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Economic Practice Test

Each of the firms produces an identical product. A) Assuming that the firms form a cartel, what price will the cartel choose if it wishes to maximize overall profits for the cartel? (c) To what output will an individual firm be restricted if this price is to be maintained (assume all firms are permitted to produce the same level of output)? (d) If the other firms stick to this output, how much would an individual firm be tempted to produce if it wished to maximize its own profit at the agreed price?….. (e) If it undercut the cartel price, what price and output would maximize its profit (assuming that the other members did not retaliate? 2 marks each) Question 5: (a) Explain and illustrate with a diagram the impact of external costs on resource allocation (2 marks for diagram plus 2 marks for explanation); b) Explain and illustrate with a diagram the impact of external benefits on resource (c) Why are public goods not produced in sufficient quantities by private markets? (2 marks) Question 6: (a) Consider this statement: When marginal revenue equals marginal cost, total cost equals total revenue and the firm makes zero profit’.

Do you agree or disagree?

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Explain. (5 marks) (b) Consider this statement: ‘A firm should increase output when it makes a profit’. Do you agree or disagree?

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Explain. (5 marks) Question 7: (a) Assuming identical long-run cost curves, draw two graphs and indicate the price ND output that result in the long-run under monopolistic competition and under perfect competition (2. 5 marks for each graph plus 2 marks for the explanations, total 7 marks) (b) Evaluate the differences between these two market structures. (3 marks).

Question 8: Discuss and illustrate with diagrams, the role and importance of money in an economy. Your answer should include a discussion on the following: a Bank creation of money; b Demand for money; c Money supply; d Determination of the equilibrium interest rate in the money market. (2. 5 marks for each part, total of 10 marks). Question 9: 10 marks total – 5 marks each part) a Illustrate and explain with diagrams the difference between demand-pull and cost- push inflation; (2. 5 marks for diagrams and 2. Marks for explanation) b Provide (describe) two (2) causes of each type of inflation. (2. 5 marks for 2 demand-pull causes and 2. 5 marks for 2 cost-push causes) Question 10: If the central bank bought $100 million of government securities from private sector- money markets, other things being equal, what would the effect be on the following? A The economy’s monetary base (2. 5 marks) b Short-term money market interest rates (2. 5 marks Longer maturity interest rates (2 5 marks) d Aggregate demand, economic activity and inflation (2. Marks) Question 11: (2. 5 marks each part) Using the aggregate demand – aggregate supply (AD-AS) diagram, show how the four economic events would affect economic activity and the price level. (Note: use a separate AD-AS diagram for each event) a A deterioration of the marketing and selling skills of firm managers; b An decrease in personal income tax; d A significant destruction in an economy’s capital stock because of war; Question 12: (a) Which policy is more expansionary: a $100 billion increase in government pending or a $100 billion cut in taxes?

Explain why (5 marks) (b) What is the difference between discretionary fiscal policy and automatic stabilizers? (5 marks) Question 13: (a) The consumer price index (I. E. ICP) is the most commonly used measure of changes in the general level of prices in Australia. Discuss some of the advantages and disadvantages of using this measure. (4 marks) (b) Why do some people ‘lose’ from inflation and why do some people Win’ from inflation? (6 marks) Question 14: Important Note: Answer this question on the examination question paper.

The allowing diagram shows a demand curve and supply curve of the Australian dollar against the Japanese Yen in the foreign exchange (FIX) market.. (a) With reference to the diagram, who might be demanding dollars in the FIX market and why? (b) Who is supplying dollars in the FIX market and for what purpose? (c) Mark the equilibrium exchange rate on the diagram. (d) Now illustrate the effect of an increased demand for dollars and a decreased supply of dollars. (e) Has the exchange rate appreciated or depreciated? (Delete the incorrect one) Appreciated / Depreciated End of Paper – Thank You

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