Eco 550

1. You have been appointed "Global Manager" of a firm that has two plants, one in the United States and one in Mexico. Assume, you cannot change the size of the plants or the amount of capital equipment. The wage in Mexico is $5. The wage in the U.S. is $20. Given current employment, the marginal product of the last worker in Mexico is 100, and the marginal product of the last worker in the U.S. is 500.

Is the firm maximizing output relative to its labor cost? Yes or No. Show how you know. If it is not, what should the firm do?

2. You've been hired as a managing consultant by an unprofitable firm to determine whether it should shut down its operation. The firm currently uses 70 workers to produce 300 units of output per day. The daily wage (per worker) is $100, and the price of the firm's output is $30. The cost of other variable inputs is $500 per day. Although you don't know the firm's fixed cost, you know that it is high enough that the firm's total costs exceed its total revenue. You know that the marginal cost of the last unit is $30. Should the firm continue to operate at a loss? Yes or No. Carefully explain your answer. (show all your calculations).

3. The following are possible examples of price discrimination, except (Points : 2)

prices in export markets are lower than for identical products in the domestic market.

senior citizens pay lower fares on public transportation than younger people at the same time.

a product sells at a higher price at location A than at location B, because transportation costs are higher from the factory to A.

subscription prices for a professional journal are higher when bought by a library than when bought by an individual.

4. An increase in the marginal propensity to ...... will decrease the size of the expenditure multiplier () and therefore the IS-curve will shift to the ...... and become steeper. If people save more and spend less, firms will experience an increase in unintended inventories. Firms will respond by decreasing production and national income will 3...... (Points : 2)

save, left, decrease.

consume, right, increase.

save, left, increase.

consume, left, decrease

save, right, decrease

5. In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price level stability under these conditions the government should: (Points : 2)

increase tax rates and reduce government spending.

discourage personal saving by reducing the interest rate on government bonds.

increase government expenditures.

encourage private investment by reducing corporate income taxes.

6. Which of the following will happen when the Federal Reserve buys bonds from the public in the open market and cash in the hands of the public does not change? (Points : 2)

the required reserve ratio will increase

the money supply will decrease

the deposits of commercial banks will decline

commercial bank reserves will increase

7. Which of the following industries is most likely to represent the Monopolistic Competition market structure? (Points : 2)

pharmaceuticals

tobacco products

hair salons

farm equipment

8. Assume that the prices of cars manufactured in the U.S. increases due to an increase in quality. Which of the following should happen if the same number of cars is produced? (Points : 2)

real GDP should increase but nominal GDP should stay the same

nominal GDP should increase

the GDP-deflator should decrease

real GDP and the GDP-deflator should decrease

all of the above

9. In economic analysis, any amount of profit earned above zero is considered "above normal" because (Points : 2)

normally firms are supposed to earn zero profit.

this would indicate that the firm's revenue exceeded both its accounting and opportunity cost.

this would indicate that the firm was at least earning a profit equal to its opportunity cost.

this would indicate that the firm's revenue exceeded its accounting cost.

10. When the slope of the total revenue curve is equal to the slope of the total cost curve (Points : 2)

monopoly profit is maximized.

marginal revenue equals marginal cost.

the marginal cost curve intersects the total average cost curve.

the total cost curve is at its minimum.

Both A and B

11. Assuming the existence of economies of scale, if a firm finds that it can reduce its unit cost by decreasing its scale of production, it means that (Points : 2)

it has too much production capacity relative to its demand.

it should try to produce less.

the law of diminishing

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