## (solution) 1) Suppose you are hired to manage a small manufacturing facility

1) Suppose you are hired to manage a small manufacturing facility that produces a particular product.

Part A) You know that you are operating in a monopolistically competitive market, that is, you are a small part of a large market with many competitors in this market. From data collected, you know that market demand has recently decreased and market supply has recently decreased.Name two shift factors/determinants that can cause the market demand to decrease and two shift factors/determinants that can cause the market supply to decrease.

Part B) Now, suppose that the following change occurs: a complimentary good goes down in price. What decisions will you make regarding production levels and pricing for your production facility based ONLY on this change (ignore the changes discussed in part a)? Should you increase or decrease production? Should you increase or decrease price?

2)

Consider the data for two products as shown below. (20 points)

 Quantities Purchased Quantities Purchased Prices Product X Product Y \$6 40 50 \$4 50 80

 Quantities Purchased Quantities Purchased Income Product X Product Y \$30,000 25 20 50,000 10 30

(Part A) Using themidpoint formula, calculate theprice elasticity of demandfor each product andcharacterize each as either an elastic or inelastic good

(Part B) Using themidpoint formula, calculate theincome elasticityfor each product andcharacterize each as either an inferior or normal good.

3) You have been hired to manage a small manufacturing facility whose cost and production data are given in the table below. (20 points)

Workers  Total Labor Cost   Output
Total Revenue 1 \$250      60      \$150 2 \$500     110      \$475 3 \$750     150      \$725 4 \$1,000     180      \$925 5 \$1,250     200      \$1,065 6 \$1,500     210      \$1,195 7 \$1,750     215

\$1,295

Part A) (5 points) What is themarginal productof thesecond worker?.

Part B) (5 points) What is themarginal revenue product (MRP) of thefourth worker?

Part C) (5 points) What is themarginal cost (MC)of thefirst worker?

Part D) (5 points) Based on yourknowledge of marginal analysis,how many workers should you hire?Explain you answer.

4) John operates a small business out of his home and has very little in terms of fixed costs. Answer the next questions (Parts A and B) on the basis of the following cost data for John?s firm operating in pure competition. (20 points)

Output  TFC   TVC

0 \$30.00  \$0.00 1 \$30.00  \$70.00 2 \$30.00  \$120.00 3 \$30.00  \$150.00 4 \$30.00  \$200.00 5 \$30.00  \$270.00 6 \$30.00

\$360.00

(Part A) Refer to the above data. If theproduct price is \$70and John produces as long as MR is equal or greater than MC,how much will the profit or loss be? Show all calculations.

(Part B) Refer to the above data. If theproduct price is \$45, and John produces in order to maximize profits or minimize his losses,how much will the profit or loss be? Show all calculations.

5) Discussstructural, cyclical, frictional, and natural unemployment.

What type offiscal policies or monetary policies are generally recommended toaddress high unemployment? Why?

Which type of unemployment will be most affected by these policies? Why?

6) Answer Parts A and B completely. (30 points)

Part A) (20 points) Suppose nominal GDP in 2012 was \$100 billion and in 2014 it was \$220 billion. The general price index in 2012 was 100, and in 2014 it was 140.

Between 2012 and 2014, the real GDP rose by what percent?

Part B) Use the following labor market scenario to answer the following questions:

In a given year in the United States, the total number of residents is 190 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 5 million.

Part 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?

Part 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) Discuss a scenario in which the use of leading indicators for an industry or firm might improve performance and promote better decision making. In your response, discuss at least three leading indicators.

8) Evaluate the fundamental arguments between Keynesians and Monetarists concerning the level of government involvement in our economy to minimize the impact and stabilize the different stages of the business cycle. (15 points)

Part 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 effect works. (10 points)

Part C) You are told that 90 cents out of every extra dollar pumped into the economy goes toward consumption (as opposed to saving). Including the multiplier effect, estimate the total GDP impact of an autonomous increase in government spending that equals \$8 billion. (15 points) (Points : 40)

9) Let the exchange rate be defined as the number of dollars per Japanese yen. Assume that there is a decrease in U.S. interest rates relative to that of Japan. (30 points)

Part A) Would this event cause the demand for the dollar to increase or decrease relative to the demand for the yen? Why? (5 points)

Part B) Has the dollar appreciated or depreciated in value relative to the yen? (5 points)

Part 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 Japan?  (10 points)

Part D) If you had a business exporting goods to Japan, and U.S. interest rates fell as they have in this example, would you plan to expand production or cut back? Why? (10 points) (Points : 30)

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