Exam 3 Practice Test

1. This excludes any material that will be covered during Tuesdays lecture.
2. Do all of your sample problems several times. Make sure you can calculate things like consumer
surplus, deadweight loss, consumer surplus if a monopoly is forced to price like a perfect
competition structure, etc.
3. What is the difference between the demand curve for one firms product in a perfect
competition market structure and the demand curve for one firms product in any other market
structure?
The demand curve in a perfect competition market structure is perfectly horizontal, while in
monopolistic competition, oligopoly, and monopoly market structures, the demand curve is
downward sloping.
4. What are two things that monopolies choose to maximize their profits?
Monopolies choose how much output to produce and they choose what price to charge.
5. Know how to calculate profits.
Find the quantity where marginal revenue equals marginal cost. Use that quantity to find the
values (in dollars) of where the quantity intersects the marginal cost curve and average total
cost curve. The difference between the two values is profit per unit. Multiply this by how
many units we have (quantity) and that gives us the profits.
6. Define barriers to entry.
Anything that keeps new firms out of the industry when firms are earning economic profits.
7. What are the barriers to entry that we talked about in class?
Economies of scale
-When it is cheaper for one firm (or a few big firms) to serve an entire market than a
lot of little firms.
Legal Barriers like patents
Control over key inputs to production
8. Know the efficiency effects of monopoly.
How does a monopoly differ from the perfect competitions standard for efficiency?
Monopolies charge P>MC
Monopolies do not produce Q where ATC is minimized
Monopolies reduce consumer surplus
Monopolies produce deadweight loss
9. When a monopolist is forced to set a price like a perfectly competitive firm, what price does it
charge?
It charges P = MC
10. Regulating a natural monopoly usually takes the form of forcing the firm to set P = to what?
ATC
11. Any firm that faces a downward sloping demand curve charges what?
They charge P>MC
12. What is the ability to charge P > MC known as?
Market Power
13. Market power is inversely related to what?
Elasticity
If demand is very inelastic (More of a vertical demand), market power is large.
 If demand is very elastic (More of a horizontal demand), market power is small.
14. Under which market structure do firms have NO market power?
Perfect competition
15. Is government intervention justified in every case that involves market power?
No
16. What are the cases we talked about in class which can justify government intervention?
Abuse of market power
Undue market power
Exorbitant market power
17. Which market structures have at least some market power?
Monopolistic competition
Oligopoly
Monopoly
Any firm, not just a monopoly, that faces a downward sloping demand curve will have SOME
amount of market power.
18. When does market power cause harm?
When the good is a necessity (food, toothpaste, gasoline, etc.) with few or no substitutes
19. Define a horizontal merger.
Two firms in the same market/industry competing with one another merge.
20. Define vertical merger.
Two firms in different stages of production of the good merge.
21. Who looks at mergers?
Department of justice
Federal Trade Commission
In some cases:
Federal Communications Commission
Federal Energy Regulatory Commission
State Public Service Commissions
22. What efficiency do mergers create?
Economies of scale. Spreading fixed costs over larger outputs. There is an elimination of
duplicate functions.

23. Make sure to know this spectrum.

24. Describe a monopolistic competition market structure.
There are a lot of firms. They sell products that are substitutes from one another. It is easy to
enter the market as a seller. Because products are not IDENTICAL, the demand curve for a firm
is not horizontal; it is downward sloping.
25. Page 364 graph in your book about profits shrinking in a monopolistic competition structure as
firms enter the market.
26. Comparing Perfect competition and monopolistic competition market structures.
Situation Perfect Monopolistic
Competition Competition
In the short run, can a firm earn profits? Yes Yes
Do profits attract new firms? Yes Yes
As firms enter the market, price goes down so P = ATC = MC P = ATC > MC
that
Is ATC minimized? Yes It doesnt have to be
27. Which definition that we have learned before does monopolistic competition violate?
Productive efficiency (goods and services produced at the lowest possible cost, minimum ATC)
28. How do customers benefit from monopolistic competition?
If customers are convinced that there are differences between products, the price increase for
one product will not cause all customers to leave that product for a substitute. This means
that the demand curve will not be horizontal. This means that profits will not be maximized at
the minimum ATC.

ONTO MACRO NOW

29. Define Stagflation.
High prices with no economic growth.
30. Define Mercantilism.
A countrys wealth is measured by how much precious metal (gold, silver, etc.) it has.
31. Who said that a countrys wealth is measured by the amount of goods and services its citizens
have. The best way to have a lot of goods and services is to produce a lot of goods and services?
Adam Smith
32. Define GDP.
GDP is Gross Domestic Product. It is the market value of all final goods and services produced
in a country during a given period of time (a year).
33. What is the current value of GDP?
$18.86 Trillion
34. Who measures GDP?
The Bureau of Economic Analysis, which is part of the Department of Commerce.
35. What did GDP grow at in 2016?
2%
36. What is a normal amount of GDP growth?
2%-3%
37. What happens to the unemployment rate as GDP Shrinks (negative)?
The unemployment rate goes up.
38. What are some things left out of GDP?
Intermediate goods (goods used to produce the final product)
 Housewife/househusband activities
The underground economy
Non-Market activities
Transfer payments like Unemployment checks and social security
Buying stocks
Illegal activities
Anything used (it would be double counted)
39. Do the exercise from class (its at the end of the guide).
40. What are the components of the GDP ?
Consumption goods ($12.9 trillion)
Durable goods
Non-durable goods
Services ($8.8 trillion)
Investment goods ($3.1 trillion)
Residential
Business Structures
Equipment
Software/Intellectual Property Products
Changes to Inventories
Government Purchases ($3.3 trillion)
State and Local ($2.06 trillion)
Federal ($1.25 trillion)
Defense ($732 billion)
Non-defense ($521 trillion)
Net Exports (-$540 billion)
Exports ($2.26 trillion)
Imports ($2.8 trillion)
41. When is the last time the US exported more than it imported?
34 years ago, 1981.
42. What is the value added approach?
An alternative way of calculating GDP which includes intermediate goods but not their total
value. It only includes the added value at each stage of the production process.
43. Real and Nominal GDP exercises at the end of the guide.
44. What is the value of US Real GDP?
$16.8 trillion
45. What is the value of US Nominal GDP?
$18.86 trillion
46. What is the formula for the GDP deflator?
(Nominal GDP/Real GDP) x 100
47. What is the base year for the GDP Deflator?
2009
48. What is the current value of the GDP Deflator?
112.2
49. What is the formula for GDP per capita?
 Total GDP/Total Population
50. Why do we use GDP per capita?
It is used for international comparisons
51. What is the US GDP per capita?
$18.8 trillion/320 million people = $58,000 per capita
52. What is the European Unions GDP per capita?
$20.8 trillion/508 million people = $41,000 per capita
53. What are some problems with the way that GDP is measured?
The value of leisure is not included in GDP
GDP doesnt reflect negative effects of production
GDP doesnt reflect social problems
GDP measures the size of the pie but not how the pie is divided
54. What is an alternative measure to GDP?
Genuine Progress Indicator (GPI). It measures whether a countys growth is production of
goods/services actually increases the well-being of the population. It includes things like cost
of resource depletion, cost of pollution, cost of crime, loss of habitat, etc.
55. Define GNP.
GNP is Gross National Product. Its the value of all final goods and services produced by the
residents of the U.S even if production takes place outside of our borders.
56. Before which year did we pay attention to GNP?
1991
57. After which year did we pay attention to GDP?
1991
Assume that we are talking about GDP in 2017.

$12 million in chips made in New York and sold in Colorado Yes, C, Non-Durable
$3 million mansion sold in 1999 sells again in 2017 for $12 No
million
$2 million spent on new police cars for Lawrence, Kansas Yes, G, Local and State
$6 million spent on illegal drugs in Texas No
$7 million worth of work from housewives and househusbands No
$30 million worth of Volkswagens produced in Germany and sold Yes, NX, Imports
in California
$10 million in haircuts Yes, C, Services
$12 million in Ford cars sold 30 years ago No
$6 million grapes sold to a wine making company No
$120 million in items resold on eBay No
$1 million spent on stock broker services Yes, C, Services
$22 million spent on Google stocks No
$18 million spent on helicopters for the air force Yes, G, Federal, Defense
$35 million spent on warehouses for Amazon Yes, I, Business Structure
$20 million spent on personal computers Yes, C, Durable
$22 million spent on computers for the Kansas City Royals Yes, I, Equipment
$11 million worth of coca cola products made in Atlanta, GA and Yes, NX, Exports
sold in China
$ 35 million in social security payments to citizens No
$16 million spent on oil changes this year Yes, C, Services
$12 million spent on oil changes 15 years ago No
$10 million worth of houses sold for the first time this year Yes, I, Residential
$3 million in McDonalds hamburgers Yes, C, Non-Durable
$6 million in t-shirts made in China and sold in New York Yes, NX, Imports
$3 million in unemployment checks from the government No
$10 million worth of grapes sold at the grocery store (people are Yes, C, Non-Durable
eating them, not making anything from them)
$32 million worth of bananas produced in Mexico and sold in No
Canada
$ 900,000 spent on factories for Coca Cola Yes, I, Business Structure
$26 million spent on tires for Pontiac to put on the cars they sell No
1. What are the values of the following categories and subcategories:
Consumer goods $72m
Durable goods $20m
Non-durable goods $25m
Services $27m
Investment $67.9m
Residential $10m
Business Structures $35.9m
Equipment $22m
Software/intellectual property $0
Changes to inventories $0
Government $20m
State and local $2m
Federal $18m
Defense $18m
Non-Defense $0
Net Exports -$25m
Exports $11m
Imports $36m
2. What is the value of GDP?

$134.9m

3. What is the value of things not included in GDP?

$296m (include both values from example 2 on the previous table)

4. List the subcategories of C In order of least to greatest.

Durable, Non-Durable, Services

5. List the subcategories of I In order of least to greatest.

Software/intellectual property, changes to inventories, residential, equipment, business

structures

6. List the subcategories of G In order of greatest to least.

Federal, State and local

7. List the subcategories of NX In order of greatest to least.
Imports, Exports
 2014 is the base year.

2014 2014 2015 2015 2016 2016

Q P Q P Q P
McDonalds
Hamburgers 12,000 3.80 12,200 3.90 12,600 4.00
Harley
Motorcycles 350 20,000 375 20,100 400 20,500
Graphic T-
Shirts 3250 40 3400 45 3600 47
Baseball Hats 6750 30 6760 32 6800 34
Nintendo
Switches 1200 300 1250 325 1300 400

What is the value of nominal GDP in 2014, 2015, and 2016?

2014: $7,738,100

2015: $8,360,650

2016: $9,170,800

What is the value of Real GDP in 2014, 2015, and 2016?

2014: $7,738,100

2015: $8,260,160

2016: $8,785,880

What is the Value of the GDP deflator in 2014, 2015, and 2016?

2014: 100

2015: 101.22

2016: 104.38
 2014 is the base year.

2014 2014 2015 2015 2016 2016

Q P Q P Q P
McDonalds
Hamburgers 12,000 0.99 12,200 1.09 12,600 1.21
Harley
Motorcycles 350 16,000 375 16,250 400 17,000
Graphic T-
Shirts 3250 34 3400 37 3600 42
Baseball Hats 6750 20 6760 26 6800 28
Nintendo
Switches 1200 300 1250 325 1300 400

What is the value of nominal GDP in 2014, 2015, and 2016?

2014: $6,217,380

2015: $6,814,858

2016: $7,676,846

What is the value of Real GDP in 2014, 2015, and 2016?

2014: $6,217,380

2015: $6,637,878

2016: $7,060,874

What is the Value of the GDP deflator in 2014, 2015, and 2016?

2014: 100

2015: 102.67

2016: 108.72