SL 151 Bremmer I Name CM May 12 2006 3rd In Class Exam Chapters 10 11 13 16 Part I Multiple Choice 3 points each For each of the following questions indicate the best answer in the space provided 1 A B C D E After 15 years with Ford Motor Corporation Cameron loses his job His boss explained that Cameron s position has been downsized after the technological advances in automobile production Cameron is best considered not in the labor force seasonally unemployed frictionally unemployed structurally unemployed cyclically unemployed 2 A B C D E In the long run a pure monopolist only earns a normal profit only earns positive economic profits may realize an economic profit a normal profit or a loss will never leave the industry may earn positive or zero economic profits 3 A B C D E If marginal cost decrease a profit maximizing monopolist will reduce price and reduce output reduce price and increase output increase price and increase output increase price and reduce output increase output but it will not change price 4 A B C D E Which of the following statements is correct If a monopolist has inelastic demand then marginal revenue is positive From society s viewpoint a profit maximizing monopolist underproduces output because price exceeds marginal cost A pure monopoly will maximize profits when MR 0 In the short run a monopolist will shut down if P ATC A pure monopoly always faces a perfectly inelastic market demand curve 5 A pure monopolist should never produce in the A segment of its demand curve where the price elasticity of demand is greater than 1 B inelastic segment of its demand curve because it can always increase total revenue by more than it increases total cost by reducing price C elastic segment of its demand curve because it can increase total revenue and reduce total cost by lowering price D inelastic segment of its demand curve because it can increase total revenue and reduce total cost by increasing price 6 A B C D E If the long run supply curve of a purely competitive industry slopes upward this implies that input prices remain constant as firms enter decrease as firms enter increase as firms exit increase as firms enter Both B and C 7 Assume a purely competitive industry decreasing cost industry is initially in long run equilibrium and a decrease in demand occurs In the long run the price will be higher than initially and output will be smaller than initially the same as the initial price but output will be smaller than initially lower than initially and output will be smaller than initially higher than initially and output will be greater than initially smaller than initially and output will be greater than initially A B C D E Page 1 8 A B C D E Everything else held constant a decrease in the nominal interest rate causes consumption to decrease causes investment to decrease causes bond prices to rise causes the net present value of a prospective investment project to fall None of the above 9 A B C D E Holding everything else constant which of the following would cause a decrease in investment An increase in expected profits Unusually high levels of capacity utilization An increase in the price of capital goods A decrease in taxes A cost saving reduction in government regulation 10 A B C D E Everything else held constant which of the following would cause consumption to increase An increase in taxes An increase in the nominal interest rate A decrease in stock prices Households expect future prices to decrease Households expect future income to increase 11 According to the long run macroeconomic model a decrease in government spending on goods and services would cause A the aggregate demand curve to shift to the left B the price level to fall but there would be no change in equilibrium GDP C real wages to fall D A B and C E Only A and B 12 A B C D E In the long run macroeconomic model a rise in the price level implies a rise in the nominal wage but no change in the real wage a fall in the nominal wage but no change in the real wage an increase in real GDP a rise in employment Both C and D 13 A B C Which of the following statements about the loanable funds model is correct A shortage will cause the nominal interest rate to fall During times of growing real GDP the demand for loanable funds shifts to the left and the nominal interest rate falls A decrease in expected inflation causes a decrease in the demand for loanable funds an increase in the supply of loanable funds and a decrease in the equilibrium nominal interest rate D All of the above statements are correct E None of the above statements are correct 14 A B C D E According to the loanable funds model an increase in the price level causes the demand for loanable funds to shift to the right and the nominal interest rate will increase the demand for loanable funds to shift to the left and the nominal interest rate will decrease the supply of loanable funds to shift to the right and the nominal interest rate will decrease the supply of loanable funds to shift to the left and the nominal interest rate will increase the supply of loanable funds to shift to the left the demand for loanable funds to shift to the right and the nominal interest rate will increase but the change in the quantity of funds is indeterminate 15 A B C D E Which of the following statements is correct Unexpected inflation hurts debtors and benefits creditors increases the real value of savings increases the purchasing power of the dollar hurts those that live on fixed income None of the above statements are correct Page 2 Part II Short Answer Questions 55 points total For each of the following questions give a concise but complete answer When appropriate use math graphs or equations to help explain your answer Label all the axes of your graphs If you require more space right on the back of each page indicating that you have done so 1 Suppose a perfectly competitive constant cost industry is in long run equilibrium Using two graphs one showing the market demand and supply curves and the other showing the short run average cost curves of the typical firm illustrate and describe the short run and long run effects of a decrease in demand Specifically mention what happens to the market price the market output the output of the typical firm and the profits of the typical firm both in the short run and the long run Using your diagram illustrate and explain how the long run industry supply curve is derived 15 points 2 Answer both of the following