GM 545 Final Exam Study Guide

1. 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 le els and pricing for your Widget facility! "emem#er that supply and demand are a#out the market supply and market demand, which is #igger than your own company. You are #eing gi en data on supply and demand for the whole market, and are #eing asked what effect that has on you as a small part of that market. (#.) $ow, suppose that following the supply and demand changes in (a), a su#stitute good goes down in price, and your costs of production decrease. What new decisions will you make regarding production le els and pricing for your Widget facility! %. &ere is some data on the demand for marshmallows' (rice *1+ *, *. *0 *% )uantity 1++ -++ /++ 1-++ %%++

(a.) 1s demand elastic or inelastic in the *.2*, price range! &ow do you know! (#.) 1f the ta#le represents the demand faced #y a monopoly firm, then what is that firm3s marginal re enue as it increases output from 1-++ units to %%++ units! Show all work. (4e careful here to determine the marginal re enue per5unit6) -. You ha e #een hired to manage a small manufacturing facility which has cost and production data gi en in the ta#le #elow. Workers 1 % 0 ; . / 7otal 8a#or 9ost *%++ 0++ .++ ,++ 1+++ 1%++ 10++ :utput ;+ 10+ %%+ %/+ -++ -1; -%+ 7otal "e enue *-;+ ./; 11%+ 1;/+ 1,.; %+/+ %1/+

(a.) What is the marginal product of the second worker! (#.) What is the marginal re enue product of the fourth worker! (c.) What is the marginal cost of the first worker! (d.) 4ased on your knowledge of marginal analysis, how many workers should you hire! <=plain you answer. 0. (79: 9) Answer the ne=t >uestions on the #asis of the following cost data for a firm in pure competition' :?7(?7 222222 7@9 2222222222 7A9 + *1++.++ +.++

1 % 0 ; .

1++.++ 1++.++ 1++.++ 1++.++ 1++.++ 1++.++

/+.++ 1%+.++ 1;+.++ %%+.++ -++.++ -B+.++

(a.) "efer to the a#o e data. 1f the product price is */;, at its optimal output, will the firm realiCe an economic profit, #reak e en, or incur an economic loss! &ow much will the profit or loss #e! Show all calculations. (#.) "efer to the a#o e data. 1f the product price is *1++, at its optimal output, will the firm realiCe an economic profit, #reak e en, or incur an economic loss! &ow much will the profit or loss #e! Show all calculations. ;. A software producer has fi=ed costs of *-+,+++ per month and her 7otal Aaria#le 9osts (7A9) as a function of output ) are gi en #elow' ) 7A9 (rice -,+++ * ;,+++ *; 1-,+++ 1;,+++ 0 %-,+++ %,,+++ --,+++ 0%,+++ % 0-,+++ /+,+++ 1 (a.) 1f software can only #e produced in the >uantities a#o e, what should #e the production le el if the producer operates in a monopolistic competiti e market where the price of software at each possi#le >uantity is also listed a#o e! Why! (Show all work). (#.) What should #e the production le el if fi=ed costs rose to *;+,+++ per month! <=plain. .. (a.) Suppose nominal DE( in 1BBB was *1++ #illion and in %++1 it was *%/+ #illion. 7he general price inde= in 1BBB was 1++ and in %++1, it was 1;+. 4etween 1BBB and %++1, the real DE( rose #y what percent! (#.) ?se the following scenario to answer >uestions (#1.) and (#%.). 1n a gi en year in the ?nited States, the total num#er of residents is 1/+ million, the num#er of residents under the age of 1. is -, million, the num#er of institutionaliCed adults is 1; million, the num#er of adults who are not looking for work is 1/ million, and the num#er of unemployed is 1+ million. (#1.) "efer to the data in the a#o e Scenario. What is the siCe of the la#or force in the ?nited States for the gi en year! (#%.) "efer to the data in the a#o e Scenario. What is the unemployment rate in the ?nited States for the gi en year! /. a.) Suppose your local 9ongress representati e suggests that the federal go ernment inter enes in the gasoline market to stop runaway price increases. Would you say that this iew #asically supports the Feynesian or the Monetarist school of thought! Why! What position would the opposing school of thought take on this issue! (4e #rief 22 you can answer this in % or - #rief paragraphs). (#.) Any change in the economy3s total e=penditures would #e e=pected to translate into a change in DE( that was larger than the initial change in spending. 7his phenomenon is known as the multiplier effect. <=plain how the multiplier effect works.

(c.)You are told that B+ cents out of e ery e=tra dollar pumped into the economy goes toward consumption (as opposed to sa ing). <stimate the DE( impact of a positi e change in go ernment spending that e>uals *%+ #illion. ,. a.) "eser e re>uirement for #anks is set at ;G. Your firm deposits its profits of *%,,+++ into the 7hird $ational 4ank. &ow much e=cess reser e does your deposit generate for the #ank! What is the ma=imum amount of new money that can #e created in the #anking system as a result of this deposit! Show all work. (#.) What is the @ederal @unds "ate in the #anking system! <=plain how the @ed manipulates this rate in order to achie e macroeconomic o#Hecti es. B. 8et the e=change rate #e defined as the num#er of dollars per 4ritish pound. Assume there is an increase in ?.S. interest rates relati e to that of 4ritain. (a.) Would this e ent cause the demand for the dollar to increase or decrease relati e to the demand for the pound! Why! (#.) &as the dollar appreciated or depreciated in alue relati e to the pound! (c.) Eoes this change in the alue of the dollar make imports cheaper or more e=pensi e for Americans! Are American e=ports cheaper or more e=pensi e for importers of ?.S. goods in Dreat 4ritain! 1llustrate #y showing the price of a ?.S. cell phone in 4ritain, #efore and after the change in the e=change rate. (d.) 1f you had a #usiness e=porting goods to 4ritain, and ?.S. interest rates rose as they ha e in this e=ample, would you plan to e=pand production or cut #ack! Why!