Micro Free Response Questions

1.Assume that in a perfectly competitive market, a firm's costs and revenues are

  • marginal cost = average variable cost at $20
  • marginal cost = average total cost at $30
  • marginal cost = average revenue at $25

(a) How will this firm determine the profit maximizing level of output?

(b) What price will this firm charge? Explain how the firm determined this price.

(c) Should this firm produce in the short run? Why or why not?

(d) Will this firm earn a profit or incur a loss? Why?

2. The Toledo arena holds a maximum of 40,000 people, as indicated in the graph above. Each year the circus holds eight performances, all of which are sold out.

(a) Analyze the effect on each of the following of the addition of a fantastic new death-defying trapeze act that increases the demand for tickets.

(i) The price of tickets
(ii) The quantity of tickets sold

(b) The city of Toledo institutes an effective price ceiling on tickets. Explain whre the price ceiling would be set. Explain the impact of the ceiling on each of the following.

(i) The quantity of tickets demanded
(ii) The quantity of tickets supplied

(c) Will everyone who attends the circus pay the ceiling price set by the city of Toledo? Why or why not?

Macro Free Response Questions

1. Suppose the following conditions describe the current state of the United States economy.

  • Real gross domestic product is growing at the rate of 3 percent
  • The inflation rate is 9 percent
  • The unemployment rate is 4.5 percent

(a) Identify the main problem this economy faces

(b) Assume the Federal Reserve decides to remedy the conditions described above by engaging in open-market operations. Describe the action the Federal Reserve would take. Using the aggregate demand-aggregate supply model, analyze the impact of this policy on each of the following.

(i) The interest interestrate
(ii) Output and employment
(iii) The price level

(c) Identify one limitation on the effectiveness of the monetary policy undertaken in (b).

(d) Now assume instead that Congress votes to increase personal income taxes. Using aggregate demand-aggregate supply analysis, explain what effect this policy will have on each of the following.

(i) Output and employment
(ii) The price level
(iii) The interest rate

(e) Identify one limitation on the effectiveness of the fiscal policy undertaken in (d).

2.

Exchange Rates
Year / Dollar / Yen / Franc / Mark
1 / 1 / 350 / 4.0 / 1.8
2 / 1 / 350 / 5.8 / 2.3

(a) Given the change in the value of the dollar between year 1 and year 2, as indicated in the table above, describe the effects this will have on United States tourism overseas.

(b) Using an aggregate supply and aggregate demand graph, explain the impact of the change in the value of the dollar on the price and output levels in the United States.

(c) Explain what impact the change in the value of the dollar will have on the United States balance of trade.

3.A stranger arrives from outside a given economic system with $1,000 of acceptable currency that has never been in the system before. The nation's banking system is governed by a central bank that has set a reserve requirement of 10 percent.

(a) Assume the stranger deposits the $1,000 in a local bank. Explain the impact of this deposit on each of the following:.

(i) The change in the dollar value of the local bank's reserves.
(ii) The maximum possible change in the dollar value of the local bank's loans.
(iii) The maximum possible change in the dollar value of the total money supply.

(b) State TWO factors in the real world that might cause this change in the money supply to be less than the maximum possible change.

4. Assume an economy is in a recession.

(a) Identify one monetary policy action and one fiscal policy action that could be used to help the economy out of the recession. Explain the effect of each policy on the price level and the equilibrium level of output.

(b) Given your answer in part (a) on the price level effect, explain the effect the policy actions you identified in part (a) would have on the economy’s imports and its exports.

(c) Given your answer in part (a) on the output effect, explain the effect the policy actions you identified in part (a) would have on the economy’s imports and its exports.

(d) Given your answers above, explain what effect the policy actions would have on the international value of the dollar.

5. Assume an economy is at full employment.

(a)explain how an increase in net investment will affect each of the following.

(i) Aggregate demand
(ii) Capital stock
(iii) Long-run aggregate supply
(iv) Output

(b) Explain how the increase in net investment will affect the country's production possibilities curve shown below.