Question 1 Answer all questions. Read the following statements and choose the best answer by writing the alphabetical letter on the answer sheets.
Question 21. Use the information in the table below to answer the following questions concerning a consumer's choice between food and clothing.
Clothing | MUc | MUc/Pc | Food | MUf | MUf/Pf |
1 | 60 | 6.00 | 1 | 115 | 5.75 |
2 | 55 | | 2 | 105 | |
3 | 51 | | 3 | 98 | |
4 | 48 | | 4 | 94 | |
5 | 47 | | 5 | 92 | |
6 | 46 | | 6 | 90 | |
(a)Fill in the blanks that remain in the table.
(b)Let income=$130, Pf=$20, and Pc=$10. Does the market basket C=1 and F=6 satisfy the budget constraint? Could this be the utility maximizing market basket? If not, in which direction would the consumer like to reallocate his purchases (i. e., more food or more clothing)?
(a)
Clothing |
MUc |
MUc/Pc |
Food |
MUf |
MUf/Pf |
1 |
60 |
6.00 |
1 |
115 |
5.75 |
2 |
55 |
5.50 |
2 |
105 |
5.10 |
3 |
51 |
5.10 |
3 |
98 |
4.90 |
4 |
48 |
4.80 |
4 |
94 |
4.70 |
5 |
47 |
4.70 |
5 |
92 |
4.60 |
6 |
46 |
4.60 |
6 |
90 |
4.50 |
(b)Yes, 1×10+6×20=$130=income, so the budget constraint is satisfied with this market basket. However, this market basket could not be utility maximizing since (MUc/Pc)=6>(MUf/Pf)=4.5. The consumer can increase utility by spending more money on clothing.
Question 31. A plastics monopolist faces the demand curve P=180 - Q, where Q is measured in thousands of pounds per year and P is measured in dollars per pound. Marginal cost is constant at MC=$60 per pound.
(a)Find the monopolist's profit-maximizing price and quantity.
(b)What is the elasticity of demand at the profit-maximizing price?
(a)Set MR=MC, or 180-2Q=60 to find Q* =60 and P* =180-60=120.
(b)The point elasticity of demand at P* = 120 is Ed=-bP/Q=-1 (120/60)=-2. As is always true with linear demand, the monopolist produces in the elastic portion of the demand curve.
Question 41. Suppose Q
D=100-2P, and Q
S=-50+3P.
(a)What is the original market equilibrium price and quantity?
(b)The government imposes a tax of $1 per unit. Compute the after-tax equilibrium. What are the new equilibrium price and quantity? How much revenue does the government collect?
(a)Setting QD=QS, the original equilibrium is the solution to 100-2P=-50+3P or P* =$30 and Q*=40.
(b)After a $1 tax is imposed, we can solve for the price received by sellers: 100-2(PS+1)= -50+ 3PSor PS* = 148/5 =$29.60. The new quantity is Q*=38.8. The government collects $×38.8=$38.80.
Question 51. What are the three major functions of money? Describe how drastic inflation can undermine the ability of money to perform these three basic functions.
Money acts as (1) a medium of exchange—enabling the purchase of goods and services, (2) a store of wealth—the ability to delay purchase yet maintain wealth, and (3) a unit of account—the assignment of a monetary value to goods and services permitting a comparison of relative value, both currently and over time.
Drastic inflation refers to a period of rapid escalation in prices, meaning the purchasing power of money plummets. We may observe sellers unwilling to accept money and using it, they find its purchasing power significantly eroded. Then money is not acting as a medium of exchange. When its purchasing power is declining, money is obviously not a good store of wealth. Also in such periods, borrowers benefit at the expense of savers, as they repay dollars that have lower purchasing power than the dollars they initially borrowed, and we may find some prices escalate more rapidly than others. Then money is not functioning as a good unit of account.
If rampant inflation does occur, money ceases to perform its functions well and individuals may mm to barter as a means of organizing the exchange of goods and services. This is an inefficient outcome for the economy.
Question 61. Consider the following data: Nominal GDP for 1994 was $6550 billion, as compared to $6250 billion for 1993. The GDP deflator for 1994 was 102.5, as compared to 100.0 for 1993.
(a)Calculate the rates of growth of nominal GDP and real GDP for 1994.
(b)What was the inflation rate (as measured by the GDP deflator) for 1994?
(a)Nominal GDP1993=$6250 billion; and nominal GDP1994=$6550 billion;
The growth rate of nominal GDP for 1994 =($6550b-$6250b)/$6250b×100%
=4.8%
Real GDP1993=($6250b/100.0)×100=$6250b
Real GDP1994=($6550b/102.5)×100≈$6390.2b
The growth rate of real GDP for 1994 =($6390.2b-$6250b)/$6250b×100% =2.2%
(b)The inflation rate for 1994=(102.5-100.0)/100.0×100%=2.5%
Quextion 71. What is the Phillips curve? What does it purport to show? Why might we be interested in the relationship suggested by the Phillips curve? Explain.
The Phillips curve depicts an inverse relationship between inflation and the unemployment rate, based on empirical data over the 1950s and 1960s. It purports to show that a stable trade-off exists between unemployment and inflation. The interest in the Phillips curve arises because it presents governments with a dilemma in economic policy. Manipulation of aggregate demand fails to shift the inflation unemployment trade-off; that is the position of the Phillips curve.
Demand management policies only enable a choice to be made about the position of the economy on the Phillips curve—low unemployment and high inflation or, by accepting higher levels of unemployment, lower levels of inflation. Thus the existence of the Phillips curve implies it is impossible to achieve low inflation and full employment simultaneously.