Question 1.

Answer the following questions appropriately.

Multiple Choice (2 point each) Michelle grows apples and catches fish. Last year she harvested 1500 apples and 600 fish. She values one fish as having a worth of three apples. She gave James 300 apples and 100 fish for helping her to harvest apples and catch fish, all of which were consumed by James. Michelle set aside 200 fish to help with next year's harvest In terms of fish, consumption would equal (A) 700 fish. (B) 900 fish. (C) 1 100 fish. ( D) 2700 fish. 2. What is the unemployment rate if there are 180 million people employed, 6 million people unemployed, and 14 million not in the labor force? (A) 3.00% (B) 3.23% (C) 3.33% (D) 3.65% 3. In forecasting consumer spending using surveys of consumer confidence. research suggests that (A) the forecasts are not improved when using consumer confidence measures. (B) the forecasts are improved when using consumer confidence measures, C) the forecasts are improved when using consumer confidence measures for forecasts made during recessions. but not expansions (D) the forecasts are not improved when using consumer confidence measures for forecasts made during expansions, but not recessions 4. An increase in the price of capital goods will (A ) increase the expected future marginal product of capital. (B) reduce the expected future marginal product of capital. (C) increase the interest cost and the depreciation cost of capital. (D) increase the interest cost but not affect the depreciation cost of capital 5. Suppose output is $25 billion, government purchases are $9 billion, desired consumption is $12 billion, and desired investment is $6 billion. Net foreign lending would be equal to (A) -$4 billion. (B) -$2 billion, (0) $2 billion. (D) $4 billion. 6. According to the Solow model, an increase in the capital-labor ratio will (A) always reduce steady-state consumption per worker. (B) always increase steady-state consumption per worker. (C) reduce steady-state consumption per worker if the capital-labor ratio is below the Golden rule capital stock. (D) increase steady-state consumption per worker if the capital-labor ratio is below the Golden rule capital stock. 7. If real income rises 4%, prices rise 1%, and nominal money demand rises 4%, what is the income elasticity of real money demand? (A) 3/4 (B) 4/5 (C) 1 (D) 5/3 8. If the asset market is to remain in equilibrium, then if the money supply increases, output is unchanged, the price level is unchanged, and the expected inflation rate is unchanged, then (A) the real interest rate must rise. (B) the real interest rate must decline. (C) the nominal interest rate must rise. (D) the inflation rate must rise.(15 points) Problem 2 In the short-run, we assume that capital is a fixed input and labor is a variable input, so the firm can increase output only by increasing the amount of labor it uses. In the short run, the firm's production function is q = f (L, K) = 8LK + 512 - 2 13, where q is output, L is labor, and K = 5 is the fixed units of capital. (a) What is the marginal product of labor as a function of L? (b) What is the average product of labor as a function of L? (c) At which point does the law of diminishing returns set in? (Find the critical value L*.)(30 points) Problem 4 Consider a consumer with preferences represented by the utility function U (x, y) = 2x'4y0'5. She has a wealth of w and faces the market prices of x and y, Px and P3,, respectively. (a) Derive the consumer's Marshallian (uncompensated) demand functions. (b) What is the consumer's Engel curve for good y? (Hint: This can be obtained directly from the Marshallian demand function for good y.) Is y a normal good or an inferior good? (c) Derive the consumer's expenditure function, E (Px, Py, [7). ((1) Now suppose Px = $2, 1\