1. Tuition at Matchbook Cover Tech was $9,000 per semester and enrollment was 5,500 in 1995. By 2005, tuition had fallen to $6,000 and enrollment to 2,800. Does this mean that the demand curve for education at Matchbook Cover Tech is positively sloped with regard to price (i.e., that the own price coefficient in the demand equation is positive)? Explain your answer. (6)
2. Based on our discussion in class and on what you have read, in what ways can the large current account deficit in the US over the past several years be considered
a.) beneficial for the US economy? (4)
b.) detrimental for the US economy? (4)
3. Given that the marginal propensity to consume is 0.67, and that the federal government increases its spending by $50 billion and increases taxes by $50 billion. Assuming constant price levels, what effect would this policy action have on the equilibrium level of real GDP (once all spending cycles are completed and assuming constant price levels)? SHOW YOUR WORK! (6)
4. Suppose that economists have made the following projections for the coming year:
exports $540B, imports $610B, capital outflow $320B, capital inflow $360B.
As the year unfolds, these projections, which were based on exchange rates, inflation rates, growth rates, etc. at the beginning of the year, are proving to be quite accurate. a.) Explain how the value of the dollar on the foreign exchange market will change as a result, and explain why the dollar will then stabilize at some point. (5) b.) Given the trade and capital flow information above (exports $540B, imports $610B, capital outflow $320B, capital inflow $360B), what various types of pre-emptive or reactive actions could policy makers take to keep the dollar stable (neither rising nor falling on the foreign exchange market) during the year. (3)
5. a. Explain (don't just describe) the relationship between the marginal product of the variable resource and the marginal cost of producing additional output in the short run. (5) b.) What is the difference between the law of diminishing returns and increasing returns to scale (economies of scale)? (3)
6. A perfectly competitive firm has the following short-run cost structure:
Output Marginal Cost
Total fixed costs are $50 and the market price of the product is $40 per unit. How many units should the profit-maximizing firm produce (if any) and how much will the firm's total profits or losses be in the short run? SHOW YOUR WORK! (9)
7. A perfectly competitive firm will maximize profits by producing in the short run at the level of output at which price and marginal cost are equal. Would a monopoly firm also maximize profits by following the same rule? Explain why or why not. (5)
(Complete problem set also found in attachment).
The initial equilibrium is investigated.