ABC Helpers Sample Test for Freelance writers-

Economics

NAME _JUNAID ALI S/O ROSHAN ALI

Answer all of the following questions in not more than three sentences

1) Some companies suffer more in a recession (or economic slowdown) than others.
Many businesses are positioned to benefit more from a recovery (or strong economic
growth period). Determine how Ford is being affected by the current slow
growth.
a) Explain what should happen to Ford’s profits in the different stages of
Business cycle.
Answer:
Ford’s profit in five different stages of Business Cycle will be
 Trough:
In trough the economic activity in an economy is very low due to low
income, reduced consumption expenditure. There is low demand for
producer goods due to which prices tend to decline.
Ford in such phase of business cycle will be facing a very low profit or
even loss because of very low demand for their products. This will lead to
a decrease in their product prices. They will decrease the production by
firing some of their worker in order to meet the cost of production.
Resultantly, their production will fall and so as their profit.
 Recovery:
Recovery phase of the Business is characterized by a rise in consumption
expenditure. This rise in consumption is due to the house hold optimism
about prices that prices will not fall further. This in turn increases the
demand for goods. Moreover, investment rises due a fall in the interest
rate by banks.
Ford’s in such scenario will be facing an increasing demand for their
products. They will tend to increase their production, for which they will
need more worker and capital. Ford’s investment and employment will
increase. The wages and rent they will pay to their worker will be less than
their skill. So, Ford will have the opportunity to earn profit.
 Expansion:
This stage of business cycle is viewed as favorable phase. It characterized
by increase in employment, output, demand and supply of products, profit.
 Here investors are in good financial conditions. Ford in such condition
will increase its production to the point where it gives maximum profit. It
will do so by utilizing is idle fund.

 Peak:

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 In this stage of business cycle, the economic growth reaches its maximum
but do not increase further. Here employment, output, sales and profits are
at maximum. In peak, the cost of production raises prices of final products
due to higher price of factors of production. But overall income of
individual and firm remains the same. Also, every factor of economic
activity is saturated at this phase.
As the economy is at its peak, so is the Ford. The employment level,
output, sales and profit of the Ford are at maximum in this stage of
Business Cycle.
 Recession:
In peak the economic activity reaches its maximum but in recession it
starts falling. Like production, prices, saving and investment start
decreasing. Firms in this phase face a decline in demand for their output
due to which they stop further investment in factors of production.
Same will be the case with Ford. At this stage of Business cycle, Ford’s
output will be greater than its demand in the market. It will face a situation
in which cost of producing a product will be greater than the profit it
generates. Consequently, Ford will opt for decreasing its output which will
lead to a decrease in its profit.

b) How should the company adjust its strategy to the current economic
Conditions?
Answer:

2) Carefully read the following situations and answer parts a & b.

a) A positive earnings report has just been released by Wal-mart. How should
this impact Wal-mart’s stock price? Explain and draw a graph with the
appropriate demand and/or supply curves.
Answer:
The release of Wal-mart’s positive earnings report will develop investor’s trust to
buy Wal-mart’s stocks. This will lead to increase the demand for Wal-mart’s stocks
which will ultimately raise the price of Wal-mart’s stocks, according to law of demand.

Price

P1

P0

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With the rise in demand at price P0 the demand curve (red line) shift rightward to thick
black line. Now the demand is Q1 which is greater than the quantity supplied so the price
will rise and will equate demand and supply at P1 and Q2.

b) Now suppose that Wal-mart decides to sell more shares of its stock to the
public. How will the stock price be affected now? Explain and draw a graph
Showing what is happening in this case.
Answer:
In this case Wal-mart is going to increase the supply of its stocks at a particular
price. As the supply of stocks increases its prices will fall, according to law of supply.

Price

P0
P1

Q0 q2 q1 demand and supply

With the Wal-mart’s intention of selling more of its share the supply curve shift
downward from red to blue supply cure. At this stage the price is p0, supply is q1 greater
than demand that is q2. So prices will fall from p0 to p1 and will equate demand and
supply at q2.

3) Law of Diminishing Returns

a) Explain this important law.
Answer: This law state that with employment of additional units of an input while other
inputs are held constant, first increase output at an increasing rate, followed by a constant
rate and then by a diminishing rate.
Suppose a firm producing output by employing labor and capital. Let say the firm
initially has 5 units of capital and 3 unit of labor. Let labor be the firm’s only variable
input and capital is a fixed input. Now if the firm increases its labor input from 3 units to
4 units. This increase in labor will yield more than more than one unit increase in output.
Similarly when the labor is increased to 6 units will increase output more than two units
of output. With further increase in labor the output will increase at constant rate and
eventually output will start increasing at a decreasing rate with further employment of
labor.

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This happen because with employment of an extra unit of labor the marginal productivity
of capital first increases at an increasing rate then at a constant rate and finally at a
diminishing rate.

b) Why is it essential for companies to follow this idea to maximize profits?

Answer:
This idea is important because it helps companies to determine the point where
their profit can be maximized. With the increase of one factor of production while
holding other factors constant will first increase output at an increasing rate, then at a
constant rate and finally at a diminishing rate. With the diminishing rate a point is
reached where the marginal product of that particular input gets zero. This is the point
where the firm output is maximum and so as their profit. Beyond this point if the firm
employed more input will not only decrease its output but also its profit

c) When should the company stop producing?

Answer:
When the company’s revenue gets less than the cost of production, then the
company should better stop producing.
.

4) Perfect Competition
a) Explain the characteristics of this type of market.
Answer:
Perfect competition is a type of market in which there are numerous buyers and sellers.
Both economics agents are well informed. Buyers are free to move. The sellers have not
control over price and they are price taker. It means the price is determined by market
forces that are demand and supply. The sellers have no authority to increase or decrease
the price. The products which the sellers sell are identical.

b) What is the main difference between this market & monopolistic competition?
Answer:
In perfect competition the prices are given that is they are determined by market forces
like demand and supply. The firms are price taker not price maker. Moreover, in perfect
competition the products produced by the firms are identical.
On the other hand, in monopolistic competition the firms produced differentiated
products. Like products are close substitute for each other. Here price is set by the seller.

c) Why is it important for a perfectly competitive firm to keep tight control over
costs?

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Answer:
A firm has two options to maximize its profit that are either to increase its
products prices or minimize its cost of production. In perfect competition, the firm can’t
increase its product price because the firm is a price taker. In other words, in perfect
competition the price is given and no firm can deviate from the given price. So, only
option left for a perfectly competitive firm is to keep tight control over cost in order to
maximize its profit.

5) Assume that the following data describe the condition of the commercial banking
system:
Total reserves: $ 80 billion
Transactions deposits: $800 billion
Cash held by public: $100 billion
Reserve requirement: 0.10

a) How large is the money supply (M1)?

Answer:
By definition M1 include currency in circulation and other currency equivalents
and assets that can be easily converted into cash. According to this, M1= transaction
deposits + Cash held by public =$900 billion
Because from the transaction deposits the depositor can withdraw cash any time.

b) Are the banks fully using their lending capacity? Explain.

Answer:
The banks lend according to total reserve they have. So here the
Bank is lending according to its capacity.

c) What would happen to the money supply if the public deposited

another $20 billion in cash in transaction accounts? How would
this impact lending capacity?
Answer:
According to M1 definition, with another deposit of $20 billion in transaction accounts
by public, Money supply will remain the same. This is because transaction deposits are
included in M1. With this $20 billion increase in the transaction deposit the lending
capacity of the bank the will remain the same because the bank lend according to its total
reserve. In transaction deposits the bank is liable to provide cash to the account holder
any time at their request. So the increase in transaction deposits is not going to increase
the lending capacity of the bank.

6) The unemployment rate is considered an important economic indicator.

a) Explain why the unemployment rate will never reach 0%.
Answer:

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According to Philips curve, there is a negative relationship between unemployment and
inflation. If an economy opts for decreasing unemployment it will have to increase
inflation and vice versa. Zero unemployment means there will be very high inflation or
hyperinflation, which is a disaster for an economy. Moreover it’s a necessary condition
for a healthy economy to have some unemployment. This type of unemployment is called
natural unemployment, the unemployment that prevails when output and employment are
at full employment level. This natural of unemployment is due to imperfect information
and job shopping.

b) Briefly describe the different types of unemployment.

Answer:
 Structural Unemployment :
This type of employment occurs when there comes some structural
changes in a market economy. For example, the invention of the
automobile increased demand for automobile mechanics and decreased
demand for farriers (people who shoe horses).
Moreover this happen when an economy shifts from labor intensive to
capital intensive technology. The labor is substituted with capital. The
workers get unemployed.
 Cyclical unemployment:
This unemployment is due to the fluctuation in the business cycle. For
example in the boom the unemployment will be very low but in recession
the unemployment will increase.
 Frictional unemployment:
This type of unemployment occurs because of workers who are voluntarily
between jobs. Some are looking for better jobs. Due to a lack of perfect
information, it takes times to search for the better job. Others may be
moving to a different geographical location for personal reasons and time
must be spent searching for a new position.

c) What type of unemployment is most dangerous to the economy? Why?

Answer
Structural unemployment is most dangerous for an economy because all else type of
unemployment decreases with the passage of time. But this unemployment remains the
same with the passage of time. Because once a worker gets unemployed just because of
his outdated skills he will never get employed unless and until he update his skills, which
is some time beyond the ability of the worker.

7) Suppose the federal government established a $20,000 fine for companies exceeding
the safe limit on water pollution.
a) How does this affect the market demand curve for an offending company’s
products?

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Answer:
With this $20,000 fine the company has two options that are forward push
approach and backward push approach. If the company adopts the forward push approach
which is to transfer this fine to the consumer by increasing the price of the company
product. This approach is going to decrease the market demand for the company’s
product. According to the law of demand, the quantity demand falls with increase in price
of the particular commodity.
On the other hand, if the company adopt the backward push approach that is bearing the
whole cost of fine by itself. In this case the market demand for the company’s product
will remain the same as it was before.

b) Draw a graph illustrating this point.

Answer:
Price
P1

P0

Q1 Q0 Demand and supply

The upward slopping curve represents the supply curve of the company and downward
slopping curve shows the demand for the company products. With initial price P0 that is
the equilibrium price, the quantity demanded is Q0. The increase in price from P0 to P1,
leads to the fall of quantity demand from Q0 to Q1.
If the company doesn’t increase the price then it will operate at the equilibrium price that
is P0 and will have demand as Q0.

c) Would some companies still find that polluting was economical? Under what
Conditions?
Answer:
If the company is producing goods that are necessities and they adopt the forward push
approach. With which the cost of fine is transferred to the consumers in the shape of
increasing the price of the company products. In such case if the market demand of the
company product do not fall. Under such scenario the company will find polluting the
water economical.

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