ECON 544
1.
(TCO A) Suppose you are hired to manage a small manufacturing facility that produces Widgets.
(a.) (15 points) You know from data collected on the Widget Market that market demand and market supply have both increased recently. As manager of the facility, what decisions should you make regarding production levels and pricing for your Widget facility?
Remember that supply and demand are about the market supply and market demand, which is bigger than your own company. You are being given data on supply and demand for the whole market and are being asked what effect that has on you as a small part of that market.
Question 2. 2. (TCO B) Here is some data on the demand for lettuce:
Price Quantity
$10 100
$ 8 120
$ 6 140
$ 4 160
$ 2 180
(a.) (15 points) Is demand elastic or inelastic in the $6-$8 price range? How do you know?
(b.) (15 points) If the table represents the demand faced by a monopoly firm, then what is that firm- marginal revenue as it increases output from 160 units to 180 units? Show all work. (Be careful here!) (Points : 30)
Scenario 2:
Suppose the governor of California has proposed increasing toll rates on California's toll roads, and has presented two possible scenarios to implement these increases. Following are projected data for the two scenarios for the California toll roads:
Scenario 1: Toll rate in 2012: $10.00. Toll rate in 2016: $22.50
For every 100 cars using the toll roads in 2012, only 81.6 cars will use the toll roads in 2016.
Scenario 2:
Toll rate in 2012: $10.00. Toll rate in 2016: $17.50
For every 100 cars using the toll roads in 2012, only 96.2 cars will use the toll roads in 2016.
Using the midpoint formula, calculate the price elasticity of demand for Scenario 1 and Scenario 2. (10 points)
Assume 10,000 cars use California toll roads every day in 2012. What would be the daily total revenue received for each scenario in 2012 and in 2016? (6 points)
Q. 3
Question 3. 3. (TCO C) You have been hired to manage a small manufacturing facility whose cost and production data are given in the table below.
Total Total Workers Labor Cost Output Revenue
1 $300 50 $350
2 600 140 675
3 900 220 1120
4 1200 270 1570
5 1500 300 1865
6 1800 315 2070
7 2100 320 2170
Workers Total Labor Cost Output Total Revenue Marginal Labor Cost Marginal Product Marginal Revenue
1 300 50 350 300 50 350
2 600 140 675 300 90 325
3 900 220 1120 300 80 445
4 1200 270 1570 300 50 450
5 1500 300 1865 300 30 295
6 1800 315 2070 300 15 205
7 2100 320 2170 300 5 100
(a.) (6 points) What is the marginal product of the second worker?
(b.) (6 points) What is the marginal revenue product of the fourth worker?
(c.) (6 points) What is the marginal cost of the first worker?
(12 points) Based on your knowledge of marginal analysis, how many workers should
(d.) you hire? Explain you answer. (Points : 30)
Question 4. 4. (TCO C) Answer the next questions (Parts A and B) on the basis of the following cost data for a firm operating in pure competition:
OUTPUT ------ TFC ---------- TVC
0 $500.00 0.00
1 500.00 70.00
2 500.00 130.00
3 500.00 170.00
4 500.00 200.00
5 500.00 300.00
6 500.00 510.00
(a.) (15 points) Refer to the above data. If the product price is $185 at its optimal output, will the firm realize an economic profit, break even, or incur an economic loss? How much will the profit or loss be? Show all calculations.
(15 points) Refer to the above data. If the product price is $200 at its optimal output, will
the firm realize an economic profit, break even, or incur an economic loss? How much
(b.) will the profit or loss be? Show all calculations. (Points : 30
Question 5. 5. (TCO D) A software producer has fixed costs of $120,000 per month and her Total Variable Costs (TVC) as a function of output Q are given below. Complete the table (TC, MC, TR, and MR), then answer Parts A and B.
Q TVC Price
1,000 $115,000 $125
2,000 120,000 74
3,000 130,000 55
4,000 150,000 44
5,000 180,000 30
(a.) (15 points) If software can only be produced in the quantities above, what should be the production level if the producer operates in a monopolistic competitive market where the price of software at each possible quantity is also listed above? Why? (Show all work.)
(b.) (15 points) What should be the production level if fixed costs rose to $160,000 per month? Explain.
(Points : 30)
Question 5. 5. (TCO D) A software producer has fixed costs of $20,000 per month and her Total Variable Costs (TVC) as a function of output Q are given below. Complete the table (TC, MC, TR, and MR), then answer Parts A and B.
Q TVC Price
2,000 $5,000 $25
4,000 7,000 22
6,000 18,000 20
8,000 33,000 10
10,000 50,000 1
(a.) (15 points) If software can only be produced in the quantities above, what should be the production level if the producer operates in a monopolistic competitive market where the price of software at each possible quantity is also listed above? Why? (Show all work.)
(b.) (15 points) What should be the production level if fixed costs rose to $70,000 per month? Explain.
(Points : 30)
Question 6. 6. (TCO F)
(a.) (20 points) Suppose nominal GDP in 1999 was $200 billion, and in 2001, it was $270 billion. The general price index in 1999 was 100 and in 2001 it was 150. Between 1999 and 2001, the real GDP rose by what percent?
(b.) Use the following scenario to answer questions (b1) and (b2). In a given year in the United States, the total number of residents is 270 million, the number of residents under the age of 16 is 38 million, the number of institutionalized adults is 15 million, the number of adults who are not looking for work is 17 million, and the number of unemployed is 10 million.
(b1.) (5 points) Refer to the data in the above scenario. What is the size of the labor force in the United States for the given year?
(a.) (15 points) Suppose your local Congress representative suggests that the federal government should NOT intervene in the baseball ticket market to stop runaway price increases. Would you say that this view basically supports the Keynesian or the Monetarist school of thought? Why? What position would the opposing school of thought take on this issue? (Be brief -- you can answer this in 2 or 3 brief paragraphs).
(b.) (10 points) Any change in the economy- total expenditures would be expected to translate into a change in GDP that was larger than the initial change in spending. This phenomenon is known as the multiplier effect. Explain how the multiplier effect works.
8. (TCO G)
(a.) Reserve requirement for banks is set at 5%. Your firm deposits its profits of $42,000 into the Third National Bank.
(10 points) How much excess reserve does your deposit generate for the bank?
Excess reserves= 95% of 42000= 39900
(10 points) What is the maximum amount of new money that can be created in the banking system as a result of this deposit? Show all work.
the new money created = (1/.05)*42000=840000
(b.) (10 points) What is the Federal Funds Rate in the banking system?
0.25 currently.
(10 points) Explain how the Fed manipulates this rate in order to achieve macroeconomic objectives. (Points : 40)
Question 9. 9. (TCO E and I) Let the exchange rate be defined as the number of dollars per Japanese yen. Assume that there is a decrease in U.S. interest rates relative to that of Japan.
(a.) (10 points) Would this event cause the demand for the dollar to increase or decrease relative to the demand for the yen? Why?
(b.) (10 points) Has the dollar appreciated or depreciated in value relative to the yen?
(c.) (10 points) Does this change in the value of the dollar make imports cheaper or more expensive for
Americans? Are American exports cheaper or more expensive for importers of U.S. goods in Japan?
Illustrate by showing the price of a U.S. e-reader in Japan before and after the change in the exchange
rate.
Effect on Japanese imports. Let us import an e reader from USA.
The depreciation of the $ makes US exports cheaper and US imports expensive.
Assume the price was 100 $ in US and E= 1$/Yen. So its price in Japan = 100 Yen.
Now let E= 1.5$/Yen. The same product is at 100$ in USA but now requires 100/1.5= 66.67Yen. The
price of this import of Japan has fallen.
(d.) (10 points) If you had a business exporting goods to Japan, and U.S. interest rates fell as they have in
this example, would you plan to expand production or cut back? Why? (Points : 40)
USA 
India