Posted: September 18th, 2017

# Economic questions

You must completely answer4 questionsfor 80 unscaled points
INSTRUCTIONS

YOU ARE REQUIRED TO ANSWER 2 QUESTIONS FROM EACH SECTION.
READ THE QUESTIONS CAREFULLY BEFORE YOU ATTEMPT TO ANSWER THEM. ALL QUESTIONS, INCLUDING SUBQUESTIONS, MUST BE ANSWERED COMPLETELY.

YOU ARE ALLOWED TO USE YOUR TEXT, CHEATSHEETS, NOTES, AND CALCULATORS TO HELP YOU IN SOLVING THE PROBLEMS.

SECTION 1

MARKET STRUCTURE, COSTS OF PRODUCTION, AND MARKET DEMAND AND SUPPLY

Answer question 1and an additional question, including sub-questions, from this section

Q1. Suppose the marginal revenue (MR) function of a monopolist is 5000-0.25Q, what is the profit maximizing price and quantity? (4 points).With the aid of illustrations, show or identify the demand, marginal revenue and total revenue curves(4 points).Using the MR function and your illustrations, state the maximum amount of total revenue—in US dollars—that can be obtained.(4 Points)
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3. (a) Suppose the quantity of gadgets demanded is reported to have fallen by 20 units—from 50 to 30 units—as a result of a per-unit-price increase in widgets from \$10 to \$14, what is the cross-price elasticity of demand? (2 points). Explain your cross-price elasticity coefficient and graphically show and explain the consumer responses in both markets (1 point).As a manager, carefully explain why your estimated coefficient may or may not influence your pricing decision in this case.(1 point)
(b) Alternatively, suppose you estimate a double-log-demand function for widgets as follows:

Qd =1.2789-0.1647Pw (0.077) +0.5115i (0.415) +0.1483P-0.0089T(0.0026)-0.0961D(0.026);

wherethe standard errors are in parenthesis, Qd is for the quantity of widgets demanded, Pw is for the price of widgets,i is for disposable income, P is for the price of gadgets, T is for sales tax on widgets, and D is for household debt.
Assuming that there are 30 observations and that the R2 is 0.80, critically evaluate the regression model and resultsfrom a managerial point of view. (4 points)

MITIGATING (BONUS/OPTIONAL) QUESTION (4 POINTS for accurate responses)

BQ: Suppose the demandcurve for a monopolist is 600 –P, and the marginal revenue function is MR = 600 -3Q. If the monopolist has a constant marginal and total per unit cost of \$60:
(a) What is the profit of the firm (in US dollars)? (b) With the aid of an illustration, explain why the firm cannot be a desirable model of efficiency.

SECTION 2

MACROECONOMICS

Answer question 4 and an additional question, including sub-questions, from this section

4. Today, the size of the US economy is estimated to be about \$17 trillion. By the end of 2008
it was estimated to be about \$15 trillion. Assuming that about 33 % of full employment GDP was lost (say about \$5trillion) during the Great Recession, use the concepts of the liquidity trap and the Keynesian model (cross) to show and explain why managers accumulated inventories during the Great Recession.(12 points)
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5. In response to the Great Recession, the Federal Reserve and the US Government adopted expansionary monetary and fiscal policies. For example, the US government spent about \$700b at some point. Evaluate the effect of the fiscal stimulus on national output if the relevant multiplier and full employment output are estimated to be 1.75—an average CBO estimate—and \$15 trillion respectively(1 Point).Given the average CBO estimate of the multiplier, what is the estimated marginal propensity to consume (MPC)?(3 points).What could have been the contribution of the fiscal stimulus—ceteris paribus—to US recessionary output in the first year?(4 points).Refer to Question 4 for recessionary output.

6. What is monetary policy? (1Point). How did the Fed try to stabilize the US economy during the Great Recession? (3 Points). Notwithstanding the efforts to stimulate the economy, inbuilt risk-aversion and pessimism dampened the intended effects of monetary policy. Suppose that instead of spending the US government had given a tax cut to the tune of \$700b, what would have been the impact on recessionary output if the relevant multiplier is estimated to be 0.75?
(2 Points). Refer to Question 4 for recessionary output. Given the size of the multiplier (0.75), what is the marginal propensity to save (MPS)? (2 points)

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