Economics 1rst Set Of Problems

1rst set of problems Business Economics, Micro & Macro Vilnius-Kaunas FALL SEMESTER 2009

ECONOMICS 1RST SET OF PROBLEMS Fall Semester 2009

Lecturer P U E R T A S, J. M.

1rst SET OF PROBLEMS Welcome to the fantastic Republic of Uzupis where according to its Constitution a dog has the right to be a dog. You have been chosen by the Uzupian Parliament as advisor of the Minister of Economy. They will pay you not a lot of money (only 20.000 UKR, Uzupian kronu)and it is a very difficult job! The Uzupian Economy faces many problems. But the people of the free and bohemian Republic of Uzupis trust you because you have attended the lectures of the famous Lecturer Mykolas Durys and studied the book “Principles of Economics” of Gregory Mankiw. I wish you good luck!! (*)The Uzupian Kronu is the currency of the country. Ukr (Uzupian kronu. 10 Ukr = 1 euro)

I remind you that you have to hand in all the exercises and readings before the dead-line!!!! EVALUATION CRITERIA: Sum A+B. A) 2 points if you hand in the exercises before the dead-.line. If you hand in it after the dead-line you will not get any point. B) 8 points if there are not important mistakes in your answers. 5 points if there are some important mistakes in your answers. 3 points if there are many important mistakes. 0 points if you don’t hand in the exercises before or after the dead-line.

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1rst set of problems Business Economics, Micro & Macro Vilnius-Kaunas FALL SEMESTER 2009

1) Construct graphically the production possibilities frontier for the Republic of Uzupis, using the data given in the following table. Does the principle of increasing cost hold the Uzupian economy? (check the slides) Republic of Uzupis 2009 Production Possibilities CANS OF BEANS (millions per CANS year) year) 75 0 60 6 45 11 30 15 15 18 0 20

OF

SOUP

(Millions

per

2) Still you are living in the fabulous Republic of Uzupis where ”everybody has the right to make mistakes” (article 6 Republic of Uzupis Constitution) The only free republic of artists in the world (it is not a joke). The thing is that they are great in Arts but not in dealing with Economics. They have now some problems with the supply and demand of cans of beans. Can you help them?

Republic of Uzupis 2009 supply and demand schedules for cans of beans PRICE 70 90 110 120 140 160

QUANTITY DEMANDED 20 19 18 16 14 12

QUANTITY SUPPLIED 14 15 18 20 22 24

(*)Quantities expressed in millions of units (cans of beans) A) Try to graph the demand curve and the supply curve and show the equilibrium price and quantity

B) Now suppose that it becomes not popular to eat beans, so the quantity demanded at each price falls by 4 million cans per year. What is the new equilibrium price and quantity. Show this solution graphically. C) Suppose instead that the most important Uzupian factories (that produce cans of beans) decide to go out and to reduce the quantity of product supplied (inside Uzupis) reducing the quantity supplied by 4

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1rst set of problems Business Economics, Micro & Macro Vilnius-Kaunas FALL SEMESTER 2009 million cans of beans at every price. Find the new equilibrium price and quantity and show it graphically. D) What are the equilibrium price and quantity if the shifts described in question B and C happen at the same time? 3) Alberto Pinto is a student enjoying his Erasmus at the fabulous Republic of Uzupis. The republic experiences high level of inflation in the basic products as french fries, pizzas, burgers, hot dogs and beer. Those products constitute the basic diet of Alberto and their room mates. Last month the price for fries increased from 20 Ukr (*) per kg to 22Ukr per kg. The amount bought by Alberto falls from 10 to 8 kg. Calculate the elasticity of demand using the midpoint formula (that is preferable when calculating the price elasticity of demand because it gives the same answer regardless of the direction of the change). Check the sample of slides “The elasticity and its applications”. (*)The Uzupian Kronu is the currency of the country. Ukr (Uzupian kronu. 10 Ukr = 1 euro)

After reading Chapter 6 ” Supply and demand and government policies” (G.Mankiw book) solve the following problems: 4) The demand and supply schedules for hot-dogs are as follows Price per hot-dog Supplied 11 ukr 10 ukr 9 8 7 6

Quantity demanded 1 milion of units 2 4 6 8 10

Quantity

15 milion of units 12 9 6 3 1

a) What are the equilibrium price and quantity of hot-dogs sold?

b) Hot-dog manufacturers persuade the Government of Uzupis that hotdog consumption is good for the economy of the country. The Uzupian Parliament votes to impose a price floor 2 Ukr above the equilibrium price. What is the new market price? How may hot-dogs are sold?

c) Irate college students (the main consumers of hot-dogs) march on Uzupian Parliament and demand a reduction in the price of hot dogs. The Parliament votes to repeal the price floor and impose a price ceiling 1Ukr below the former price floor. What is the new market price? How many hot dogs are sold?

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1rst set of problems Business Economics, Micro & Macro Vilnius-Kaunas FALL SEMESTER 2009 5) The government of the Republic of Uzupis requires beer drinkers to pay a 20 Ukr. tax on each case of beer purchased. a) Draw a supply-and-demand diagram of the market for beer without the tax. Show the price paid by consumers, the price received by producers, and the quantity of beer sold. What is the difference between the price paid by consumers and the price received by producers? b) Now draw a supply-and-demand diagram for the beer market with the tax. Show the price paid by consumers, the price received by producers and the quantity of beer sold. What is the difference between the priced paid by consumers and the price received by producers? Has the quantity of beer sold increased or decreased? 6) After reading Chapter 4 “Supply and demand: how markets work” (G.Mankiw book) answer the following question: Popeye’s is living now in the Republic of Uzupis. He does not love anymore his former girlfriend Olivia. Popeye’s has lost his job and he is living now with his savings. As a result he buys more spinach. Is the spinach and inferior or a normal good? What happens to Popeye’s demand curve for spinach? 7) After reading Chapter 24 “Production and Growth” (G.Mankiw book) answer the following question: Suppose that Dacia, an auto company owned entirely by Romanians citizens opens a new factory in the Republic of Uzupis a) What sort of foreign investment would this represent? b) What would be the effect of this investment on Uzupian GDP? c) Would the effect on the GNP be larger or smaller? 8) After reading Chapter 23 ”Measuring nation’s income” (G.Mankiw book) answer the following questions: This is the GDP equation: Y=C+I+G+NX what components of GDP (if any) would each of the following transactions affect? a) A Uzupian family buys a new car b) A citizen buys a new house c) The firm Uzupis Bicycles & Co sells a old model from its inventory d) You buy two cepelinai at “Prie Angelo Kavine” e) The government of Uzupis repaves Filaretu gatvė f) The mom of your fiancé buys a bottle of Spanish wine g) Phillips Morris opens a new factory in Uzupis. Below are some data from the Republic of Uzupis. Suppose the Republic only produces kebabs and pizza. All the prices are in Ukr, the national currency of Uzupis.

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1rst set of problems Business Economics, Micro & Macro Vilnius-Kaunas FALL SEMESTER 2009

Year

Price kebab

2001 2002 2003

10 20 20

of

Quantity millions

100 200 200

in

Price of pizza

Quantity pizza millions

20 20 40

50 100 100

of in

a) Compute nominal GDP, real GDP, and the GDP deflator for each year, using 2001 as the base year. b) Compute the percentage change in nominal GDP, real GDP and GDP deflator in 2002 and 2003 from the preceding year. c) Did economic well-being rise more in 2002 or 2003? Explain 9) After reading Chapter 25 ”Saving, investment and the financial system” (G.Mankiw book) answer the following question: Suppose the GDP of the Republic of Uzupis is Ukr 8 trillion, taxes are are Ukr 1.5 trillion, private savings are Ukr. 0.5 trillion. And public savings are Ukr 0.75 trillion. Assuming the Uzupian economy is closed calculate Consumption, Government Purchases, National Savings and Investment.

10) After reading Chapter 3 ”Interdependence and the gains for trade” (G.Mankiw book) answer the following questions:

The workers of the Free Republic of Uzupis and the Holly Kingdom of Kristiania can each produce 40 bicycles a year. An Uzupian worker can produce 100 tones of potatoes a year, whereas a Kritianese worker can produce 50 tones of potatoes a year. To keep things simple, assume that each country has 100 millions workers. a) For this situation construct a table analogue to table 3 (Chapter 3 G.M book). b) Graph the production possibilities frontier of the Republic of Uzupis and the Holly Kingdom of Kristiania. c) For Uzupis what is the opportunity cost of a bicycle? Of potatoes? For Kristiania what is the opportunity cost of a bicycle? Of potatoes? d) Which country has an absolute advantage in producing bicycles? In producing potatoes? e) Without trade half of each country’s workers produce bicycles and half produce potatoes. What quantities of bicycles and potatoes does each country produce? 11) After reading Chapter 25 ”Savings, investment and the financial system” (G.Mankiw book) answer the following questions: For each of the following pairs, which bond would you expect to pay a higher interest rate? Explain.

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1rst set of problems Business Economics, Micro & Macro Vilnius-Kaunas FALL SEMESTER 2009 a) A bond of the German government of a bond of the Republic of Uzupis? b) A bond that repays the principal in 2010 or a bond that repays the principal in 2020? c) A bond from Microsoft or a bond from “Mantas & Co”, a small company my friend Mantas runs in his garage? That’s it…. Please I prefer a hard copy of your work. I remind you that you have to work individually. Don’t work in “teams” (if not I will have to divide the mark between the members of the team). I remind you as well that the readings and assignments represent an important part of your grade. Check the syllabus!!! If you deliver the assignment after the dead-line without any reasonable excuse it will be also evaluated. But then you only will get 8 points as a maximum!!!

CONSTITUTION OF THE REPUBLIC OF UZUPIS

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