GM 545 Practice Final Answer Key

SA SA 1.As the manager of a factory, what would you do regarding pricing and production if: a. There is an increase in supply? S, supply shifts right, P, price falls…..Q increases b. there is a decrease in supply and a decrease in demand? We know a simultaneous decrease in supply & demand results in an decrease in Q. Change in P is indeterminent. c. The price of a substitute good rises and your labor costs rise?? D demand shifts far right, S supply shifts left. P price definitely goes up, don’t change Q

2. (TCO B) The following table shows part of the demand for tickets to a local sporting event: Price(P)...Quantity(Q) (2 pts.) Is demand elastic in the $3 - $6 price range? Ed = ∆ Q = = -100 = ( )/2 200_______ = < 1.0 = inelastic ∆ P = $6-$3 = 3 = 0.67 ($6 +$3)/2 $4.50 (4 pts.) Ed = 0.8 in the $6 - $10 price range. In this range of demand, by what percentage would quantity demanded change if price changes by 5 percent? Ed = ∆Q/ ∆P = 0.8 ∆Q = Ed x ∆P = 0.8 X 0.05 = 0.04 = 4% (4 pts.) Price falls from $15 to $10. Does total revenue (TR) increase, decrease, or remain the same? TR($15) = $15 X 40 = $600 TR($10) = $10 X 100 = $1000 i.e Elastic since TR increases when P falls

3. (TCO C) You have been hired to manage a small manufacturing facility which has cost and production data given in the table below. Total Total Workers Labor Cost Output Revenue 1 $ $ (a.) What is the marginal product of the second worker? MP = ∆Q/∆L= /1 = 100 (b.) What is the marginal revenue product of the fourth worker? MRP = ∆ TR = $1600-$1200 = $400 (c.) What is the marginal cost of the first worker? MC = ∆Lcost/∆L = $200 - $0 = $200 (d.) Based on your knowledge of marginal analysis, how many workers should you hire? Explain you answer. MC = $200 so where is rising MRP > = MC? #4 MC = $200 MRP = $400 #5 MC = $200 MRP = $150 so stop at #4

4. ( TCO C) Answer the next question on the basis of the following cost data for a purely competitive seller: Total Product TFC TVC 0 $50 $ Refer to the above data. If the product price is $80, 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 MC = ∆ TVC Q= 0 MC = $0 1 $80- $0 = $ = = = = = 90 At Q=5 MR =80, MC = $70 <MR TR = 5 X $80 = $400, TC = = $320 P = $80 Q=6 MR = 80, MC=$90 > MR TR = 6 X $80 = $480,TC= = $410 P = $70

5. (TCO D) A handbag producer has fixed costs of $20,000 per month and her Total Variable Costs (TVC) as a function of output Q are given below: Q TVC Price 5,000 $ 6,000 $9 15,000 16, ,000 30, ,000 46, ,000 66,000 1 (a)If it 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). MC = ∆ TVC /∆Q MR = ∆TR/∆Q Q 5000 = MC = $6000/5000 = $1.20 MR = $45000/5000 = $ MC = $10000/10000= $1.00 MR = $60000/10000 = MC = $14000/10000 = $1.40 MR = $20000/10000= MC = $16000/10000= $1.60 MR = $(20000)/10000= ($2.00) MC= $20000/10000= $2.00 MR = $(60000)/10000= ($6.00) At Q = 25,000 MC= $1.40 MR = $2.00 MC<MR YES TR = $125m TC = $50m Profit = $75m = 35,000 MC = $1.60 MR = ($2.00) MC>MR NO! TR= $105m TC = $66m Profit = $39m (b.) What should be the production level if fixed costs rose to $30,000 per month? Explain. It would be the same, Total revenue is greater than Total Variable costs in both cases

6. (TCO F) Suppose nominal GDP in 2005 was $10 trillion and in 2006 it was $14 trillion. The general price index in 2005 was 100 and in 2006 it was 110. Between 2005 and 2006 Real GDP rose by what percent? NomGDP $14B ÷1.10 = Real GDP = $12.72B Pct change = $12.72÷10 = 1.272, subtract 1 =.272 = %

7.In a given year in the United States, the total population is 300 million, the number of residents under the age of 16 is 50 million, the number of institutionalized adults is 20 million, the number of adults who are not looking for work is 30 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? 300 – ( ) = 200 Labor force (b2.) Refer to the data in the above Scenario. What is the unemployment rate in the United States for the given year? UE rate = UE/ Labor force = 12/200 = 0.06 = 6%

8. (TCO G) (a.) First National Bank is fully loaned up with reserves of $40,000 and demand deposits equal to $200,000. The reserve ratio is 20%. Households deposit $10,000 in currency into the bank. How 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. Money Multiplier = 1/ Reserve Ratio = 1/.20 = 5X Initial Deposit X Money Mult = change in MS $10,000 X 5 = $50,000 Initial Dep + New Money = Change in MS $10,000 (+ $40,000) = + $50,000 (b.) What is the fed funds rate in the banking system, and explain how the Fed manipulates this rate in order to achieve macroeconomic objectives.

9. Explain the difference between the Keynesian and Monetarist (Classical) economic schools of thought regarding Government regulation of the economy. Keynesians believe you should use fiscal & monetary policy to help manage the economic cycles. Classical or monetarists believe you should let the economy move by itself & the market system. The Fed should only grow the Money supply by as much as real economic growth. 10. Explain the Spending Multiplier effect. If the savings rate is 20%, what is the spending multiplier? How much would in increase in Government spending of $10 billion change GDP? Spending multiplier (Ms) = 1/MPS = 1/.20 = 5X Change in GDP = ∆Govt spending X Ms = $10B X 5 = $50B