1. Use the model of supply and demand to explain how a fall in the price of frozen yogurt would affect the price of ice cream and the quantity o f ice cream sold. In you explanation, identity the exogenous and endogenous variables.
2. Suppose a women marries her butler. After they are married, her husband continues to wait on her as before, and she continues to support him as before (but as a husband rather than as an employee). How does the marriage affect GDP? How should it affect GDP?
3. Abby consumes only apples. In year 1, red apples cost $1 each, green apples cost $2 each, and Abby buys 10 red apples. In year 2, red apples cost $2, green apples cost $1, and Abby buys 10 green apples.
a. Compute a consumer price index for apples for each year. Assume that year 1 is the base year in which the consumer basket is fixed. How does your index change from year 1 to year 2?
b. Compute Abby's nominal spending on apples in each year. How does it change from year 1 to year 2?
c. Using year 1 as the base year, compute Abby's real spending on apples in each year.
d. Defining the implicit price deflator as nominal spending divided by real spending, compute the deflator for each year.
e. Suppose that Abby is equally happy eating red or green apples. How much has the true cost of living increased for Abby? Compare this answer to your answers parts a and d. What does this example tell you about Laspeyres and Paasche price indexes?
4. Suppose that an economy's production function is Cobb-Douglas with parameter α=0.3
a. What fractions of income do capital and labor receive?
b. Suppose that immigration increases the labor force by 10 percent. What happens to total output (in percent)? The rental price of capital? The real wage?
c. Suppose that a gift of capital from abroad raises the capital stock by 10 percent. What happens to total output (in percent)? The rental price of capital? The real wage?
d. Suppose that a technological advance raises the value of the parameter A by 10 percent. What happens to total output (in percent)? The rental price of capital? The real wage?