# ECON 545 FINAL EXAM

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 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.) (15 points) 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 Widget facility?
(Points : 30)
2. (TCO B) 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.
1. Using the midpoint formula, calculate the price elasticity of demand for Scenario 1 and Scenario 2. (10 points)
2. 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)
3. Is demand under Scenario 1 and under Scenario 2 price elastic, inelastic, or unit elastic. Briefly explain. (4 points)
(Points : 30)
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

(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.   (Points : 30)
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.

(b.) (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 will the profit or loss be? Show all calculations.
(Points : 30)

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.

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)
6. (TCO F)

(a.) (20 points) 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.)   (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?
(Points : 30)
7. (TCO G and H)

(a.) (15 points) What are the arguments for and against the use of fiscal policy to fight inflation, lower unemployment, and raise GDP (Keynesian and Monetarist)?

(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 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.
(Points : 40)
8. (TCO G)

(a.) Reserve requirement for banks is set at 5%. Your firm deposits its profits of \$28,000 into the Third National Bank.

(10 points) How much excess reserve does your deposit generate for the bank?

(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.

(b.) (10 points) What is the Federal Funds Rate in the banking system?

(10 points) Explain how the Fed manipulates this rate in order to achieve macroeconomic objectives.
(Points : 40)
9. (TCOs E and I) Let the exchange rate be defined as the number of dollars per Japanese yen. Assume that there is a relatively lower rate of inflation in the U.S. 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.

(d.) (10 points) If you had a business exporting goods to Japan, and U.S. inflation fell as discussed above in this example, would you plan to expand production or cut back? Why?
(Points : 40)
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