3. If the government were to reduce income taxes, how would the reduction affect output and the price level in the short run? In the long run? Describe how the aggregate supply and aggregate demand curves would be affected?

Comment on the government’s budget. How did it change after the increase in government purchase?

TRUE OR FALSE
a. When potential real GDP is equal to actual real GDP, there is no unemployment.
b. A significant increase in wages will shift aggregate supply curve to the right in the short run.
c. When the government decided to reduce their spending, then the aggregate supply curve will decrease or shift to the left in the short run.
d. If the central Bank wants to expand aggregate demand, it can increase the money supply, which would increase the interest rate.
e. To find spending multiplier, we have to calculate one divided by marginal propensity to consume.

Explain why true and why false!

How did “free market fundamentalism” contribute to the US/global financial crisis of 2008? How do the makers of the film The Inside Job criticise public and private actors in this crisis? What role did the US state play (or refused to play) in this crisis? Why? Can you draw parallels between this crisis and the 1997-98 East Asian crisis?

In the movie Forest Gump, Consider the barriers to entry facing potential competitors in Forrest’s monopoly market ( his shrimp boat). The more contestable a market, the closer it will be to a perfectly competitive market, whereas the less contestable a market, the closer it will be to a monopoly.

Define and defend your own position on the University of Texas/Texas A& M admissions policy of granting admission to the Top 7-8% of students from Texas High Schools.

World oil prices have been rapidly swinging over the last few years, in part because of the declining value of the U.S. dollar, changes in supply and demand, and OPEC’s attempts to manage output in order to maintain higher prices. (OPEC stands for the Organization of Petroleum Exporting Countries)

As the president of an oil producing and exporting company in Alberta:

• Explain how you may use hedging to protect your company’s income.
• Share a recent publication with your fellow students and your instructor.

5. Assume that the reserve requirement is 5 percent. All other things being equal:

Will the money supply expand more if the Fed buys $2,000 worth of bonds or if someone deposits in a bank $2,000 that he had been hiding in his cookie jar?

If one creates more, how much more does it create?

6. Assume that the banking system has total reserves of $100 billion. Assume also that required reserves are 10 percent of checking deposits and that banks hold no excess reserves and households hold no currency.

What is the money multiplier? _______What is the money supply? $__________

1. Draw a correctly labeled graph showing a long-run average cost curve.  Label the sections showing economies of scale, diseconomies of scale and constant returns to scale.   Explain economies of scale, constant returns to scale, and diseconomies of scale.

Multiple Choice

1. In the long run:
   1. All inputs can be varied.
   2. No inputs can be varied.
   3. Only variable inputs can be varied.
   4. Only fixed inputs can be varied.
   5. A limited number of inputs can be varied.
2. Sunk costs:
   1. Are costs that can be recovered when production is halted.
   2. Are costs that should be not ignored in future decisions.
   3. Are costs that should be ignored in future decisions.
   4. Are incurred in the short run only.
   5. Are costs of production that reoccur.
3. If the LRATC is falling the firm is experiencing:
   1. decreasing AVC.
   2. constant returns to scale.
   3. economies of scale.
   4. diseconomies of scale.
   5. cost minimization.
4. If the LRATC is rising the firm is experiencing:
   1. increasing AVC.
   2. constant returns to scale.
   3. economies of scale.
   4. diseconomies of scale.
   5. cost maximization.

6. A paper mill dumps waste into a lake used by a tilapia farmer. The paper mill’s marginal private cost function of producing a tonne of paper is represented by: MPC = 5 + ½ Q and the marginal benefits can be represented by: MSB = 65 – Q. The tilapia farmer’s costs from the pollution can be represented by: MEC = ½ Q.
   1. Sketch the paper mill's marginal private cost curve, the marginal social cost curve, and the marginal social benefit of paper curve.

2. What is the efficient level of paper production? If no one owns the lake and there is no regulation of pollution, what is the quantity of paper produced per week? Illustrate the deadweight loss of the no-regulation level of production in your figure.

3. If the government introduces a tax to correct the externality, what is the tax per tonne of paper produced that achieves an efficient outcome?

4. If the tilapia farmer owns the lake, how much paper is produced per week and what does the paper mill pay the farmer per tonne? Explain you answer.

5. If the paper mill owns the lake, how much paper is produced per week? Explain.

6. Compare the quantities of paper produced in (d) and (e) and explain the relationship between these quantities.

1. Why is the principle agent-problem important in economics?

2. what two critical assumptions underlie the principle agent-problem?

3. Provide two critiques or counters of the assumptions outlined above.

True or False

1.The Cross-Price elasticity of demand for good X is -2, if its demand changes from 100 units to 300 units, because of an increase in Price of Good Y from $1 to $2?

2.If the Demand for a good is inelastic, we can say that, as Price decreases, the Total Revenue will decrease.

3.If the demand for a good rises, when income falls, the good is an inferior good.

4.Because of the law of supply, we can be sure that price elasticity of supply, which measure the responsiveness of quantity supplied to a change in market price of the good, will always be NEGATIVE.