ECON 545 Week 8 Final
TCO A) Suppose you are hired to manage a small
manufacturing facility that produces Widgets.
(a.) You know from data collected on the Widget
Market that market demand has recently
decreased and market supply has recently
increased. 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.) Now, suppose that following the supply and
demand changes in (a), a substitute good goes
down in price, and your costs of production
decrease. What new decisions will you make
regarding production levels and pricing for your
(TCO B) Here is some data on the demand for
(a.) Is demand elastic or inelastic in the $6-$8
price range? How do you know?
(b.) If the table represents the demand faced by a
monopoly firm, then what is that firm’s
marginal revenue as it increases output from 1700
units to 2300 units? Show all work.
TCO C) You have been hired to manage a small
manufacturing facility which has cost and
production data given in the table below.
Workers Labor Cost
(a.) What is the marginal product of the second
(b.) What is the marginal revenue product of the
(c.) What is the marginal cost of the first
(d.) Based on your knowledge of marginal analysis,
how many workers should you hire? Explain
TCO C) Answer the next questions on the basis of
the following cost data for a firm in pure
OUTPUT —— TFC ———- TVC
(a.) 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.
(b.) Refer to the above data. If the product price
is $100, 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.
(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
(a.) 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
(b.) What should be the production level if fixed
costs rose to $48,000 per month? Explain.
(a.) Suppose nominal GDP in 1999 was $100 billion
and in 2001 it was $260 billion. The
general price index in 1999 was 100, and in 2001
it was 180. 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 230 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 27 million, and the number of unemployed
is 12 million.
(b1.) 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.) Refer to the data in the above Scenario.
What is the unemployment rate in the United
States for the given year?
(TCO G and H)
(a.) What are the arguments for and against the
use of fiscal policy to fight inflation, lower
unemployment, and raise GDP (Keynesian and
(b.) 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
(c.) You are told that 80 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 $10 billion.
(a.) 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.) What is the discount rate in the banking
system, and explain how the Fed manipulates this
rate in order to achieve macroeconomic objectives.
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.) Would this event cause the demand for the
dollar to increase or decrease relative to the
demand for the pound? Why?
(b.) Has the dollar appreciated or depreciated in
value relative to the pound?
(c.) 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.) 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?