- Suppose the interest rate is 4%.
- [a.]
What is the discounted present value of receiving $2500 next year? (2 points)
- [b.]
What is the discounted present value of receiving $2500 in two years? (2 points)
- [c.]
What is the discounted present value of receiving $2500 every year for 4 years, starting next year? (2 points)
- [d.]
If you won a lottery and were given the choice of receiving $2500 every year for 4 years, starting next year, or receiving $400 every year forever, which would you choose? (2 points)
- When firms are making investment decisions, do they take the real interest rate or the nominal interest rate into account? Why? (4 points)
-
Suppose the nominal interest rate is 8%, inflation is 10%, and you invest $1000 for a year. What happens to the purchasing power of your $1000 (precisely)? (4 points)
-
- [a.]
Draw the circular flow of money between firms and people. (2 points)
- [b.]
Write down an equation that relates GDP, the money supply, the price level, and the velocity of money. Suppose GDP is 100, the money supply is 150, and the velocity of money is 4, what is the price level? (2 points)
- [c.]
Suppose GDP grows 2%, the price level rises 5%, the money supply falls 3%, how must the velocity of money change? (2 points)
- [d.]
What does the equation of exchange tell us about aggregate demand? (2 points)
- Suppose we have the following information about Libraryville, an economy which produces two goods, books and bread:
Table 1: Libraryville's economy
|
year | Books | Price of books | Bread | Price of bread | Nominal GDP | Real GDP
|
|
|
1994 | 10 | 5 | 6 | 2 | |
|
|
1995 | 10 | | 7 | 4 | 98 |
|
|
1996 | 12 | 7 | 9 | 6 | |
|
|
1997 | 14 | 8 | | 7 | 182 | |
- [a.]
Fill in the empty values in the table, use 1995 as the base year when calculating real GDP. (4 points)
- [b.]
What is the GDP price deflater in 1996, in 1995 dollars? How much did the price level increase between 1995 and 1996? (2 points)
- [c.]
Suppose the population growth rate of Libraryville is 5%. What is the rate of economic growth over this time period? (2 points)
- Suppose the government is running a budget surplus. It decides to permanently increase spending. It permanently increases taxes on savings income just enough to pay for the spending increase. The government spending has no effect on the return to private investment.
Graphically show what happens to the interest rate, savings, and investment, and comment on how this change might affect consumption. (9 points)
-
Suppose there is no government deficit. The government cuts taxes with no change in spending. What are the two views on how consumers respond to increases in the deficit? Describe graphically what will happen under both views, make sure you comment on crowding out, and when and why it occurs. (9 points)
- Suppose we have an industry that pollutes. If we only care about efficiency, is it better for this industry to be perfectly competitive or a monopoly? A graph may help. (6 points)
- Explain the Coase theorem. (6 points)
-
Suppose a friend of yours tells you, ``...when the price rises, demand falls, but when demand falls, the price falls, so the relationship between price and demand is both positive and negative..." What's wrong with your friend's statement? (6 points)
-
Draw two production possibilities frontiers, one which demonstrates the principle of increasing costs and one which does not. Explain what the principle of increasing costs means. (6 points)
- Suppose that in Rochester the demand for one bedroom apartments is given by, Qd = 1000-P, and the supply is, Qs = P-200.
- [a.]
Graph the supply and demand curves. What is the equilibrium quantity and quantity of apartments rented? Label it on your graph. What are the gains from trade? Label them on your graph. (5 points)
- [b.] Suppose the city decides to impose rent control on one bedroom apartments. City council passes a law that $550 is the maximum rent a landlord can charge for a one bedroom apartment. How many one bedroom apartments are rented now? Is there are shortage or a surplus? How big is it? Draw a new graph, illustrating the effects of rent control on price and quantity. Label the shortage or the surplus. Label the gains from trade now. How have they changed? (6 points)
- [c.] What might happen as a result of this policy? (1 point)
- Supply and demand
- [a.]
Because of all of the rain in Southern California, farmers have been unable to plant their lettuce crops. What effect will this have on the market for lettuce? Illustrate this using a graph. What effect will this have on the market for salad dressing? Illustrate this using another graph. (4points)
- [b.]
The world cup (soccer) will be held in France this summer. Many americans are planning on attending. What effect will the world cup have on air fares from the United States to Europe? Illustrate this using a graph. What effect will the world cup have on the market for soccer balls? Illustrate this graphically. (4 points)
- Suppose that we have a demand curve given by, P = 10-2Q, marginal revenue given by, MR = 10-4Q, and marginal and average cost given by, MC = AC = 2.
- [a.]
What is the profit maximizing quantity for a monopolist? What is the corresponding price? What are the monopolist's profits? What is the consumer surplus under monopoly? What is the dead weight loss under monopoly? (5 points)
- [b.]
What is the efficient quantity to produce? What is the consumer surplus given this quantity? What is the dead weight loss? (3 points)
- [c.]
Suppose that this monopolist can perfectly price discriminate. What are the monopolist's profits now? What is the resulting consumer surplus? What is the dead weight loss? (3 points)
- [d.]
How much would the monopolist in this example be willing to pay in order to perfectly price discriminate? (2 points)
-
Suppose we have a duopoly. These two firms can form a cartel and charge the monopoly price of 10, or cheat and charge a price of 9. The table below gives each firm's payoffs, in profits, given the two possible strategies.
Table 2: Duopoly
|
| Firm 2, p=10 | Firm 2, p=9
|
|
|
Firm 1, p=10 | 12,10 | 4,15
|
|
Firm 1, p=9 | 18,-4 | 7,7 |
- [a.]
Define Nash Equilibrium. (2 points)
- [b.]
What is the Nash Equilibrium for this game? Why? (4 points)
- Suppose that the price of an IBM computer (or compatible) rises from $2000 to $2400, and the quantity demanded of a Macintosh computer rises from 500,000 to 550,000. What is the cross price elasticity of demand between IBM computers and Macintosh computers? Are these two goods substitutes or complements? (5 points)
- Suppose there is a price taking firm who has total cost given by,
TC(Q) = 2Q2+60, marginal cost given by, MC(Q) = 4Q, and price,
P = 20.
- [a.]
What is the profit maximizing quantity for this firm to produce? What is
the maximum profit? (4 points)
- [b.]
Suppose that this firm has TFC(Q) = 60 and TVC(Q) = 2Q2, will this firm
operate or shut down in the short run? (3 points)