Econ 111 - Principles of Economics - Accelerated Treatment - Second Midterm Examination - Fall 2014
Q1) EXPLAIN if the following statements are true or false:
a) In a Cournot duopoly with identical firms A and B the reaction function for B is given by: Qb = 100 - (1/2) Qa, where Qa and Qb are quantities produced by firms A and B. True of false: Firms A and B can only reach a Cournot equilibrium if each firm produces quantity Qa = Qb = 66.66. (Graph and show your work).
b) Your salary as part time employee at the University Bookstore was $10,000 in 2013 and is $10,200 today (in 2014). Inflation over the same period has been about 2%. Therefore, your real salary and purchasing power have remained the same over the period.
Q2) The aggregate demand for bubble candy in Madison is given by Q = 220 - 10 P and the aggregate supply by Q= 20 + 30 P (where P is the price per candy box in dollars, and Q is the quantity of candy boxes).
a) What are the equilibrium price and quantity of bubble candy in Madison?
b) If the government were to impose a $2 quantity tax per box of bubble candy what is the new price consumers will have to pay and producers will receive per box of candy?
c) What is the equilibrium quantity with this tax?
d) Who is paying this $2 per box tax? Be as specific as you can.
e) Put the demand, supply and all prices and quantities in a clear graph. (Show all prices and quantities and the tax).
Q3) In the plant fertilizer industry, there is one dominant firm that is also the price leader, and several smaller firms which charge exactly the same price with the price leader. The small firms' supply curve is given by P= 20+ 2Q. The dominant firm faces a residual demand of P= 80 - (1/2) Q.
a) Find the market demand curve in the plant fertilizer industry.
b) If all the small firms together produce 20 units in equilibrium, how many units does the dominant firm produce?
c) What is the dominant firm's marginal cost if it is constant for all values of Q?
4) a) Suppose that, in a given month, 98 million people are working and another 5 million are seeking work. What would be the official unemployment rate, as reported by the US Bureau of Labor Statistics (BLS)?
b) Now suppose that the economy goes into recession. Three million additional workers are laid off and begin seeking work, while 4 million of those previously seeking work give up searching out of discouragement. What is the new official unemployment rate as reported by the BLS?
c) Go back to the assumptions about employment and unemployment in a). above. Now suppose that 7 million of the employed switch to jobs in the underground economy. When interviewed by the BLS, 50 percent of these switchers report that they are not working and not seeking work, while the other 50 percent report that they are not working but are seeking work. What happens to the official unemployment rate reported by the BLS?
5) Answer the following. (The questions below are independent from each other.)
a) MPS = 0.5. What is the investment spending multiplier?
b) MPC = 0.8. What is the tax multiplier?
c) If the government spending multiplier is 9, what is the tax multiplier?
d) If the tax multiplier is -2, what is the investment multiplier?
e) If the government expenditure G and taxes T are both decreased by $200 billion, what will be the effect on output?