BE 201 Final Exam

a. A U.S. college student decides to spend a year studying at the Sorbonne in Paris.

i. Creates a demand

a. A U.S. government bond held by a Spanish citizen matures, and the loan amount is paid back to that person.

i. Creates a demand

a. The U.S. economy grows faster than the French economy.

i. Creates a demand

a. An Italian manufacturer ships machinery from one Italian port to another on a Liberian freighter.

i. Creates a supply

a. It is widely expected that the euro will depreciate in the near future.

i. Creates a supply

a. A German automobile firm decides to build an assembly plant in South Carolina.

i. Creates a supply of European euros in a foreign exchange market

a. A country that grows faster than its major trading partners can expect the international value of its currency to depreciate.

i. This statement is true because when a country grows faster than its major trading partners, the international value of its currency will depreciate.

a. A country's currency will appreciate if its inflation rate is less than that of the rest of the world.

i. When a country inflation rate is less than other countries, these other countries will want to buy more from the country with the lower rate because the goods will be cheaper. This means that the demand for that countries currency will be high, meaning the country's currency will appreciate.

a. A U.S. airline firm purchases several Airbus planes assembled in France.

Creates a demand for European euros in foreign exchange market

3. "Monopolistic competition is monopolistic up to the point at which consumers become willing to buy close-substitute products and competitive beyond that point." Explain. LO2

a. Monopolistic competition is when firms are similar but they do not have a perfect substitute for a product or service. A large part of this is that there are many competitors, and there is an easy exit and entry.

1. Explain the law of demand. Why does a demand curve slope downward? How is a market demand curve derived from individual demand curves? LO2

a. The law of demand states that other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls. In short, there is a negative or inverse relationship between price and quantity demanded. The demand curve slopes downward because the relationship between price and quantity demanded is inverse or negative. A market demand curve is derived from individual demand curves by adding quantities demanded by all customers at each of the various possible prices.

a. A nation whose interest rate is rising more rapidly than interest rates in other nations can expect the international value of its currency to appreciate.

i. With a nations interest rates being higher, other countries will want to lead the country money because they will make more money back from the loan. Meaning other countries will want to exchange their currency for the currency of the nation with the highest rate. With this, the international value of its currency will appreciate.

2. Discuss the major barriers to entry into an industry. Explain how each barrier can foster either monopoly or oligopoly. Which barriers, if any, do you feel give rise to monopoly that is socially justifiable? LO2

a. Economies of Scales: a barrier because of the need for new firms to start big to achieve the low production costs of those already in the industry. b. Patents and licenses: legal barriers to entry that are somewhat justifiable. If inventions were not protected from copying, the urge to create new products would lessen. However, some may say the present 17 years granted for patents isn't too high. It can foster a monopoly because c. Ownership or Control of Essential Resources: this is when a company controls a resource essential for a specific area which can limit the entry of other companies. This can foster a monopoly because it would be the only option.

2. What effect would a rule stating that university students must live in university dormitories have on the price elasticity of demand for dormitory space? What impact might this in turn have on room rates? LO1

a. If students had to live in university dormitories, then there is no substitute available for students except the dorms. This makes the price demand elasticity of dorms more inelastic. This is because students have no other option when it comes to housing. This will increase room rates because students won't be able to opt for outside rooms.

3. Research has found that an increase in the price of beer would reduce the amount of marijuana consumed. Is cross elasticity of demand between the two products positive or negative? Are these products substitutes or complements? What might be the logic behind this relationship? LO5

a. If the price of beer were to increase which would than reduce the consumption of marijuana, then the cross elasticity of demand between these two products is negative. Beer and marijuana are complementary to each other. The logic behind this relationship is that since the price of beer has risen, that leads to less consumption of beer. Less consumption of beer leads to a reduce in marijuana consumption due to the fact that it is usually consumed along with beer.

1. "No firm is completely sheltered from rivals; all firms compete for consumer dollars. If that is so, then pure monopoly does not exist." Do you agree? Explain. How might you use Chapter 6's concept of cross elasticity of demand to judge whether a monopoly exists? LO1

a. It is true that all firms compete for consumer dollars, but companies can still be monopolies. When there are not any substitutes, such as electricity or water, that means utility companies are monopolies. This ties into Chapter 6 because cross elasticity of demand is used to identify and measure the strength of substitute goods, with monopolies there is no substitutes. When the cross elasticity is zero than it is a pure monopoly.

2. Distinguish among land-, labor-, and capital-intensive goods, citing an example of each without resorting to book examples. How do these distinctions relate to international trade? How do distinctive products, unrelated to resource intensity, relate to international trade? LO1, LO2

a. Land-Intensive Goods: goods that use land intensively, which include corn, vegetables, meat etc. b. Labor-Intensive Goods: goods that use labor intensively, which include clothes, toys, home appliances etc. c. Capital-Intensive Goods: goods that use capital intensively, which include high-tech industries such as pharmacy, software etc. d. Countries are endowed with a different amount of land, labor and capital, meaning those who are abundant is certain areas should specialize in producing them. Distinctive products relate to international trade because products have different characteristics. Consumers may prefer chocolate from Belgium rather than domestically produced.

1. How does monopolistic competition differ from pure competition in its basic characteristics? From pure monopoly? Explain fully what product differentiation may involve. Explain how the entry of firms into its industry affects the demand curve facing a monopolistic competitor and how that, in turn, affects its economic profit. LO1

a. Monopolistic competition differs from pure competition because it has product differentiation. It differs from pure monopoly because of the easy entry and exit it has. Product differentiation involves providing products with slightly different physical characteristics, offer varying degree of customer service, provide varying amounts of locational convenience, or proclaim special qualities. As new firms enter, the demand curve shifts to the left, falls, because now each firm has a smaller share of total demand and now faces a larger number of close substitute products. This decline effects the economic profit.

1. Explain why the choice between 1, 2, 3, 4, 5, 6, 7, and 8 "units," or 1,000, 2,000, 3,000, 4,000, 5,000, 6,000, 7,000 and 8,000 movie tickets, makes no difference in determining elasticity in Table 6.1. LO1

a. Since elasticity of demand measures the responsiveness of change in demand due to change in price, the quantity demanded does not affect the elasticity. Using the mid-point formula, you are able to use either choice when determining the elasticity, you will get the same answer.

2. Suppose that a Swiss watchmaker imports watch components from Sweden and exports watches to the United States. Also suppose the dollar depreciates, and the Swedish krona appreciates, relative to the Swiss franc. Speculate as to how each would hurt the Swiss watchmaker. LO3

a. Since the Swedish krona appreciated, the watchmaker is now going to be paying more for the parts than he was before. This will hurt the watchmaker because his costs are increasing. Since the dollar is depreciating, this will hurt the watchmaker because the price would increase for Americans, meaning he will sell a lower amount than before.

3. For each stock in the stock market, the number of shares sold daily equals the number of shares purchased. That is, the quantity of each firm's shares demanded equals the quantity supplied. So, if this equality always occurs, why do the prices of stock shares ever change? LO5

a. Since the stocks market is a competitive market, buyers and sellers can alter supply and price depending on what it happening in the market. Depending on the current demand for the share, prices can change, and depending on how many shares are being supplied, buyers and sellers can alter the price.

3. How does the demand curve faced by a purely monopolistic seller differ from that confronting a purely competitive firm? Why does it differ? Of what significance is the difference? Why is the pure monopolist's demand curve not perfectly inelastic? LO3

a. The demand curve faced by a monopoly is downward sloping because it has pricing power. The demand curve faced by a purely competitive firm is flat and horizontal because it does not have pricing power. If a firm in a perfectly competitive market increases its price above the market price, it will lose all of its business to competitors. Monopolies don't have competitors. The significance is that monopolies may earn a positive profit in the long run. Also, this ability to price above marginal cost decreases the quantity, increases the price, and creates dead weight loss relative to a perfectly competitive market. A monopoly's demand curve isn't perfectly inelastic because even though there is no substitutes, consumers can always choose just not to consume the product at all.

2. Compare the elasticity of a monopolistic competitor's demand with that of a pure competitor and a pure monopolist. Assuming identical long-run costs, compare graphically the prices and outputs that would result in the long run under pure competition and under monopolistic competition. Contrast the two market structures in terms of productive and allocative efficiency. Explain: "Monopolistically competitive industries are populated by too many firms, each of which produces too little." LO2

a. The demand curve of a monopolistic competitors is less elastic in comparison to a pure competitor and it is more elastic in comparison to a pure monopolist. Price is more and output is less for the monopolistic competitor. b. Pure Competition: P=MC (allocative efficiency); P= minimum ATC (productivity efficiency). c. Monopolistic: P>MC (allocative efficiency); and P> minimum ATC (productivity inefficiency) d. Monopolistic competitors have excess capacity; meaning that fewer firms operating at capacity could supply the industry output.

1. Quantitatively, how important is international trade to the United States relative to the importance of trade to other nations? What country is the United States' most important trading partner, quantitatively? With what country does the United States have the largest trade deficit? LO1

a. The importance of international trade to the US is more than it is to any other country. The US has the highest combined volume of exports and imports. The US's most important trading partner in terms of numbers is Canada. The US has the largest trade deficit with China.

2. Explain the law of supply. Why does the supply curve slope upward? How is the market supply curve derived from the supply curves of individual producers? LO3

a. The law of supply states that as price rises, the quantity supplied rises, and as price falls, the quantity supplied falls. The supply curve slopes upward because the relationship between price and quantity supplied is positive, or direct. A market supply curve is derived from the supply curves of individual producers by summing up all of the supply curves of all the individual producers in the market.

3. Explain: "The United States can make certain toys with greater productive efficiency than can China. Yet we import these toys from China." Relate your answer to the ideas of Adam Smith and David Ricardo. LO2

a. The reason the US might import toys from China even though they have a greater productivity efficiency is because of cost. China may have a low opportunity cost in the production of toys compared to the US. Smith and Ricardo believe that one should not attempt to make something that would cost less to just buy.