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Homework Practice Questions: Microeconomics/Macroeconomics
The following questions are for homework practice only. They are to be answered in detail, so it can be used for practice and future reference.
1. Suppose you are hired to manage a small manufacturing facility that produces Widgets.

(a.) 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.) 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?

2. Here is some data on the demand for marshmallows:

Price Quantity
$10 100
$ 8 300
$ 6 700
$ 4 1300
$ 2 2200

(a.) Is demand elastic or inelastic in the $6-$8 price range? How do you know?

(b.) If the table represents the demand faced by a monopoly firm, then what is that firm's marginal revenue as it increases output from 1300 units to 2200 units? Show all work. (Be careful here!)
3. You have been hired to manage a small manufacturing facility which has cost and production data 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.) What is the marginal product of the second worker?

(b.) What is the marginal revenue product of the fourth worker?

(c.) What is the marginal cost of the first worker?

(d.) Based on your knowledge of marginal analysis, how many workers should you hire? Explain you answer.
4. 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.) 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.) 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. 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 15,000 4
23,000 28,000 3
33,000 42,000 2
43,000 70,000 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 competitive market where the price of software at each possible quantity is also listed above? Why? (Show all work).

(b.) What should be the production level if fixed costs rose to $50,000 per month? Explain.
6. (a.) Suppose nominal GDP in 1999 was $100 billion and in 2001 it was $260 billion. The general price index in 1999 was 100, and in 2001 it was 180. 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 230 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 12 million.

(b1.) 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.) Refer to the data in the above Scenario. What is the unemployment rate in the United States for the given year?
(a.) 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.) 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.

(c.) 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.
(a.) Third National Bank is fully loaned up with reserves of $30,000 and demand deposits equal to $100,000. The reserve ratio is 5%. Households deposit $20,000 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.) What is the fed funds rate in the banking system, and explain how the Fed manipulates this rate in order to achieve macroeconomic objectives.
9. Let the exchange rate be defined as the number of dollars per British pound. Assume there is a relatively lower rate of inflation in U.S. relative to that of Britain.

(a.) Would this event cause the demand for the dollar to increase or decrease relative to the demand for the pound? Why?

(b.) Has the dollar appreciated or depreciated in value relative to the pound?

(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 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.) If you had a business exporting goods to Britain, and U.S. inflation fell as discussed above in this example, would you plan to expand production or cut back? Why?

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Solution Preview

1. The increase in supply is likely the result of the increased demand, which created economic profit for firms because of higher prices. Depending on whether the increase in supply has expanded sufficiently to causes prices to fall and economic profits to disappear, your firm could profit by expanding output and increasing prices. This can be determined by seeing if prices are higher than they were before the increase in demand. The price per unit tells you the marginal revenue per unit sold. Output decisions should then be based on setting output so that marginal cost is equal to marginal revenue.

If the price of a substitute good increases, then demand for your product should increase. The increase in the cost of production, however, will cause your revenue to fall if you keep your price the same. The increase in demand should enable you to increase prices, though, selling perhaps the same number as before but at a higher price. This will keep increase revenues so as to cover your increased costs.

2. PEoD = (percent change in quantity)/ (percent change in price).
The change in quantity is 900, and the percent change is 900/1300 = .69
The change in price is $2, and the percentage change in price is therefore:
$2/$4 = 50 %
Since the percentage change in quantity demanded was greater than the percentage change in price, demand is elastic.

At 1300 units, the firm generates $4 x 1300 = $5200 in total revenue. At 2200 units, its total revenue is 2200 x $2 = $4400. The marginal revenue is the change in total revenue of divided by the change in quantity produced. MR = ΔTR / ΔQ. Therefore we have
MR = -$800/900 = -$.89

3. The marginal product of the second worker is the additional output he generates. Thus, we have 280-100=180. The marginal revenue product of the fourth worker is the increase in revenue that the firm receives from hiring the 4th worker. Thus we have 1570-1440= 130. The marginal cost of the first worker is $500.

The firm should continue to hire workers until the marginal revenue of each worker is less than marginal labor cost. This occurs when the firm hires the second worker. The worker costs the firm an additional $500, but only brings in $450 of ...

Solution Summary

Demand and supply, exchange rates, and government intervention in the gasoline market.