Macroeconomics Answers

Having completed this course as part of your MBA program you have been hired by a
medium sized company. You attend a meeting where the CEO explains that the goal of the company is to maximize profits, not total revenue. As such the firm must estimate both costs and revenues to determine the output where the difference between marginal revenue and marginal cost is the greatest. Will this output level maximize the firm’’s profits? Explain why or why not

given the aggregate demand curve, an increase in aggregate supply would raise real GDP and reduce the price level.

true or false

Explain in three well-structured paragraphs the basic principles of the New Keynesian Economics.

a. Firms often pay managers a percent of profits to encourage them to work longer hours for the company. Managers are often conflicted by the desire for extra income and the reduction of leisure time for family and personal enjoyment. Consider the following example. When the manager is paid a salary of $100,000 without a share of profits, she spends the minimum required time at work and maximizes her leisure time. When the manager is paid $100,000 plus a small percent of profits she increases the time spent at work. Her average income increases to $120,000. Can you tell from this example whether the manager has shown a preference for the second compensation scheme? If so, has the company benefited from the second compensation scheme?

b. Explain why the short run ATC is U shaped. Explain why the long run ATC is also U shaped. How are the two curves different?

Assume that a firm hires only labour and capital to produce bicycles

a. Explain the cost minimization rule for this firm and why this rule is logical

b. Suppose that the firm hires 100 units of capital and 500 units of labour and that the MPl is 20 while MPk is 25. If a unit of labour costs $4.00 and a unit of capital costs $5.00, is the firm minimizing costs? Explain.

c. If the price of capital falls to $4.00 what should the firm do to minimize cost? Explain why your answer is consistent with the cost minimization rule.

2. A firm produces the following units of output, Q, by hiring a fixed quantity of capital, K, and labour, L, as follows:

L: 8, 16, 24, 32, 40, 48, 56, 64, 72, 80

Q: 16, 36, 65, 97, 137, 177, 209. 233, 249, 257

a. Determine the average and marginal products of labour.

b. Provide rough graphs of the total product, average product and marginal product curves and explain why they behave in the way they do. Be sure to label your axes correctly.

c. Assuming that the cost of capital is $1,000 and labour costs $10.00 per hour, determine the total variable cost, average variable cost and the marginal cost of the firm for the output levels given above.

d. Provide rough graphs of the TVC, AVC and MC curves and compare their behaviour with the product curves in part b. Be sure to label your axes correctly.

explain why Without a big drop in wages, weak demand for labour yields a jobless
recovery

A price ceiling is a government price control that sets the maximum allowable price for a good or service. One often cited example is rent control.

A. Explain why rent control creates a shortage of rental housing. Illustrate with a supply/demand graph.

B. What are FOUR other consequences of rent control, in addition to the shortage?

C. Identify the winners and the losers in the rent control situation.

The demand for Wanderlust Travel Services (X) is estimated to be:
QX =22,000–2.5PX +4PY –M+1.5AX

where AX represents the amount of advertising spent on X, M is income per capita, and the other variables have their usual interpretations.

Suppose that the price of good X is $450, good Y sells for $40, the company utilizes 3000 units of advertising, and consumer income is $20,000.

A. Calculate the elasticity of demand for good X with respect to the price of X, the price of Y, income, and advertising.

B. Should the price of good X be raised to increase total revenue? Explain why or why not.

C. Calculate consumer surplus at the profit‐maximizing price if the marginal cost is $264.

9. Kyle and Lyle want to pool their inheritance money to make a joint investment. They are young and are willing to accept moderate to high risk over a number of years. Which combination of investment options best suits their needs? (5 points)

Money market account and bonds
Mutual funds and stocks
Savings account and bonds
Stocks and futures