5. (TCO D) A software producer has fixed costs of $30,000 per month and her Total Variable…

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5. (TCO D) A software producer has fixed costs of $30,000 per month and her Total Variable Costs (TVC) as a function of output Q are given below: Q TVC Price 3,000 $ 5,000 $5 13,000 25,000 4 23,000 50,000 3 33,000 80,000 2 43,000 120,000 1 (a.) (15 points) If software can only be produced in the quantities above, what should be the production level if the producer operates in a monopolistic competitive market where the price of software at each possible quantity is also listed above? Why? (Show all work.) (b.) (15 points) What should be the production level if fixed costs rose to $50,000 per month? Explain. (Points : 30) 6. (TCO F) (a.) (20 points) Suppose nominal GDP in 1999 was $100 billion and in 2001 it was $270 billion. The general price index in 1999 was 100 and in 2001, it was 150. Between 1999 and 2001, the real GDP rose by what percent? (b.) Use the following scenario to answer questions (b1.) and (b2.). In a given year in the United States, the total number of residents is 170 million, the number of residents under the age of 16 is 38 million, the number of institutionalized adults is 15 million, the number of adults who are not looking for work is 17 million, and the number of unemployed is 10 million. (b1.) (5 points) Refer to the data in the above scenario. What is the size of the labor force in the United States for the given year? (b2.) (5 points) Refer to the data in the above scenario. What is the unemployment rate in the United States for the given year? (Points : 30) Explanation: (a.) ANS. Students need to make use of the inflation formula for the GDP deflator here and compare results between the two years. For 1999: 100 = [$100B / real GDP] x 100 So, real GDP must equal $100B. For 2001: 150 = [$270B / Real GDP] x 100 1.5 = [$270B / Real GDP] Real GDP = $270B / 1.5 So, real GDP must equal $180B. Therefore, real GDP decreases by 10% between 1999 and 2001. (b1.) ANS. The labor force is calculated as: (Number of residents) – (#under 16) – (#institutionalized adults) – (#not looking for work) So, the labor force is = 270M – 38M – 15M – 17M = 200M (b2.) ANS. The unemployment rate is = (# of unemployed) / (# in labor force) = 10M / 200M = 5% 7. (TCO G and H) (a.) (15 points) Suppose your local Congress representative suggests that the federal government should NOT intervene in the baseball ticket market to stop runaway price increases. Would you say that this view basically supports the Keynesian or the Monetarist school of thought? Why? What position would the opposing school of thought take on this issue? (Be brief — you can answer this in 2 or 3 brief paragraphs). (b.) (10 points) Any change in the economy’s total expenditures would be expected to translate into a change in GDP that was larger than the initial change in spending. This phenomenon is known as the multiplier effect. Explain how the multiplier effect works. (c.) (15 points) You are told that 75 cents out of every extra dollar pumped into the economy goes toward consumption (as opposed to saving). Estimate the GDP impact of a positive change in government spending that equals $25 billion. (Points : 40) (a.) Reserve requirement for banks is set at 5%. Your firm deposits its profits of $28,000 into the Third National Bank. (10 points) How much excess reserve does your deposit generate for the bank? (10 points) What is the maximum amount of new money that can be created in the banking system as a result of this deposit? Show all work. (b.) (10 points) What is the Federal Funds Rate in the banking system? (10 points) Explain how the Fed manipulates this rate in order to achieve macroeconomic objectives. (Points : 40)

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