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# FinalAnswers F2006 - Economics 1 Fall 2006 University of...

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Economics 1 Final Exam Fall 2006 December 13, 2006 University of California, Berkeley 5-8 PM Page 1 of 29 Economics 1 Final Examination Please do not open the exam until you are told to do so. The exam ends at 8pm. If you finish later than 7:50, please remain in your seats so that you do not disturb others. At 8:00, you will be asked to come to the front of the room and place your exam in the pile in front of your GSI’s name. Points for each question are given in parentheses. Total points: 180 Your Name________________________________ Your SID__________________________________ Your GSI’s Name____________________________ Your Section # and time_______________________

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Economics 1 Final Exam Fall 2006 December 13, 2006 University of California, Berkeley 5-8 PM Page 3 of 29 1. (10 points): In Elkton, MD, the market for burritos satisfies the four necessary conditions of perfect competition. The graphs below represent the market supply and demand for burritos and a typical firm’s cost curves. a. (6 points): Show the firm’s price, quantity and profit in the stage I equilibrium (label them p 1 , q 1 , and PROF 1 , respectively). b. (4 points): In words, describe what happens as the market moves to stage II equilibrium. Seeing the positive profit in the burrito industry, firms will enter. This shifts the market supply curve out (from S to S 2 ), and will lower the market price to the minimum of the firm’s AC curve (p 2 ). The firm will reduce its output to the minimum point of its AC curve (q 2 ), and receive zero profit. Q \$/Q \$/q S D MC Market for Burritos Typical firm producing Burritos p 1 =p 0 AC q q 1 PROF 1 S 2 p 2 q 2
Final Exam Fall 2006 December 13, 2006 University of California, Berkeley 5-8 PM Page 4 of 29 2. (30 points, 5 points each): True/False, Explain: Decide whether the following statements are true or false, and explain your answers. Correct but unexplained answers will receive very little credit. You may draw a graph if it aids in your explanation. a. Depreciation of the domestic currency decreases GDP by decreasing exports and increasing imports. False. Depreciation of the domestic currency makes domestic goods less expensive to foreigners and foreign goods more expensive to domestic consumers. This increases exports and increases imports, increasing GDP. b. The Aggregate Supply curve slopes upward because firms supply more when the price level is high. False. The AS curve shifts upward because input prices change more slowly than output prices. Therefore, as output prices increase, firms can increase profit in the short run by employing more inputs. c. Perfectly competitive firms can earn positive profits in a stage 1 equilibrium. True. Firms can earn a positive profit in stage 1 equilibrium, but entry will

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FinalAnswers F2006 - Economics 1 Fall 2006 University of...

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