Econ 111 - Principles of Economics - Accelerated Treatment -  Second Midterm Examination - Spring 2013

Q1) Explain if the following are true or false.

a) A good has a perfectly inelastic demand and a typical upward slopping supply. True or False: Imposing a $1 quantity tax will create some deadweight loss, raise the price that consumers pay by exactly $1, and won't change the price that producers receive. (Graph).

b). Consider the following two statements:

(i) More people are employed in Tappania now than at any time in the past 50 years.

(ii) The unemployment rate in Tappania is higher now than it has been in 50 years.

True or False? Statements (i) and (ii) can be true at the same time. Explain your answer.

Q2) Consider the following facts for a price leadership oligopoly industry. The aggregate market demand is given by P = 700 - ½Q. The aggregate supply by all the small firms in this industry is given by P = 100 + Q. The equilibrium quantity produced by all firms in the industry is Q = 700.

a) What is the marginal revenue for the dominant firm?

b) Suppose the marginal cost for the dominant firm is constant over Q. What is the marginal cost?

c) What is the equilibrium quantity all small firms jointly supply, and what is the equilibrium quantity for the dominant firm (the price leader)?

Q3) The demand for garden gnomes is given by P=100-(1/2)Q and supply is given by P=(3/2)Q. Garden gnomes, however, generate a positive externality when purchased and displayed. Each garden gnome provides a benefit to the general public that is valued at $20.

a) How many gnomes will be purchased and at what price will they be sold?

b) How many more gnomes would be purchased if the socially optimal quantity were traded?

c) Graph the situation and explain how this optimal quantity can be achieved.

Q4) Answer the following (The questions below are independent from each other.):

a. MPS = .4. What is the investment spending multiplier?

b. MPC = .9. What is the government spending multiplier?

c. MPC = .75. What is the tax multiplier?

d. If the government spending multiplier is 6, what is the tax multiplier?

e. If the tax multiplier is -2, what is the government spending multiplier?

f. If the government expenditure G and taxes T are both decreased by $100 billion simultaneously, what will the effect be on the equilibrium output (income)?