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| There are three firms in an economy: A, B, and C. Firm A buys $250 worth of goods from firm B and $200 worth of goods from firm C, and produces 200 units of output, which it sells at $5 per unit. Firm B buys $100 worth of goods from firm A and $ 150 worth of goods from firm C, and produces 300 units of output, which it sells at $7 per unit. Firm C buys $50 worth of goods from firm A and nothing from firm B. It produces output worth $1,000. All other products are sold to consumers. a. Calculate GDP. b. If a value-added tax (a tax on the total value added of each firm) of 10 percent is introduced, how much revenue will the government get? c. How much would government get if it introduced a 10 percent income tax? d. How much would government get if it introduced a 10 percent sales tax on final output? |
There are three firms in an economy: A, B, and
P 2 3 4 5 6 7 8 9 10 11 12 Qs 100 200 300 400 500 600 700 800 900
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| P 2 3 4 5 6 7 8 9 10 11 12 Q s 100 200 300 400 500 600 700 800 900 1000 1100 Q D 550 500 450 400 350 300 250 200 150 100 50 Now imagine that there is a price ceiling on coconuts at $3 but in order to prevent wasting peoples’ time by making them wait in line, the government hands out ration coupons to people. In order to buy a coconut you need a coupon. Assume that the number of coupons is the appropriate number to clear the market with the price ceiling (you should know what that is). Now notice that the government probably doesn’t know who has the highest marginal value for coconuts so, while this will eliminate the waste from the line it will most likely not allocate the coconuts efficiently. However, we can solve this problem by allowing people to trade the coupons! So imagine that there is such a market and it is perfectly competitive. a. What will the price of a coupon be in this market? b. Draw the price ceiling graph and identify the consumer and producer surplus, and the dead weight loss. There should be an area in there which would have been the cost of the line had there been a line. Label this area “A.” Who gets this surplus now? |
Consider a market in which the market demand curve is
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| Consider a market in which the market demand curve is given by P = 18 – X – Y, where X is Firm 1’s output, and Y is Firm 2’s output. Firm 1 has a marginal cost of 3, while Firm 2 has a marginal cost of 6. a) Find the Cournot equilibrium outputs in this market. How much profit does each firm make? b) Find the Stackelberg equilibrium in which Firm 1 acts as the leader. How much profit does each firm make? |
Suppose the Home firm is considering whether to enter the
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| Suppose the Home firm is considering whether to enter the Foreign market. Assume that the Home firm has the following costs and demand: Fixed costs = $140 Marginal costs = $10 per unit Local price = $25 Local quantity = 20 Export price = $15 Export quantity = 10 a. Calculate the firm’s total costs from selling only in the local market. b. What is the firm’s average cost from selling only in the local market? c. Calculate the firm’s profit from selling only in the local market. d. Should the Home firm enter the Foreign market? Briefly explain why. e. Calculate the firm’s profit from selling to both markets. f. Is the Home firm dumping? Briefly explain. |
Use the money market and foreign exchange (FX) diagrams to
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| Use the money market and foreign exchange (FX) diagrams to answer the following questions. This question considers the relationship between the euro (€) and the U.S. dollar ($). The is in U.S. dollars per euro, E$/€. Suppose that with financial innovation in the United States, real money demand in the United States decreases. On all graphs, label the initial equilibrium point A. a. Assume this change in U.S. real money demand is temporary. Using the FX and money market diagrams, illustrate how this change affects the money and FX markets. Label your short-run equilibrium point B and your long-run equilibrium point C. b. Assume this change in U.S. real money demand is permanent. Using a new diagram, illustrate how this change affects the money and FX markets. Label your short-run equilibrium point B and your long-run equilibrium point C. c. Illustrate how each of the following variables changes over time in response to a permanent reduction in real money demand: nominal money supply MUS, price level PUS, real money supply MUS/PUS, U.S. interest rate i$, and the E$/€. |
Angela has a monthly income of $120, which she spends
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| Angela has a monthly income of $120, which she spends on MP3s and a composite good (whose price you may assume is $1 throughout this problem). Currently, she does not belong to an MP3 club, so she pays the retail price of an MP3 of $2; her optimal basket includes 20 MP3s monthly. For the past several months Asteroid, a media company, has offered her the chance to join their “Premium Club”; to join the club she would need to pay a membership fee of $60 per month, but then she could buy all the MP3s she wants at a price of $0.50. She has decided not to join the club. Asteroid has now introduced an “Economy Club”; to join, Angela would need to pay a membership fee of $30 per month, but then she could buy all the MP3s she wants at a price of $1. Draw a graph illustrating (1) Angela’s budget line and optimal basket when she joins no club, (2) the budget line she would have faced had she joined the Premium Club, and (3) her budget line if she joins the Economy Club. Will Angela surely want to join the Economy Club? If she were to join the club, how many MP3s per month might she buy? Show how you arrive at your answers using a revealed preference argument. |
In a dry, dusty desert town, only two people (Antoinette
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| Suppose for simplicity that Antoinette and August are limited to pumping either 20, 30, 40, or 50 gallons of water each. a. Verify that the payoffs in the game table on next page, which reflect the profits Antoinette and August earn, are accurate. Fill in any missing values. Remember that the market price is determined by total production, but that each producer’s profit is determined by how much each chooses to produce. b. Suppose that Antoinette and August agree to collude and restrict their combined output to maximize their joint profits. They agree to divide production and profits equally. Referring to the payoff matrix above, how many gallons will they agree to produce in total? How many gallons of the total market supply will each supply? How much profit will each earn? c. Does Antoinette have any incentive to cheat on this collusive arrangement? Does August? If so, how will such cheating manifest itself? d. What is the Nash equilibrium in this game? Is the Nash equilibrium an ideal outcome for our two water producers? e. How does the game Antoinette and August are playing resemble a prisoner’s dilemma game? |
Consider two countries that are currently pegged to the euro:
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| Consider two countries that are currently pegged to the euro: Lithuania and Comoros. Lithuania is a member of the European Union, allowing it to trade freely with other European Union countries. Exports to the Eurozone account for the majority of Lithuania’s outbound trade, which mainly consists of manufacturing goods, services, and wood. In contrast, Comoros is an archipelago of islands off the eastern coast of southern Africa that exports food commodities primarily to the United States and France. Comoros historically maintained a peg with the French franc, switching to the euro when France joined the Eurozone. Compare and contrast Lithuania and Comoros in terms of their likely degree of integration symmetry with the Eurozone. Plot Comoros and Lithuania on a symmetry-integration diagram as in Figure 8-4 (19-4). |
Consider the Edgeworth box diagram at the right, which illustrates
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| a. How many peaches do Billy Joe and Bobby Sue have in their fridge? b. How much cream do Billy Joe and Bobby Sue have in their fridge? c. Suppose that Billy Joe pulls 5 peaches and 1 pint of cream out of the fridge, and says, “You can have the rest” to Bobby Sue. Illustrate this allocation of peaches and cream by placing a point in the Edgeworth box. Label the point “A.” d. Bobby Sue pulls the remaining peaches and cream out of the refrigerator, and comments, “Hey – I’m a bit long on cream and short on peaches here. Give me a couple of your peaches and take one of my creams.” Represent this reallocation of peaches and cream by placing a second point in the Edgeworth box. Label the point “B.” e. Billy Joe happens to find a couple of extra peaches behind last night’s gnocchi leftovers, and proudly proclaims, “Finders keepers!” Represent the effects of Billy Joe’s discovery by altering your Edgeworth box. Assume that Bobby Sue acknowledges and respects the “finders, keepers” rule. |
An economy is in a steady state with no productivity
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| An economy is in a steady state with no productivity change. Because of an increase in acid rain, the rate of capital depreciation rises permanently. a. According to the neoclassical growth model, what are the effects on steady-state capital per worker, output per worker, consumption per worker, and the long-run growth rate of the total capital stock? b. In an endogenous growth model, what are the effects on the growth rates of output, capital, and consumption of an increase in the depreciation rate of capital? |
