Your Recitation number in the first 3 spaces of Sequence Number on the scan sheet 701 M 2:00, Lim 709 M 11:00 Lim 702 M 3:00 Nicoara 710 M 12:00 Lim 703 M 4:00 Nicoara 712 W 4:00 Liu 705 T 10:00 Kahveciogl (Daver) 713 R 10:00 Liu 706 R 2:00 Davis 714 R 11:00 Liu 707 R 1:00 Davis 715 R 4:30 Kahveciogl (Daver) 708 R 3:00 Davis 717 T 11:00 Kahveciogl (Daver) Econ 10 Exam 2a: Page 7 of 7