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A. Costs: short run and long run
1. Give two examples of types of internal economies of scale. Give two causes of internal diseconomies of scale.
2. Is a competitive market more likely if the minimum efficient scale is high or low relative to the level of demand in the industry? Why?
B. Revenues, costs, and profits
1. What is meant by normal profit? What is meant by supernormal profit?
C.
1. Explain why firms in perfect competition are price takers. What factors enable imperfectly competitive firms (such as those in monopolistic competition) to influence the price?
2. Price competition is not common in many markets and many firms prefer to try to differentiate their products instead. Explain why price competition is not common and why firms prefer to build a brand or develop some unique selling point and using this as a means of competing rather than using price alone.
3. According to Porter, the likelihood of making profits in an industry depends on five factors. List Porter’s five forces. The implication of Porter’s five forces analysis for managers of firms is that they should examine these five factors before choosing an industry into which to move. They should also consider ways of changing the five factors to make them more favorable. Discuss two ways of changing any of the five factors to make them more favorable to the firm.
D. Equilibrium in the economy
1. If planned injections are $300 million and planned withdrawals are $400 million, is the economy in equilibrium or not? Explain why actual injections will equal actual withdrawals in this case. Explain what will happen to output and national income going forward compared to the present level.
2. Which of the following statements are true and which are false?
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a. an increase in withdrawals decreases aggregate demand b. an increase in savings increases withdrawals c. an increase in exports increases withdrawals d. a decrease in taxation reduces withdrawals e. an increase in investment increases injections
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3. Savings $20 billion, Exports $40 billion, Taxation revenue $45 billion, Government spending $20bn, Investment $15 billion. Given that the economy is in equilibrium what is the value of import spending?
4. Planned withdrawals = $500 billion. Planned injections = $600 billion. Explain what will happen to output and national income compared to the present level.
E.
1. The aggregate supply curve could be inelastic or elastic (with respect to changes in the demand-induced changes in the price level). This depends on the position of the economy relative to its potential output. Explain why aggregate supply might be price inelastic. Explain why aggregate supply might be price elastic.
2. Assume that aggregate supply is relatively price inelastic. Describe the effect of a decrease in aggregate demand on the equilibrium price level and output in the economy (i.e., would the effect be an increase, or a decrease, or a small increase, or a small decrease in the equilibrium price? How about output?).
3. What is the difference between demand-side policies and supply-side policies? Give examples for each.
F.
1. What is the difference between the government budget deficit and the national debt? What is the relationship between the two?
2. What is the difference between a structural deficit and cyclical deficit?
3. How does the government finance its deficit? To finance a budget deficit interest rates might have to increase. What is the effect of higher interest rates on aggregate demand? Explain what is meant by ‘crowding out’.
G.
1. What are the three functions of money?
2. List the three motives behind the demand for money.
3. State the mechanisms through which an increase in money supply could lead to an increase in aggregate demand. Be sure to discuss the roles of asset prices, interest rates, and exchange rates.
4. Refer to question 3 above. What could be the likely position of the economy relative to full employment when the increase in the money supply leads to
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a. an increase in prices as well as output? b. an increase in output (with no or small effect on price)? c. an increase in prices (with no or small effect on output)?
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5. Using Fisher’s equation of exchange, if M = $3,000bn, V = 2, T = 2,000 what is the price level?
6. Using Fisher’s equation of exchange one can show that an increase in the money supply leads to an increase in the price level. However, under some conditions, such an increase in the money supply could also lead to more output and the price level may not increase. State one condition under which this might happen.
H.
1. Using an example, explain how a supply-side policy can be used to reduce the natural rate of unemployment (i.e., to reduce voluntary unemployment). Be sure to discuss the impact of the policy on the job acceptance curve and/or the labor force curve.
I.
1. When inflation is 2% does this mean that all prices in the economy are growing by 2% or the weighted average of prices is growing by 2%? Explain your answer.
2. Explain how inflation might affect a country’s international competitiveness.
3. Explain why a government might be concerned about deflation in the economy.
4. The table below shows the changes in price and the relative importance of each item in a shopping basket for 4 products. Which item has changed the most in price? Which item has the highest importance in the basket? Obtain the weighted price change for each item. Calculate the weighted percentage price change for the basket. Does the weighted percentage price change reflect the price change of the most important item in the basket?
|
Product |
Price change (%) |
Weight |
|
A |
20 |
30 |
|
B |
10 |
40 |
|
C |
10 |
10 |
|
D |
-10 |
20 |
5. The Federal Reserve maintains inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures, or PCE). Explain how setting inflation targets such as the 2% rate set by the Fed help control inflationary or deflationary episodes.
6. In the Phillips curve framework, if the government uses aggregate demand management to keep unemployment below its natural rate, then it will always need to keep prices growing at a faster rate than wages. What is the simple logic behind this argument? Explain therefore why an implication of this is that a long-run policy by the government would be to focus on changing the natural rate of unemployment through supply-side policies.