Northeastern University

University College

Economic Principles II December 16, 1994

ECN 4116 Fall 1994

Time 5:50-8:00 PM

Final Exam

Be very specific to optimize your time. Use diagrams as needed but do not forget to label them correctly.

1. Use law of diminishing marginal utility and indifference curve analysis to show a downward sloping demand curve fro a product. How should a consumer allocate money on different goods to maximize utility from a limited income.

2. a) Define price elasticity of demand for a product. How do you know that the demand for a product is elastic, inelastic and unitary elastic ?

b) Define the income elasticity of demand. How do you distinguish that a certain commodity is normal, superior, or inferior good ?

c) Define the cross elasticity of demand. How do you distinguish that a certain product is complement or a substitute ?

d) What is meant by price elasticity of supply. Is there any reason for supply elasticity to be different for a short run and a long run ?

3. a) Why does a marginal product curve cuts the average product curve at its maximum and why does a marginal cost curve cuts the average cost curve at its minimum point ?

b) How do you construct long run cost curves from the segments of short-run cost curves ? How is the shape of long run cost curve for an industry with an increasing , diminishing , and constant return to scale ?

4. Briefly explain how the Federal Reserve Bank controls money supply.

5. Is there a trade-off between unemployment and inflation in the short run ? What about in the long run ?