Problem 1.

44. What is a monopsony?

A. This is a small monopoly

B. This means that there is only one seller in the marketplace

C. This means that there is only one buyer in the marketplace

D. There is no such word in microeconomics

45. New technology that doubles the production of workers and output will do what?

A. Shift the supply curve to the left

B. Shift the Average Total Cost Curve Down

C. It will shift all cost curves to the right

D. None of the above

46. Assume that you are working hard on a new product that is not yet ready for sale. Suddenly your

competitors surprise you and are now selling similar versions of your product. Their product is also

vastly superior to yours. Your product is now a failure. What kind of a cost do you now have?

A. Fixed cost

B. Variable Cost

C. Sunk cost

D. None of the above

47. What is the main difference between the perfect competition model versus the monopoly model?

A. Perfectly Competitive Model is when P=Demand Curve = Marginal Revenue and

Monopoly has a downward sloping demand curve.

B. There is no difference in the graphs, they all look the same.

C. Perfect competition has a flat demand curve and the monopoly also has a flat or elastic

demand curve.

D. Countries that have many monopolies usually have better economies. Monopolies help

produce a higher standard of living versus a competitive market.

Problem 2.

Question 1

Use the Model of Demand and Supply to explain why the price of buffet dinners has decreased recently in Dhaka City. Your answer should include a well-labeled diagram.

Question 2

Two candidates, Mr A and Mr B, are running for presidency in Country Z. The people of Country Z can either vote for Mr A or Mr B.

We are interested to study and analyze the total number of votes received by each of the two candidates.

Discuss in detail how we can apply the model of Production Possibility Frontier (PPF) in this case. Your answer should include a well-labeled diagram.

Discuss how the definition of the PPF needs to be adjusted and modified in this situation.

Question 3

The president of Country Z wants to adopt the free market economic system and has come to you for advice. You are the economic advisor of Country Z.

a) What would be your advice to the president of Country Z? Discuss your point of view in detail.

b) The price of rice has been increasing rapidly in Country Z. Discuss all the possible ways Country Z can tackle (manage) the problem of increasing price of rice. No need to draw diagrams in this answer.

Question 4

You have decided to open a small business in Country Z and you want to hire some employees for your business.

a) Discuss why you will need a rationing device when hiring employees.

b) Discuss in detail about the rationing device you will use when hiring employees.

c) Discuss how your choice of rationing device might affect the society of Country Z.

d) Discuss how you can use the concept of incentives and negatives to get the best out of your employees. Is this situation related to optimization or efficiency? Discuss in detail.

Question 5

Mara and Dona are both consumers and producers of butter and bread. They are both living in a barter economy. The following are the production schedules of Mara and Dona:

Production schedule of Dona Butter (units per day) Bread (units per day) 8 0 4 4 0 8

Using the given situation show that specialization and trade can benefit individuals and societies. Show all steps in your analysis. Explain in detail.

You can assume that the terms of trade are 5 units of bread for 4 units of butter.

Question 6

Discuss in detail how the concept of transaction cost and economic growth may be connected. Try to explain the connection as clearly and precisely as you can. There is no need to draw any diagram.

ii.

(1) (a) A monopolist has a demand curve given by P = 100 - Q and a total cost curve given by TC = 16 + Q2 . The associated marginal cost curve is MC = 2Q. Draw a supply and demand graph showing the monopoly equilibrium. Calculate the monopolist's profit-maximizing quantity and price. How much economic profit will the monopolist earn? (b) Now suppose that, instead, the monopolist has a total cost curve given by TC = 32 + Q2 . The corresponding marginal cost curve is still MC = 2Q, but fixed costs have doubled. Draw a second supply and demand graph showing the monopoly equilibrium. Calculate the monopolist's profitmaximizing quantity and price. How much economic profit will the monopolist earn? (c) Now suppose that, instead, the monopolist has a total cost curve given by TC = 16 + 4Q2 . The corresponding marginal cost curve is now MC = 8Q, and fixed costs are back to their original level. Draw a third supply and demand graph showing the monopoly equilibrium. Calculate the monopolist's profit-maximizing quantity and price. How much economic profit will the monopolist earn? (d) Now suppose that, instead, the monopolist has the original cost curves from part (a), but also has access to a foreign market in which the monopolist can sell whatever quantity they choose to at a constant price of 60. Draw a fourth supply and demand graph showing this new equilibrium. Calculate how much the monopolist will sell in the foreign market. Also, calculate the monopolist's new quantity and price in the domestic market. Briefly explain. (e) Now suppose that the monopolist has a long-run marginal cost curve of MC = 20. Find the monopolist's profit-maximizing quantity and price. Find the efficiency loss from this monopoly. Briefly explain.

Part c.

plain how this development affects the interest rate, output, and investment. 2 The following questions deal with the medium-run correction in a closed economy after it is perturbed by a negative shock. (a) Combine the Phillips Curve (PC) equation 7 -7 = m+z-au with the production function Y = N to obtain the following alternative expression for the PC. IT - Te = ( Y - Yn) In your answer briefly define the variables used in the above relations. Suppose that the economy is initially in a medium-run equilibrium, in which the actual and expected inflation rates are 2% and inflation expectations are anchored at 7 = 2%, but then, due to a fall in business confidence, investment spending significantly falls. In parts (b), (c) and (d) below explain in words and illustrate using both the IS-LM model and the PC. (b) Describe the impact of the fall in business confidence in the short run. How does the short- run equilibrium output and inflation rate compare to the initial medium-run equilibrium output and inflation rate if the central bank does not change the real policy rate? MATHOO02 5 TURN OVER (c) Describe the medium run correction process. Be sure to discuss the change in output, inflation and interest rate. (d) In the course of the medium run correction, does the economy face the possibility of running into a liquidity trap? If so, propose alternative policies to get the economy out of the liquidity trap.Part 1: Set up the Consumer's optimization problem, and find their first-order conditions. In particular, find an expression for the relationship between the real wage and the marginal rate of substitution between consumption and leisure. Part 2: Set up the Firm's optimization problem, and find its first-order conditions. In particular, find an expression for the relationship between the real wage and the marginal product of labor. Part 3: Is the competitive equilibram for this economy Pareto Efficient? Why or why not? (For this particular question, you don't need to be algebraically rigorous. A conceptual or graphical explanation will suffice.) Part 4: Now suppose that instead of a lump-sum tax, the government raises revenue through an advalorem tax on labor at rate 7. So the consumer's budget constraint becomes CS (1 -T)WN s + 7 and the government revenue becomes TwNs. How does this change the first-order conditions? Is the competitive equilibrium in this new economy Pareto Efficient? Why or why not? (A conceptual or graphical explanation will again suffice.) Part 5: (2 points extra credit. Answer the questions about Pareto Efficiency in parts 3 and 4 by setting up a Social Planner's Problem for this economy.)Consider an economy with a representative consumer, a representative firm, and a government. Both firm and consumer are price-takers. There is an initial stock of capital which is owned by the firm. . The consumer can work up to h hours at an hourly real wage of w. Their preferences are represented by the utility function U(C, 1) = In(C) + In(1) . The consumer also pays a lump sum tax equivalent to the value of T units of consumption good. The consumer's budget constraint is therefore: CS WN s +T - T where No = h - l is the amount of labor the consumer chooses to supply, T is the amount of tax paid, and i is the profit of the firm. The consumer treats both T and as given. . The firm operates using a CRS technology that uses labor and capital to produce. Total output is Y = zF(K, Na) = zKN)-" , where No is the labor demanded by the firm, K is an exogenously given stock of capital which the firm owns, and the exponent o is some constant between 0 and 1. The firm must pay w for each unit of labor. The firm seeks to maximize profits, choosing labor demand. . The government has an exogenously given amount of spending, G, which must be funded. The only tax they collect is a lump sum tax on the consumer, T