MicroeconomicsMacroeconomicsEcon 98-Chiu Mock Final Exam Spring 2004Name & SID: Date:Points and suggested time allocations are given in parentheses for each question. If you need more space for any question, use the BACK of the same page. There are two sections: microeconomics and macroeconomics. There are 100 total points. Inspiration from Professor Train’s Spring 1994, 1995, 1996, and 1997 final exams. You have 50 minutes to complete this exam. Microeconomics1. In the graphs below, label the firm’s chosen price and output (with Pf and Qf), the optimal price and output (with P* and Q*), and shade in the area of the deadweight loss. (2 points each, 1 minute total)a. A monopolist with a positive externality.b. A natural monopoly with a positive externality.Page 1 of 9QMCMSBMPBMRPQMSBMPBMRPMCEcon 98-Chiu Mock Final Exam Spring 2004Name & SID: Date:2. The market price in a competitive industry is $20. Each firm in the industry faces a marginal cost of $20 at its chosen output level. The average cost of each firm is $20. Is this industry in stage 2 equilibrium? Explain why or why not. (3 points, 1 minute)3. A competitive industry is in stage 2 equilibrium. Due to a change in the tastes of consumers, the market demand curve shifts left, representing less demand. For each item below, state whether it will rise, fall, or stay the same when the industry moves to its new stage 2 equilibrium. (Don’t explain your answer. Just state “up,” “down,” or “the same.”) Assume that the market demand curve is downward sloping. (1 point each, 3 minutes total)a. The market priceb. Market outputc. Output of each firmd. Profits of each firme. The number of firms in the industryPage 2 of 9Econ 98-Chiu Mock Final Exam Spring 2004Name & SID: Date:4. William lives alone on an island. He spends his day collecting wood and fishing. He works ten hours per day. Suppose that William faces diminishing marginal product for his time spent in collecting wood (but not for time spent fishing). That is: as William collects wood during a day, it becomes harder and harder for him to find more. William can find 10 sticks of wood in his first hour of searching, 9 sticks of wood in his second hour, 8 in his third hour,and so on, until he is finding only 1 stick of wood in his tenth hour of searching. With fishing, he can still catch 2 fish per hour no matter how many hours he fishes. In the graph below, draw the production possibility frontier. Give numerical values for the x-intercepts and y-intercept. Draw the kinks, but you do not have to label them. You also do not need to give slopes. Just be sure the frontier is the right shape. Fish on the vertical axis and sticks of wood on the horizontal axis. (3 points, 5 minutes)Page 3 of 9Econ 98-Chiu Mock Final Exam Spring 2004Name & SID: Date:5. True, false, or uncertain. Explain your answers. (2 points each, 5 minutes total)a. A typical monopoly does not have a supply curve.b. Consider a monopolistically competitive firm. Price cap regulation can be used to induce the competitive monopolist to produce at the socially optimal quantity.6. Circle Nash equilibrium or equilibriums from this game between two firms. The payoffs are in profits. No explanations necessary. (1 points, 2 minutes)Firm 2Firm 1Low HighLow Firm 1: $50Firms 2: $25Firm 1: $75Firms 2: $65High Firm 1: $100Firms 2: $50Firm 1: $25Firms 2: $115Page 4 of 9Econ 98-Chiu Mock Final Exam Spring 2004Name & SID: Date:Macroeconomics1. Assume that prices, the interest rate, and the exchange rate are fixed. An economy is described by the following equations.C = 500 + .75YdT = .1YI = 1000EX = 1000IM = 50 + .1YG = 1000a. Calculate equilibrium output. Show your work. (5 points, 5 minutes)b. Full employment output is at $5000. Calculate a fiscal policy that puts the economy atfull-employment. Assume you can only change G but not T. (4 points, 5 minutes)Page 5 of 9Econ 98-Chiu Mock Final Exam Spring 2004Name & SID: Date:2. For each of the following cases, show how the events will shift the money demand and/or money supply curve. Show the initial and final equilibrium interest rate and quantity of money. Label the initial values r1 and M1, and label the final values r2 and M2. No explanations. (6 points each, 4 minutes total)a. Congress engages in expansionary fiscal policy and the Fed refuses to accommodate.b. Congress engages in expansionary fiscal policy and the Fed accommodates by buyingsecurities.c. Inflation sky-rockets. The Fed decides to fight inflation.d. Unemployment sky-rockets. The Fed decides to fight unemployment.3. Define liquidity trap. (10 points, 3 minutes)Page 6 of 9Md MdMd MdMrMsMrMsMrMsMrMsEcon 98-Chiu Mock Final Exam Spring 2004Name & SID: Date:4. Liquidity traps are rare, but they can happen. Assume nominal interest rates are near zero. Suppose an economy is initially close to full-employment and price-level is at low levels. OPEC shockingly raises oil prices by an enormous amount. Unemployment sky-rockets.a. Draw an AD-AS graph that illustrates both the initial state of the economy and the impact of the oil price shocks on the economy’s price level and aggregate output. Label initial Po and Yo as the initial state of the economy. Label P1 and Y1 as the impact of the oil price shocks. (5 points, 2 minutes)b. The central bank engages in expansionary monetary policy. Show the effects of the Fed on the money market graph and the AD-AS graph. Draw new graphs but be sure that they are consistent with your answers in part a. Explain your answers. Your explanations are more important than the graphs. Do not write an essay. (10 points, 4 minutes)Page 7 of 9Econ 98-Chiu Mock Final Exam Spring 2004Name & SID: Date:c. Members of parliament are politically pressured to reduce unemployment. Parliamentincreases government spending and cuts net taxes. Show the effects of fiscal policy on the AD-AS graph. Draw a new graph but be sure it is consistent with your answersin part a. Label initial Po and Yo as the initial state of the economy. Label P1 and Y1 as the impact of the oil price shocks. Label the final price-level and aggregate output as P3 and Y3. (10 points, 5 minutes)d. Evaluate the success of the expansionary fiscal policy. (4 points, 5 minutes)Page 8 of 9Econ 98-Chiu Mock Final Exam Spring 2004Name & SID: Date:5. True, false, or uncertain. Explain your answers. (4 points each, 5 minutes total)a. The United States can produce 10 computers per worker or 20 desks per worker. China can produce
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