[ 2009 Mock Exam (PM) ] Economics .Questions 33-44 face, produces, average, returns

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33. If mangoes cost India Rupees (INR) 10 each, a consumer spends his budget on fruits that he values more highly than mangoes. However, at a price of INR 4 per mango the consumer buys 20 mangoes. The total consumer surplus (in INR) is closest to:

A. 26.
B. 60.
C. 120.

34. The best characterization of a firm that is operating on its long-run average cost curve is when it:

A. experiences constant returns to scale.
B. produces a given output at the least possible cost.
C. chooses a plant size that minimizes the average fixed cost.

35. As the quantity of labor increases, which of the following is the most likely outcome with respect to the marginal revenue product (MRP) of labor?

A. MRP increases for a monopoly.
B. MRP decreases for a firm in perfect competition.
C. MRP increases for both monopoly and a firm in perfect competition.

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42. Which of the following is least likely to be a tool available to central banks for implementing monetary policy?

A. Inflation targeting.
B. Adjusting taxation.
C. Managing interest rates.

43. The monetary policy tools available to the Federal Reserve are least likely to include:

A. open market operations.
B. the ability to determine the required reserve ratios of its member banks.
C. adjustments to the amount of gold held as reserves against Federal Reserve notes.

44. Suppose the CPI basket contains only two goods and services: oranges and haircuts. In the base period, consumers bought 15 oranges at $2 each and 5 haircuts at $10 each. In the current period, consumers buy 15 oranges at $1.75 each and 5 haircuts at $12 each. The CPI for the current period is closest to:

A. 107.81.
B. 114.58.
C. 117.97.

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42. Which of the following is least likely to be a tool available to central banks for implementing monetary policy?

A. Inflation targeting.
B. Adjusting taxation.
C. Managing interest rates.

Answer: B
“An Overview of Central Banks” Anne Dolganos Picker
2009 Modular Level I, Volume 2, pp. 477-485
Study Session 6-28-b
Discuss monetary policy and the tools utilized by central banks to carry out monetary policy.
Adjusting taxation is not a tool available to central banks. Only the government can adjust taxation as it is a fiscal policy tool.

43. The monetary policy tools available to the Federal Reserve are least likely to include:

A. open market operations.
B. the ability to determine the required reserve ratios of its member banks.
C. adjustments to the amount of gold held as reserves against Federal Reserve notes.

Answer: C
“Money, the Price Level, and Inflation,” Michael Parkin
2009 Modular Level I, Volume 2, pp. 357-358
Study Session 6-24-d
Explain the goals of the U.S. Federal Reserve (Fed) in conducting monetary policy and how the Fed uses its policy tools to control the quantity of money, and describe the assets and liabilities on the Fed’s balance sheet.
The Fed uses three main policy tools to achieve its objectives: required reserve ratios, discount rate, and open market operations. Making adjustments to gold reserves is not one of the fed policy tools.

44. Suppose the CPI basket contains only two goods and services: oranges and haircuts. In the base period, consumers bought 15 oranges at $2 each and 5 haircuts at $10 each. In the current period, consumers buy 15 oranges at $1.75 each and 5 haircuts at $12 each. The CPI for the current period is closest to:

A. 107.81.
B. 114.58.
C. 117.97.

Answer: A
“Monitoring Jobs and the Price Level,” Michael Parkin
2009 Modular Level I, Volume 2, pp. 305-307, Table 1
Study Session 5-22-d
Explain and calculate the consumer price index (CPI) and the inflation rate, describe the relation between the CPI and the inflation rate, and explain the main sources of CPI bias.
CPI equals 100 times the cost of the CPI basket at current-period prices divided by the cost of the CPI basket at base-period prices. In this problem the current period cost is (15 × 1.75 + 5 × 12) = 86.25. The base period cost is (15 × 2 + 5 × 10) = 80.
The CPI is (86.25 / 80) × 100 = 107.81.

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39. For a firm in perfect competition, as output increases the marginal revenue will most likely:

A. increase.
B. decrease.
C. remain constant.

40. Price discrimination is most likely an attempt by a monopoly to:

A. resell a product.
B. capture a producer surplus.
C. capture a consumer surplus.

41. Which of the following will most likely lead to cost-push inflation?

A. A decrease in the cost of financing.
B. An increase in the money prices of raw materials.
C. A technology change that lowers production costs.

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39. For a firm in perfect competition, as output increases the marginal revenue will most likely:

A. increase.
B. decrease.
C. remain constant.

Answer: C
“Perfect Competition”, Michael Parkin
2009 Modular Level I, Volume 2, p. 157-158, Figure 3
Study Session 5-18-b
Determine the profit maximizing (loss minimizing) output for a perfectly competitive firm, and explain marginal cost, marginal revenue, and economic profit and loss.
When output increases for a firm in perfect competition, marginal revenue remains constant while marginal cost changes.

40. Price discrimination is most likely an attempt by a monopoly to:

A. resell a product.
B. capture a producer surplus.
C. capture a consumer surplus.

Answer: C
“Monopoly”, Michael Parkin
2009 Modular Level I, Volume 2, pp. 193-195
Study Session 5-19-c, d
Explain price discrimination, and why perfect price discrimination is efficient.
Explain how consumer and producer surplus are redistributed in a monopoly, including the occurrence of deadweight loss and rent seeking.
A monopoly employs price discrimination to capture consumer surplus and to convert a consumer surplus to an economic profit.

41. Which of the following will most likely lead to cost-push inflation?

A. A decrease in the cost of financing.
B. An increase in the money prices of raw materials.
C. A technology change that lowers production costs.

Answer: B
“U.S. Inflation, Unemployment, and Business Cycles” Michael Parkin
2009 Modular Level I, Volume 2, pp, 388-390
Study Session 6-25-b
Describe and distinguish among the factors resulting in demand-pull and cost-push inflation, and describe the evolution of demand-pull and cost-push inflationary processes.
Increased material costs cause firms to manufacture less. Less manufacturing decreases short-run supply making prices rise (see page 388).

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36. The cross elasticity of demand for a complementary product would most likely be:

A. zero.
B. positive.
C. negative.

37. The return to entrepreneurial ability in a firm that makes a positive economic profit is most likely:

A. normal.
B. less than normal.
C. greater than normal.

38. The belief that money wage rates are sticky is least likely to be associated with:

A. classical macroeconomics.
B. monetarist macroeconomics.
C. Keynesian macroeconomics.