ECON281- Intermediate Macroeconomic Theory I FINAL EXAM_2025.

1 ECON281- Intermediate Macroeconomic Theory I PRACTICE FINAL EXAM The duration of this exam is TWO hours. There is no choice of questions. Partial marks are indicated. The total marks for this exam are 55. This is a closed-book exam; no notes or other materials (including all types of electronic devices) are allowed. This exam has six pages: • Pages 1 and 2 consist of five Short-Answer Questions worth a total of 35 marks. • Pages 3, 4, 5, and 6 consist of twenty Multiple Choice Questions worth a total of 20 marks. Use the University of Alberta standardized examination booklet to answer the Short-Answer Questions and the scantron sheet to answer the Multiple-Choice Questions. Question 1 SkyHigh Airlines operates flights between two major cities and serves two separate customer segments: business travelers and leisure travelers. Due to aircraft size and scheduling limits, the airline faces a total seat capacity constraint of 150 passengers per flight. SkyHigh Airlines practices third-degree price discrimination and has already determined the demand and marginal revenue (MR) functions for each segment: Demand functions: Market 1: Q₁ = 200 - 2P₁ Market 2: Q₂ = 250 - P₂ Marginal revenue functions: Market 1 (Business Travelers): MR₁ = 100 - Q₁ Market 2 (Leisure Travelers): MR₂ = 250 - 2Q₂ The marginal cost (MC) of serving each passenger is $10. Determine the profit-maximizing number of passengers from each market segment (Q₁ and Q₂), and the corresponding ticket prices (P₁ and P₂) for each segment. Question 2 Using the graphs of a typical perfectly competitive firm in a perfectly competitive market: a. Draw the long-run market supply curve for the following scenarios:2 1. When the market is characterized by constant cost industries. 2. When the market is characterized by increasing cost industries. b. Explain each graph in detail, including the reasoning behind the shape of the long-run supply curve in the two markets. Question 3 Consider a perfectly competitive market with inverse market supply and inverse market demand . Suppose the government introduces a subsidy of $5 per unit in this market. i. Determine the equilibrium price and quantity traded before the subsidy. ii. Calculate the consumer surplus and producer surplus before the subsidy. iii. Determine the equilibrium quantity traded after the subsidy is imposed. iv. Calculate the increase in consumer surplus resulting from the subsidy. v. Calculate the increase in producer surplus resulting from the subsidy. vi. Calculate the deadweight loss resulting from the subsidy. vii. Calculate the impact of the subsidy on the government’s budget. Question 4 A company, Apex Manufacturing, operates two factories with the following cost functions: Factory 1: MC1 = 20Q1 (where MC1 is the marginal cost of production in Factory 1, and Q1 is the output produced in Factory 1) Factory 2: MC2 = 40Q2 (where MC2 is the marginal cost of production in Factory 2, and Q2 is the output produced in Factory 2) The company is the only firm selling this product in the market. It faces the following demand curve for its product: P = 700 – 5Q, where P represents the price of the good the firm will charge, and Q represents total output, given by: Q = Q1 + Q2. The marginal revenue (MR) is MR= 700-10Q. Calculate the values of Q1, Q2, Q, and P that maximize Apex Manufacturing's profit. Question 5 A consumer purchases two goods: chocolate (x) and a composite good (y). The consumer's utility function is given by: , with the marginal utilities of x and y being , MUy =1 The consumer has an income of $10. Initially, the price of chocolate is Px1 = 0.50, and it later decreases to Px2 = 0.20. The price of the composite good remains constant at Py = 1. i. Calculate the numerical values of the income effect, substitution effect, and price effect resulting from the price drop of chocolate. ii. Illustrate these effects with a graph, labeling all components clearly.3 Question 1 We use the following two equations: 1) MR₁ = MR₂ → 100 - Q₁ = 250 - 2Q₂ 2) Q₁ + Q₂ = 150 Step-by-step Calculation From equation (2): Q₁ = 150 - Q₂ Substitute into equation (1): 100 - (150 - Q₂) = 250 - 2Q₂ → -50 + Q₂ = 250 - 2Q₂ → 3Q₂ = 300 → Q₂ = 100 → Q₁ = 150 - Q₂ = 50 Find Prices Market 1: Q₁ = 200 - 2P₁ → 50 = 200 - 2P₁ → P₁ = 75 Market 2: Q₂ = 250 - P₂ → 100 = 250 - P₂ → P₂ = 150 Final Answer Q₁ = 50 passengers, P₁ = $75 (Business Travelers) Q₂ = 100 passengers, P₂ = $150 (Leisure Travelers)4 Question 2567 Question 3 i. Equilibrium Price and Quantity Before Subsidy Set inverse supply and demand equal: 5 + 3Q = 50 - 2Q Solving gives Q = 9, and P = 32. Equilibrium price: $32 Equilibrium quantity: 9 units ii. Consumer Surplus and Producer Surplus Before the Subsidy Consumer Surplus: CS = 0.5 × (50 - 32) × 9 = $81 Producer Surplus: PS = 0.5 × (32 - 5) × 9 = $121.50 iii. Equilibrium Quantity After the Subsidy After $5 subsidy, supply shifts: Producer receives P + 5. Set 5 + 3Q = P + 5 → P = 3Q Match with demand: 3Q = 50 - 2Q → Q = 10, P = 30. New quantity: 10 Price paid by consumers: $30 Price received by producers: $35 iv. Increase in Consumer Surplus New CS = 0.5 × (50 - 30) × 10 = $100 Increase in CS = $100 - $81 = $198 v. Increase in Producer Surplus New PS = 0.5 × (35 - 5) × 10 = $150 Increase in PS = $150 - $121.5 = $28.5 vi. Deadweight Loss (DWL) DWL = 0.5 × (10 - 9) × 5 = $2.5 vii. Government Budget Impact Government spending = 5 × 10 = $50 Question 4 Apex Manufacturing operates two factories with the following marginal cost functions: Factory 1: MC₁ = 20Q₁ Factory 2: MC₂ = 40Q₂ Market Demand: P = 700 - 5Q, where Q = Q₁ + Q₂ Marginal Revenue: MR = 700 - 10Q Step 1: Construct the Multi-Plant Marginal Cost Curve To construct the combined marginal cost curve, we horizontally add MC₁ and MC₂. From MC₁ = 20Q₁ and MC₂ = 40Q₂, set MC₁ = MC₂ at equilibrium to allocate output efficiently. Q₁ = MC₁ / 20 and Q₂ = MC₂ / 40, Equating: 20Q₁ = 40Q₂ → Q₁ = 2Q₂ Total output Q = Q₁ + Q₂ = MC₁ / 20 + MC₂ / 40 = (MC1 + 2 MC2)/ 40 ) Q = 3MC / 40 MC = 40 Q /3 Step 2: Equate Multi-Plant MC to MR Set MR = MC: 700 - 10Q = 40Q / 3 Multiply both sides by 3: 2100 - 30Q = 40Q → 2100 = 70Q → Q = 30 Total output (Q) = 309 Step 3: Determine the Monopoly Price Use the demand curve to find the price: P = 700 - 5Q = 700 - 5(30) = 700 - 150 = 550 Monopoly price (P) = $550 Step 4: Determine Q₁ and Q₂ Using the allocation from earlier: Q₁ = 2Q / 3 = 2(30) / 3 = 20 Q₂ = Q / 3 = 30 / 3 = 10 Final Results Variable Value Q₁ (Output from Factory 1) 20 Q₂ (Output from Factory 2) 10 Q (Total Output) 30 P (Monopoly Price) $550 Question 5 A consumer purchases two goods: chocolate (x) and a composite good (y). The utility function is: U(x, y) = 2√x + y Marginal utilities: MUx = 1/√x, MUy = 1 Initial price of chocolate: Px1 = $0.50 New price of chocolate: Px2 = $0.20 Price of composite good: Py = $1 Income: $10 Step 1: Initial Bundle (Point A) Set MUx/MUy = Px1/Py → 1/√x = 0.5 → √x = 2 → x = 4 Budget: 0.5*4 + y = 10 → y = 8 Utility: U = 2√4 + 8 = 4 + 8 = 12 Step 2: New Bundle After Price Drop (Point C) Set MUx/MUy = Px2/Py → 1/√x = 0.2 → √x = 5 → x = 2510 Budget: 0.2*25 + y = 10 → y = 5 Step 3: Compensated Bundle (Point B) Keep utility constant at 12: 2√x + y = 12 → y = 12 - 2√x Budget: 0.2x + (12 - 2√x) = I → x = 25, y = 2 Final Results Substitution Effect (SE): xB - xA = 25 - 4 = 21 Income Effect (IE): xC - xB = 25 - 25 = 0 Price Effect (PE): xC - xA = 25 - 4 = 2111 Multiple Choice Questions 1. Suppose that a firm uses only capital, K, and labor, L, in its production process. At the firm’s current long-run combination of capital and labor, it uses positive amounts of both inputs and measures the marginal products as MPK =15 and MPL =10 . The rental rate of capital is r = 6 and the current wage rate for labor is w = 3. The firm: a) is currently minimizing total cost in the long run. b) could lower cost by increasing the usage of capital and decreasing the usage of labor. c) could lower cost by increasing the usage of labor and decreasing the usage of capital. d) cannot lower cost without also lowering the level of output. 2. Suppose a firm’s production function can be specified as Q = 10KL. This firm’s cost function exhibits a) economies of scale b) diseconomies of scale c) neither diseconomies nor economies of scale. 3. The long-run total cost curve shows: a) the various combinations of capital and labor that will produce different levels of output at the same cost. b) the various combinations of capital and labor that will produce the same level of output. c) the minimum total cost to produce any level of output, holding input prices fixed, and choosing all inputs to minimize cost. d) for a fixed level of capital, the minimum cost to produce a given level of output. 4. Suppose for a particular production function, the cost-minimizing level of labor is and the cost-minimizing level of capital is . If and , the long-run total cost curve is: a) b) c) d) 5. Suppose that, at the current level of output, a firm in a perfectly competitive market is producing at a level such that price exceeds marginal cost, P > MC. Marginal cost is normally shaped (U-shaped). The firm: a) is currently maximizing profit since it is charging a price higher than marginal cost. b) could increase profit by lowering the level of output. c) could increase profit by increasing the level of output. d) cannot increase profit without raising price. 6. A perfectly competitive firm’s short-run supply curve is determined by the equation: a) P= AC where . Otherwise, supply is zero. b) P=AVC where . Otherwise, supply is zero. c) P=SMC where . Otherwise, supply is zero. d) where or or , depending on the level of sunk costs. Otherwise, supply is zero.12 7. Suppose that the tricorder industry is perfectly competitive. The firm of JL Picard is making a short-term economic profit. The firm of WT Riker decides to enter the tricorder industry. However, when the WT Riker firm enters the industry, it bids up some input prices. For this industry, we will likely observe a(n): a) upward-sloping long-run market supply curve. b) downward-sloping long-run market supply curve. c) horizontal long-run market supply curve. d) vertical long-run market supply curve. 8. For a perfectly competitive firm, and , where q is output. If the market price is equal to 40, at what level of output should the firm operate to maximize profit in the short run? a) 10 b) 20 c) 30 d) 40 9. The inverse elasticity pricing rule tells us the monopolist’s optimal mark-up of price over marginal cost. In general, a) the more price elastic the monopolist’s demand, the smaller the mark-up will be. b) the less price elastic the monopolist’s demand, the smaller the mark-up will be. c) price equals marginal revenue for the monopolist. d) marginal revenue equals average revenue for the monopolist. 10. A monopolist owns two plants in which to produce product A. The marginal cost of producing A is increasing, but currently is lower in plant 1 than in plant 2. How should the monopolist allocate production? a) Produce all output in plant 1. b) Produce all output in plant 2. c) Produce 50 percent in plant 1 and 50 percent in plant 2. d) Produce in plant 1 up to the point where marginal costs are equated across the plants. (In other words, reallocate production so that .) 11. A monopolist faces inverse demand P Q = − 400 4 d and has constant marginal cost MC = 80 . If this monopolist engages in first-degree price discrimination, producer surplus will be: a) 0 b) 1,600 c) 3,200 d) 12,800 12. A monopolist faces inverse demand P Q = − 400 4 d and has constant marginal cost MC = 80 . If this monopolist changes from a policy of uniform pricing to a policy of first-degree price discrimination, deadweight loss will decrease by: a) 0 b) 1,600 c) 3,20013 d) 12,800 13. Suppose that a firm faces a demand curve for its product of P Q = − 10 d . The corresponding marginal revenue curve is MR Q = − 10 2 . The firm has a constant marginal cost of $4 per unit. If the firm engages in uniform pricing, what price will the firm charge? a) $7. b) $5. c) $4. d) $3. 14. What is the primary difference between first-degree and second-degree price discrimination? a) In first-degree price discrimination, the firm charges different prices based on each consumer’s age and income, while in second-degree price discrimination, prices vary depending on the consumer’s purchase history. b) First-degree price discrimination relies on knowing consumers’ exact willingness to pay, whereas second-degree price discrimination uses quantity-based pricing without requiring this knowledge. c) In first-degree price discrimination, prices are set based on the consumer’s purchase quantity, while in second-degree price discrimination, prices are determined by the consumer’s income level. 15. (See the diagram above): Diminishing marginal returns set in at labor equals: a) 100 b) 200 c) 300 d) 400 16. The substitution effect graphically is always denoted: a) by movement along the original indifference curve, whereas the income effect is represented by a rotation of the budget line. b) by moving in the direction of the item that is becoming relatively more expensive. c) by moving in the direction of the item that is becoming relatively cheaper and the income effect is always denoted by a rotating budget line. d) by movement along the original indifference curve, whereas the income effect is represented by a parallel shift of the budget line.14 17. Suppose the marginal rate of substitution (MRS) between good X and good Y is 10. This means: a) The consumer is willing to give up 10 units of good X for 1 unit of good Y to maintain the same level of utility. b) The consumer is willing to give up 10 units of good Y for 1 unit of good X to maintain the same level of utility. c) Regardless of prices, the consumer will only consume good Y. d) Regardless of prices, the consumer will only consume good X. 18. Compensating variation is: a) the change in income necessary to hold the consumer at the final level of utility as price changes. b) the change in income necessary to restore the consumer to the initial level of utility. c) the difference in the consumer’s income between the purchase of the original basket and the new basket at the old prices. d) the change in income necessary to give the consumer the level of utility he would have after the price change. 19. Increasing marginal returns occur when the total product function is: a) decreasing. b) increasing at a decreasing rate. c) increasing at a constant rate. d) Increasing at an increasing rate. 20. Consider the utility function U = min (5x, 7y). To increase satisfaction the consumer must consume a) at least 5 units more of x b) at least 7 units more of y c) more of both x and y d) more of either x or y1 ECON281- Intermediate Macroeconomic Theory I PRACTICE FINAL EXAM The duration of this exam is TWO hours. There is no choice of questions. Partial marks are indicated. The total marks for this exam are 55. This is a closed-book exam; no notes or other materials (including all types of electronic devices) are allowed. This exam has six pages: • Pages 1 and 2 consist of five Short-Answer Questions worth a total of 35 marks. • Pages 3, 4, 5, and 6 consist of twenty Multiple Choice Questions worth a total of 20 marks. Use the University of Alberta standardized examination booklet to answer the Short-Answer Questions and the scantron sheet to answer the Multiple-Choice Questions. Question 1 SkyHigh Airlines operates flights between two major cities and serves two separate customer segments: business travelers and leisure travelers. Due to aircraft size and scheduling limits, the airline faces a total seat capacity constraint of 150 passengers per flight. SkyHigh Airlines practices third-degree price discrimination and has already determined the marginal revenue (MR) functions for each segment: • Market 1 (Business Travelers): MR₁ = 100 - Q₁ • Market 2 (Leisure Travelers): MR₂ = 250 - 2Q₂ The marginal cost (MC) of serving each passenger is $10. Determine the profit-maximizing number of passengers from each market segment (Q₁ and Q₂), and the corresponding ticket prices (P₁ and P₂) for each segment. Question 2 Using the graphs of a typical perfectly competitive firm in a perfectly competitive market: a. Draw the long-run market supply curve for the following scenarios: 1. When the market is characterized by constant cost industries. 2. When the market is characterized by increasing cost industries. b. Explain each graph in detail, including the reasoning behind the shape of the long-run supply curve in the two markets.2 Question 3 Consider a perfectly competitive market with inverse market supply and inverse market demand . Suppose the government introduces a subsidy of $5 per unit in this market. i. Determine the equilibrium price and quantity traded before the subsidy. ii. Calculate the consumer surplus and producer surplus before the subsidy. iii. Determine the equilibrium quantity traded after the subsidy is imposed. iv. Calculate the increase in consumer surplus resulting from the subsidy. v. Calculate the increase in producer surplus resulting from the subsidy. vi. Calculate the deadweight loss resulting from the subsidy. vii. Calculate the impact of the subsidy on the government’s budget. Question 4 A company, Apex Manufacturing, operates two factories with the following cost functions: Factory 1: MC1 = 20Q1 (where MC1 is the marginal cost of production in Factory 1, and Q1 is the output produced in Factory 1) Factory 2: MC2 = 40Q2 (where MC2 is the marginal cost of production in Factory 2, and Q2 is the output produced in Factory 2) The company is the only firm selling this product in the market. It faces the following demand curve for its product: P = 700 – 5Q, where P represents the price of the good the firm will charge, and Q represents total output, given by: Q = Q1 + Q2. The marginal revenue (MR) is MR= 700-10Q. Calculate the values of Q1, Q2, Q, and P that maximize Apex Manufacturing's profit. Question 5 A consumer purchases two goods: chocolate (x) and a composite good (y). The consumer's utility function is given by: , with the marginal utilities of x and y being , MUy =1 The consumer has an income of $10. Initially, the price of chocolate is Px1 = 0.50, and it later decreases to Px2 = 0.20. The price of the composite good remains constant at Py = 1. i. Calculate the numerical values of the income effect, substitution effect, and price effect resulting from the price drop of chocolate. ii. Illustrate these effects with a graph, labeling all components clearly.3 Multiple Choice Questions 1. Suppose that a firm uses only capital, K, and labor, L, in its production process. At the firm’s current long-run combination of capital and labor, it uses positive amounts of both inputs and measures the marginal products as MPK =15 and MPL =10 . The rental rate of capital is r = 6 and the current wage rate for labor is w = 3. The firm: a) is currently minimizing total cost in the long run. b) could lower cost by increasing the usage of capital and decreasing the usage of labor. c) could lower cost by increasing the usage of labor and decreasing the usage of capital. d) cannot lower cost without also lowering the level of output. 2. Suppose a firm’s production function can be specified as Q = 10KL. This firm’s cost function exhibits a) economies of scale b) diseconomies of scale c) neither diseconomies nor economies of scale. 3. The long-run total cost curve shows: a) the various combinations of capital and labor that will produce different levels of output at the same cost. b) the various combinations of capital and labor that will produce the same level of output. c) the minimum total cost to produce any level of output, holding input prices fixed, and choosing all inputs to minimize cost. d) for a fixed level of capital, the minimum cost to produce a given level of output. 4. Suppose for a particular production function, the cost-minimizing level of labor is and the cost-minimizing level of capital is . If and , the long-run total cost curve is: a) b) c) d) 5. Suppose that, at the current level of output, a firm in a perfectly competitive market is producing at a level such that price exceeds marginal cost, P > MC. Marginal cost is normally shaped (U-shaped). The firm: a) is currently maximizing profit since it is charging a price higher than marginal cost. b) could increase profit by lowering the level of output. c) could increase profit by increasing the level of output. d) cannot increase profit without raising price. 6. A perfectly competitive firm’s short-run supply curve is determined by the equation: a) P= AC where . Otherwise, supply is zero. b) P=AVC where . Otherwise, supply is zero. c) P=SMC where . Otherwise, supply is zero. d) where or or , depending on the level of sunk costs. Otherwise, supply is zero.4 7. Suppose that the tricorder industry is perfectly competitive. The firm of JL Picard is making a short-term economic profit. The firm of WT Riker decides to enter the tricorder industry. However, when the WT Riker firm enters the industry, it bids up some input prices. For this industry, we will likely observe a(n): a) upward-sloping long-run market supply curve. b) downward-sloping long-run market supply curve. c) horizontal long-run market supply curve. d) vertical long-run market supply curve. 8. For a perfectly competitive firm, and , where q is output. If the market price is equal to 40, at what level of output should the firm operate to maximize profit in the short run? a) 10 b) 20 c) 30 d) 40 9. The inverse elasticity pricing rule tells us the monopolist’s optimal mark-up of price over marginal cost. In general, a) the more price elastic the monopolist’s demand, the smaller the mark-up will be. b) the less price elastic the monopolist’s demand, the smaller the mark-up will be. c) price equals marginal revenue for the monopolist. d) marginal revenue equals average revenue for the monopolist. 10. A monopolist owns two plants in which to produce product A. The marginal cost of producing A is increasing, but currently is lower in plant 1 than in plant 2. How should the monopolist allocate production? a) Produce all output in plant 1. b) Produce all output in plant 2. c) Produce 50 percent in plant 1 and 50 percent in plant 2. d) Produce in plant 1 up to the point where marginal costs are equated across the plants. (In other words, reallocate production so that .) 11. A monopolist faces inverse demand P Q = − 400 4 d and has constant marginal cost MC = 80 . If this monopolist engages in first-degree price discrimination, producer surplus will be: a) 0 b) 1,600 c) 3,200 d) 12,800 12. A monopolist faces inverse demand P Q = − 400 4 d and has constant marginal cost MC = 80 . If this monopolist changes from a policy of uniform pricing to a policy of first-degree price discrimination, deadweight loss will decrease by: a) 0 b) 1,600 c) 3,2005 d) 12,800 13. Suppose that a firm faces a demand curve for its product of P Q = − 10 d . The corresponding marginal revenue curve is MR Q = − 10 2 . The firm has a constant marginal cost of $4 per unit. If the firm engages in uniform pricing, what price will the firm charge? a) $7. b) $5. c) $4. d) $3. 14. What is the primary difference between first-degree and second-degree price discrimination? a) In first-degree price discrimination, the firm charges different prices based on each consumer’s age and income, while in second-degree price discrimination, prices vary depending on the consumer’s purchase history. b) First-degree price discrimination relies on knowing consumers’ exact willingness to pay, whereas second-degree price discrimination uses quantity-based pricing without requiring this knowledge. c) In first-degree price discrimination, prices are set based on the consumer’s purchase quantity, while in second-degree price discrimination, prices are determined by the consumer’s income level. 15. (See the diagram above): Diminishing marginal returns set in at labor equals: a) 100 b) 200 c) 300 d) 400 16. The substitution effect graphically is always denoted: a) by movement along the original indifference curve, whereas the income effect is represented by a rotation of the budget line. b) by moving in the direction of the item that is becoming relatively more expensive. c) by moving in the direction of the item that is becoming relatively cheaper and the income effect is always denoted by a rotating budget line. d) by movement along the original indifference curve, whereas the income effect is represented by a parallel shift of the budget line.6 17. Suppose the marginal rate of substitution (MRS) between good X and good Y is 10. This means: a) The consumer is willing to give up 10 units of good X for 1 unit of good Y to maintain the same level of utility. b) The consumer is willing to give up 10 units of good Y for 1 unit of good X to maintain the same level of utility. c) Regardless of prices, the consumer will only consume good Y. d) Regardless of prices, the consumer will only consume good X. 18. Compensating variation is: a) the change in income necessary to hold the consumer at the final level of utility as price changes. b) the change in income necessary to restore the consumer to the initial level of utility. c) the difference in the consumer’s income between the purchase of the original basket and the new basket at the old prices. d) the change in income necessary to give the consumer the level of utility he would have after the price change. 19. Increasing marginal returns occur when the total product function is: a) decreasing. b) increasing at a decreasing rate. c) increasing at a constant rate. d) Increasing at an increasing rate. 20. Consider the utility function U = min (5x, 7y). To increase satisfaction the consumer must consume a) at least 5 units more of b) at least 7 units more of y c) more of both x and y d) more of either x or y