ECON 545 Final Exam 1

ECON 545
Final Exam 1

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.
(b.) (15
points) Now, suppose that following the supply and demand changes in (a), a
substitute good goes up in price, and your costs of production increase. What
new decisions will you make regarding production levels and pricing for your
Widget facility?

2. (TCO
B)Here is some data on the demand for marshmallows:………
(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’s marginal revenue as it increases output from 1300 units to 2200
units? Show all work. (Be careful here!)

3. (TCO
C) You have been hired to manage a small manufacturing facility whose cost
and production data are given in the table below…………..
(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?
(d.) (12
points) Based on your knowledge of marginal analysis, how many workers should
you hire? Explain you answer.

4. (TCO
C) Answer the next questions on the basis of the following cost data for a
firm in pure competition:………..
(a.) (15
points) Refer to the above data. If the product price is $45 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.
(b.) (15
points) Refer to the above data. If the product price is $75 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.

5. (TCO D) A software producer has fixed costs
of $18,000 per month and her Total Variable Costs (TVC) as a function of output
Q are given below:………
(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 $48,000 per
month? Explain.

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?(b2.) (5 points) Refer to the data
in the above scenario. What is the unemployment rate in the United States for
the given year?

7. (TCO G
and H) (a.) (15 points) Suppose your local Congress representative suggests
that the federal government intervenes in the gasoline 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’s 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.
(c.) (15
points) You are told that 90 cents out of every extra dollar pumped into the
economy goes toward consumption (as opposed to saving). Estimate the GDP impact
of a positive change in government spending that equals $20 billion.

8. (TCO
G)(a.) (20 points) Third National Bank is fully loaned up with reserves of
$20,000 and demand deposits equal to $100,000. The reserve ratio is 20%.
Households deposit $5,000 in currency into the bank. How much excess reserves
does the bank now have, and 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.
(b.) (20
points) What is the discount rate in the banking system? Explain how the
Fed manipulates this rate to achieve macroeconomic objectives.

9. (TCO E and I) Let the exchange rate be defined as the number
of dollars per British pound. Assume there is a decrease in U.S. interest rates
relative to that of Britain.
(a.) (10 points) Would this event cause the demand for the dollar to increase
or decrease relative to the demand for the pound? Why?
(b.) (10 points) Has the dollar appreciated or depreciated in value
relative to the pound?
(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 Great Britain? Illustrate by
showing the price of a U.S. cell phone in Britain before and after the change
in the exchange rate.
(d.) (10 points) If you had a business exporting goods to Britain, and
U.S. interest rates fell as they have in this example, would you plan to expand
production or cut back? Why?