SURVEY OF ECONOMICS

  Define or explain the following terms: (3 pts. each) 1.) Keynesian Linkage 2.) Law of Diminishing Marginal Utility 3.) Diamond and Water Paradox 4.) Economies of Scale 5.) Utility Maximizing Rule 1 6.) Implicit Costs 7.) "Price Maker" 8.) Discount Rate 9.) Excess Reserves 10.) Precautionary Demand 2 Part II. Please answer the following questions in short essay form: 1.) Explain why the demand curve for a purely competitive firm is horizonal. (10 pts.) 2.) List and explain the 5 characteristics of Monopoly (8 pts.) 3 3.) Explain the profit maximizing approach of a Monopoly firm (6 pts.) 4.) Explain the two approaches for maximizing profit for a competitive firm in the short run. (6 pts.) 4 Part III: Please answer the following problems (show all work where applicable!) (1) The following are simplified balance sheets for the commercial banking system and the Federal Reserve system (Note: No cash account exists and all checks are deposited). Perform each of the following three transactions a,b,c, making appropriate changes in columns (1) through (3) in each balance sheet. Do not curnulate your answers and only fill in those spaces which pertain to the transaction. (l&pts.) Commercial Banking System: Assets: Reserves Securities Loans Liabilities: Demand Deposits Loans from FR.B's Federal Reserve Banks Assets: Securities Loans to CB's Liabilities: Reserves of CB' s Treasury Deposits Fed Reserve notes (1) $50 80 -- 80 $200 -- 10 (1) $80 -- 10 -- 50 5 -- 35 (2) (3) (2) (3) (a) Suppose a drop in the discount rate causes commercial banks to borrow an additional $3 billion from the FED. (Use column 1) (b) The FED buys $4 billion of govt. bonds from the public. (Use column 2) (c) The Treasury spends $2 billion on research for new space satellite. (Use column 3). The following are production possibilities tables for Chile and Argentina. Assume that prior to specialization and trade, the optimum product mix for Chile is alternative C and for Argentina alternative B. (12 pts.) Chile's Production Alternatives A Pork (tons) 4 Beans (tons) 0 a 3 5 C 2 10 D 0 20 Argentina's Production Alternatives A Pork (tons) 10 Beans (tons) 0 B 6 6 C 4 12 D 0 24 a) Under specialization, what product should each country produce? b) What is the total gain in pork and beans output which results from specialization? 6- 3) Answer the next three questions on the basis of the following diagram. (1 ~ pts.) e 5 / Ht, Al., /4 41 0 a) In what market structure is this firm sellings its product? b) Which letter designates the profit-maximizing level of output? ,.. v; At the profit-maximizing output, total p10.fit is represented by which four letters? -7-