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ECON 545 Business Economics

Week 8 Final Exam All Sets A+
Complete Answer
ECON 545 Business Economics Week 8 Final Exam All Sets A+ Complete Answer
Set 1
1. Question : (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
and market supply have both increased recently. 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 up in price, and your costs of production increase. What new
decisions will you make regarding production levels and pricing for your Widget facility?
(TCO B) Here is some data on the demand for marshmallows:
Price Quantity
$10 100
$ 8 300
$ 6 700
$ 4 1300
$ 2 2200
(a.) (15 points) Is demand elastic or inelastic in the $6-$8 price range? How do you know?

(b.) (15 points) If the table represents the demand faced by a monopoly firm, then what is
that firms marginal revenue as it increases output from 1300 units to 2200 units? Show all
work. (Be careful here!)
3. Question : (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 $500 100 $700
2 1000 280 1150
3 1500 440 1440
4 2000 540 1570
5 2500 600 1670
6 3000 630 1710
7 3500 640 1730
(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.
4. Question : (TCO C) Answer the next questions on the basis of the following cost data for
a firm in pure competition:
OUTPUT TFC - TVC
0 $100.00 0.00
1 100.00 70.00
2 100.00 120.00
3 100.00 150.00
4 100.00 200.00
5 100.00 270.00
6 100.00 360.00
(a.) (15 points) Refer to the above data. If the product price is $45 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 $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.
5. Question : (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 below:

Q TVC Price
1,000 $15,000 $25
2,000 20,000 24
3,000 30,000 23
4,000 50,000 22
5,000 80,000 20
(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 $48,000 per
month? Explain.
6. Question : (TCO F)
(a.) (20 points) Suppose nominal GDP in 1999 was $200 billion, and in 2001, it was $270
billion. The general price index in 1999 was 100 and in 2001 it was 150. 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 270 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 17 million, and
the number of unemployed is 10 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?
7. Question : (TCO G and H)
(a.) (15 points) Suppose your local Congress representative suggests that the federal
government intervenes in the gasoline market to stop runaway price increases. Would you
say that this view basically supports the Keynesian or the Monetarist school of thought?
Why? What position would the opposing school of thought take on this issue? (Be brief
you can answer this in 2 or 3 brief paragraphs).
(b.) (10 points) Any change in the economys 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 90 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 $20 billion.
8. Question : (TCO G)
(a.) (20 points) 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.) (20 points) What is the discount rate in the banking system? Explain how the Fed
manipulates this rate to achieve macroeconomic objectives.
9. Question : (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.) (10 points) Would this event cause the demand for the dollar to increase or decrease
relative to the demand for the pound? Why?
(b.) (10 points) Has the dollar appreciated or depreciated in value relative to the pound?
(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 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.) (10 points) 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?
Set 1 Additional Questions:
Question 2. (TCO B) Suppose the governor of California has proposed increasing toll rates
on Californias 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.
a. Using the midpoint formula, calculate the price elasticity of demand for Scenario 1 and
Scenario 2. (10 points)
b. 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)
c. Is demand under Scenario 1 and under Scenario 2 price elastic, inelastic, or unit elastic.
Briefly explain. (4 points)
(Points : 30)
Question 3. 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 $500 100 $700

2 1000 280 1150

3 1500 440 1440
4 2000 540 1570
5 2500 600 1670
6 3000 630 1710
7 3500 640 1730
(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)
Question 4. 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)
Question 5. 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.
Q 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)
Question 6. 6. (TCO F)
(a.) (20 points) Suppose nominal GDP in 1999 was $200 billion, and in 2001, it was $270
billion. The general price index in 1999 was 100 and in 2001 it was 150. 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 270 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 17 million, and
the number of unemployed is 10 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)
Question 7. 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 economys 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)
Question 8. 8. (TCO G)
(a.) Reserve requirement for banks is set at 5%. Your firm withdraws $42,000 on its line of
credit at the Security Bank to purchase equipment for expansion. The equipment vendor
deposits the amount that he receives from you at his bank, The Highland Bank.
(10 points) By how much has each banks excess reserves changed as a result of your
withdrawal and expenditure?

(10 points) What is the maximum amount of new money that can be created in the banking
system as a result of your purchase? Show all work.
(b.) (10 points) Suppose that the Security Bank discovers its reserves will temporarily fall
slightly short of those legally required. How might it remedy this situation through the
Federal Funds market?
(10 points) Explain how the Fed manipulates the Federal Funds Rate in order to achieve
macroeconomic objectives.
(Points : 40)
Question 9. 9. (TCO E and I) 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.
(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. interest rates fell
as they have in this example, would you plan to expand production or cut back? Why?
(Points : 40)
Set 2
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 increased and market supply has recently decreased. 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 up 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) Here is some data on the demand for lettuce:
Price Quantity
$10 100
$ 8 120
$ 6 140
$ 4 160
$ 2 180
(a.) (15 points) Is demand elastic or inelastic in the $6-$8 price range? How do you know?
(b.) (15 points) If the table represents the demand faced by a monopoly firm, then what is
that firms marginal revenue as it increases output from 160 units to 180 units? Show all
work. (Be careful here!) (Points : 30)
. (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 $200 50 $350
2 400 140 675
3 600 220 1120
4 800 270 1570
5 1000 300 1865
6 1200 315 2070
7 1400 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) 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 Johns firm operating in pure competition:
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
(a.) (15 points) Refer to the above data. If the product price is $60, 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 $55 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 $30,000 per month and her Total
Variable Costs (TVC) as a function of output Q are given below:
Q TVC Price
3,000 $ 5,000 $5
13,000 25,000 4
23,000 50,000 3
33,000 80,000 2
43,000 120,000 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 $50,000 per
month? Explain.
6. (TCO F)
(a.) (20 points) Suppose nominal GDP in 1999 was $200 billion, and in 2001, it was $270
billion. The general price index in 1999 was 100 and in 2001 it was 150. 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 270 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 17 million, and
the number of unemployed is 10 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) Suppose your local Congress representative suggests that the federal
government intervenes in the gasoline market to stop runaway price increases. Would you
say that this view basically supports the Keynesian or the Monetarist school of thought?

Why? What position would the opposing school of thought take on this issue? (Be brief
you can answer this in 2 or 3 brief paragraphs).
(b.) (10 points) Any change in the economys 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 90 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 $20 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)
Set 3

1. Suppose you are hired to manage a samll manufacturing facility that produces widgets
A. You know form data collected on the widget marekt that the market demand has recently
increased and mareket supply has recently decreased. As manager of the facility, what
decison should you make regarding production levels and pricing for you wideget facility?
Remember that supply and deman are about the makert 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 follwing the supply and demand changes in (a) a subsitute good goes
up in price, and your cost of product decrease. What decisons will you make regarding
production levels and pricing for your widget facility?
2. Here is data on the demand for lettuce
Price Quantity
10$ 100
8$ 120
6$ 140
4$ 160
2$ 180
A. Is demand elastic or inelastic in the 6-8$ price range? How do you know?
(b.) (15 points) If the table represents the demand faced by a monopoly firm, then what is
that firms marginal revenue as it increases output from 160 units to 180 units? Show all
work. (Be careful here!) (Points : 30)
3.A Suppose nominal GDP in 1999 was 100billion and in 2001 it was 260billion. The
general price index in 199 was 100, and in 2001 it was 180. Between 1999 and 2001, the
real GDP rose by what present?
4. Suppose your local congress representive suggest that the federal government intervenes
in the gasonline market to stop runaway price increases. Would you say that this view
bsically supports the Keynesin or Monetarist school of thought? Why? What postion would
the opposting school of though tke on this issue?
b. Any change in the economys total expenditures would be expected to translate into
change in GDP that was larger than the initial change in spending. This phenomenon os
known as the multiplier effect. Explain the multipler effect works.
c. you are told that 90 cents our of every extra dollar pumpled into the econoomy goes
toward consumption (as opposed to saving) Estimate the GDP impact of positive change in
govenment spending that equals 20 billion.
5. Reserve requirment for banks is set at 5%. Your firm depositis it profits of 28,000 inot
the Third National Bank.
A. How much excess reserve does your deposit generate for the bank?
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 federal funds rate in the banking system?
Explain how the fed manipulates this rate in order to achieve macroeonmic objectives?
6. Let the exchange rate be defined as the number of dollars per Japanese yen. Assume
there is a increase in U.S interest ratres relative to that of Japan.

A. Would this event cause the demand for the dollar to increase or decrease relative to the
demand for the yen? Why?
b.) Has the dollar appreciatred or depreciated in value relative to the yen?
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? Illustrate by showing the price of a U.S e reader in japan before and after the
change in the exchange rate.
d.) If you had a business exporting good to japan, and u.s interest rate rose as they have in
this example, would you plan to expand production or cut back? Why
1. A software producer has fixed cost of 20,000 per month and her total variable costs TVC
as a function fo output Q are given below. Complete the table (TC, MC, TR, and MR)
Q 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. If software can only be produced in the quantities above, what should be the production
level if the producer operates in a monopolistic cometitive market whre the price of
software at each possible quantity is also listed above? Why? (show work)
B. What should be the production level if fixed cost rose to 70,000 per month? Explain
1. A software producer has fixed cost of 20,000 per month and her total variable costs TVC
as a function fo output Q are given below. Complete the table (TC, MC, TR, and MR)
Q 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. If software can only be produced in the quantities above, what should be the production
level if the producer operates in a monopolistic cometitive market whre the price of
software at each possible quantity is also listed above? Why? (show work)
B. What should be the production level if fixed cost rose to 70,000 per month? Explain

ECON 545 Business Economics

Week 8 Final Exam All Sets A+
Complete Answer