Briefly explain what real business cycle theorists believe causes the business cycle and give an example of how this takes place.
What will be an ideal response?
Student responses will vary but should accurately describe how real business cycle theorists believe that productivity shocks cause the business cycle and feature an example of this phenomena. A sample answer follows. Real business cycle theorists believe that positive and negative productivity shocks are the cause of the business cycle. That is, these economists believe real shocks such as new technology (new products or production methods), resource prices (like oil), changes in government regulation, unusually good or bad weather, international disturbances, or any other factor that can change productivity can cause fluctuations in the economy, as opposed to changes in the money supply. For instance, a very severe winter could keep significant number of people away from their jobs, slow down transportation, and damage crops and infrastructure. All of this would be a negative productivity shock, causing economic output to fall, and potentially tipping the economy into a recession.
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Suppose a monopolist sells in two distinct markets. The demand and marginal revenue for the first market are given by P1 = 240 - 2Q1 and MR1 = 240 - 4Q1, respectively, where Q1 is the quantity demanded and P1 is the price paid by the first group. The demand and marginal revenue for the second market are given by P2 = 120 - Q2 and MR2 = 120 - 2Q2, respectively, where Q2 is the quantity demanded and P2 is the price paid by the second group. The monopoly's marginal cost is given by MC = 4/9 Q, where Q is the total output produced by the monopoly.
(i) How much does the monopoly supply in each market and what price does it charge? (ii) What is the common equilibrium value of marginal revenue and marginal cost? (iii) Use your answers to parts i and ii to calculate the elasticity of demand for each market.
A negative demand shock increases consumer and investment spending and tends to increase the budget deficit.
Answer the following statement true (T) or false (F)
Strawberries, a normal good, are produced in a perfectly competitive market. Average consumer incomes increase. This will cause the individual strawberry farmer?s marginal revenue to ________ and their profit-maximizing level of output to ________.
A. increase; increase B. increase; decrease C. decrease; increase D. decrease; decrease
In the case of the perfectly competitive firm:
A) marginal revenue equals the market price. B) marginal revenue is greater than the market price. C) marginal revenue is less than the market price. D) marginal revenue is equal to, less than, or greater than market price depending on the level of output.