SL 151������������������������������������������������������������������ Name __________________________________________________ CM ______

Bremmer I����������������������������������������������������������� May 15, 2003

 

������������������������������������������������������������������������������ Third In-Class Exam - - Chapters 7, 8, 11 - 14

 

Part I.Multiple Choice (3 points each).Indicate the best answer for each question in the space provided.

 

___ 1.���� A pure monopolist would maximize total revenue if it produced that output where:

A.��� P = MC.��������� ������� D.��� P = ATC.

B.��� MR = MC.������������ E.���� MC = ATC.

C.��� MR = 0.

 

___ 2.���� In the long run, a monopolist=s economic profit:

A.��� must be zero.�������� ������� C.��� must be negative.

B.��� must be positive.��������� D.��� may be greater than or equal to zero.

 

___ 3.���� A pure monopolist should never produce in the:

A.��� segment of its demand curve where the price elasticity of demand is greater than one.

B.��� inelastic segment of its demand curve because it can always increase total revenue by more than it increases total cost by reducing price.

C.��� inelastic segment of its demand curve because it can increase total revenue and reduce total cost by increasing price.

D.��� elastic segment of its demand curve because it can increase total revenue and reduce total cost by lowering price.

E.���� short run if price is less than average total cost.

 

___ 4.���� In response to a cost-reducing technological breakthrough in the production of its product, a profit-maximizing monopolist will normally:

A.��� increase price and increase output.��������� D.��� decrease price and increase output.

B.��� decrease price and decrease output.��������������� E.���� charge the same initial price and produce the same, initial output.

C.��� increase price and decrease output.

 

___ 5.���� Printers whose skills are no longer in demand because of technological changes in typesetting and printing, and who are unemployed as a result, are examples of:

A.��� seasonal unemployment.������������������� C.��� cyclical unemployment.

B.��� frictional unemployment.������������������� D.��� structural unemployment.

 

___ 6.���� If a number of workers who have been looking for work for a long time give up their search, but they are still willing and able to work , this:

A.��� reduces the size of the labor force.���������������������������������������������������������� D.��� Answers A, B, and C.

B.��� reduces the number of those considered to be unemployed.�������������� ������� E.���� Only answers A and B.

C.��� unambiguously reduces the unemployment rate.

 

___ 7.���� If real GDP falls from one period to another, we can conclude that:

A.��� deflation occurred.

B.��� inflation occurred.

C.��� nominal GDP fell.

D.��� None of the above necessarily occurred.

 

___ 8.���� If the consumer price index (CPI) rises from 300 to 333 in a particular year, the rate of inflation in that year is:

A.��� 10 percent.������������ B.��� 91 percent.������������ C.��� 33 percent.������������ D.��� 11 percent.������������ E.���� 333 percent.

 

___ 9.���� The short-run supply curve for a perfectly competitive firm is:

A.��� that portion of the MC curve above the ATC curve.������������ D.��� the upward sloping section of the ATC curve.

B.��� that portion of the MC curve above the AVC curve.������������ E.���� the upward sloping section of the AVC curve.

C.��� the upward-sloping section of the MC curve.


___ 10.If a competitive industry has a long-run industry supply curve that is upward sloping, then:

A.��� it is a constant-cost industry.������������������� D.��� input prices remain constant as firms enter the industry in the long-run.

B.��� it is a decreasing-cost industry.����������������������� E.���� Both A and D.

C.��� it is an increasing-cost industry.

 

___ 11.Assume a decreasing-cost, perfectly competitive industry is in long-run equilibrium.Given an increase in demand:

A.��� the new long-run equilibrium price will be greater than the initial long-run equilibrium price.

B.��� the new long-run equilibrium price will be equal to the initial long-run equilibrium price.

C.��� the new long-run equilibrium price will be less than the initial long-run equilibrium price.

D.��� firms would exit the industry in the long run.

E.���� firms would incur losses in the short run.

 

___ 12.If every firm in a perfectly competitive, constant-cost industry are incurring short-run losses, then in the long run:

A.��� the market demand curve will shift to the right.��������������������� D.��� the short-run industry supply curve will shift to the left.

B.��� the market demand curve will shift to the left.���������������� ������� E.���� the ATC, AVC, and MC curves of the typical firm shift up.

C.��� the short-run industry supply curve will shift to the right.

 

___ 13.Everything else held constant, a decrease in the price level will:

A.��� increase the demand for loanable funds, causing an increase in the interest rate and an increase in investment spending.

B.��� decrease the demand for loanable funds, causing a decrease in the interest rate and a decrease in investment spending.

C.��� increase the supply of loanable funds, causing a decrease in the interest rate and an increase in investment spending.

D.��� decrease the supply of loanable funds, causing an increase in the interest rate and a decrease in investment spending.

 

___ 14.Holding everything else constant, an increase in expected inflation will:

A.��� cause a decrease in the demand for loanable funds.

B.��� cause an increase in the supply of loanable funds.

C.��� cause a decrease in the nominal interest rate.

D.��� All of the above are true.

E.���� None of the above are true.

 

___ 15.Holding everything else constant, an increase in real GDP will cause:

A.��� the demand for loanable funds to increase.

B.��� the supply of loanable funds to increase.

C.��� the nominal interest rate to increase if the shift in the demand for loanable funds is greater than the shift in the supply of loanable funds.

D.��� All of the above are true.

E.���� None of the above are true.

 

Part II.Short-answer questions (55 points total).Give a concise, but complete answer for each of the following questions.

 

1.���� Define the four components of GDP.(8 points)

 

2.���� Suppose a decreasing-cost, perfectly competitive industry is in long-run equilibrium.Using two graphs - - one showing market demand and supply and the other showing the average cost curves of the typical firm - - illustrate and describe how a decrease in the demand affects the industry both in the short and long-run.(10 points)

 

3.���� Using the loanable funds market, illustrate and describe how an increase in the government budget deficit affects the nominal interest rate.Using your diagram, explain the concept of crowding out.(10 points)

 

4.���� Table 1 below shows the demand curve and the cost curve for a pure monopolist.(17 points)

 

 

Demand Conditions

 

Cost Conditions

 

Quantity

Demanded

 

 

Price

 

Total

Revenue

 

Marginal

Revenue

 

 

Quantity

 

Total

Cost

 

Marginal Cost

 

0

 

$34

 

 

 

- - -

 

0

 

$20

 

- - -

 

1

 

32

 

 

 

 

 

1

 

36

 

 

 

2

 

30

 

 

 

 

 

2

 

46

 

 

 

3

 

28

 

 

 

 

 

3

 

50

 

 

 

4

 

26

 

 

 

 

 

4

 

54

 

 

 

5

 

24

 

 

 

 

 

5

 

56

 

 

 

6

 

22

 

 

 

 

 

6

 

64

 

 

 

7

 

20

 

 

 

 

 

7

 

80

 

 

 

8

 

18

 

 

 

 

 

8

 

100

 

 

 

9

 

16

 

 

 

 

 

9

 

128

 

 

 

A.��� Fill in the values in Table 1 for the total revenue, marginal revenue, and marginal cost of each output.(9 points)

 

B.��� Using the concepts of marginal revenue and marginal cost, determine the profit-maximizing output and price.Why Explain your answer.What are the firm=s profits?(5 points)

 

C.��� Assume the monopolist=s fixed cost increase from $20 to $90.What would be the short-run profit-maximizing price and output in this case?Everything else constant, what would happen in the long run?(3 points)

 

5.���� If AVC < P < ATC, a profit-maximizing (loss-minimizing), perfectly competitive firm will produce in the short run even though it incurs a loss.Using the short-run average cost curves of a typical firm, illustrate and describe how such a situation would occur.Using your diagram, explain why the loss-minimizing, competitive firm wouldn=t shut down in the short run if AVC < P < ATC.(10 points)