Instructions: Answer question 3 and any additional threequestions. Write legibly. Begin each numbered question on a fresh page. To get full credit you must show all steps in your work. Unsupported answers will receive no credit!
1. The economy of Googleland is producing the following three goods:
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Output 2000
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Output 2001
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Price 2000
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Price 2001
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Pens
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12
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10
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$2.00
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$1.00
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Pencils
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20
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24
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$1.00
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$2.00
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Binders
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4
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6
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$10.00
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$10.00
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(a) Calculate the nominal GDP for 2000.
(b) Calculate real GDP for 2001 using 2000 as the base year.
(c) Calculate the percentage increase in Real GDP from 2000 to 2001 using 2000 as the base year.
(d) Calculate Real GDP in 2000 using 2001 as the base year.
(e) Calculate the percentage increase in Real GDP from 2000 to 2001 using 2001 as the base year.
2. The economy of Yahoolandis represented by the following:
C=50+0.25Yd, T=1000, G=1000, I=100
(a) Calculate the equilibrium level of output. Graph your solution.
(b) If the government spending increases by 50 what is the new equilibrium level of output? Use the government spending multiplier.
(c) If the government increases taxes by 50 what is the new equilibrium level of output?Use the tax multiplier.
(d) If the government increases taxes and spending by 50 what is the new equilibrium level of output?
(e) Calculate the equilibrium level of output in case where taxes depend on income according to the following: T=-25+0.125Y.
3. Use AD and AS curves to explain the effects on the equilibrium price level and equilibrium level of output in the short run.
(a) An contractionary fiscal policy with the economy operating near full capacity.
(b) A expansionary monetary policy during a period of high unemployment and excess industrial capacity.
(c) A strong hurricane destroys energy plants which cause energy prices to increase, assuming that the Fed attempts to keep interest rates constant by accommodating inflation.
(d) The federal government pursues a contractionary fiscal policywhile the Fed acts to keep output from falling.
4. Lufthansa (LH) and British Airways (BA) are engaging into the following one-shot simultaneous game: if LH advertises for a fair from Frankfurt to Paris and BA does not, LH will make $20 million in profits and BA will make $6 million. If BA advertises and LH does not, LH will make $2 million and BA will make $6 million. If LH advertises and BA advertises, each firm earns $10 million. If neither firm advertises, BA will make $8 million and LH will make $4 million.
(a) Write the payoff matrix for the above game.
(b) Does LH have a dominant strategy?
(c) Does BA have a dominant strategy?
(d) What is the Nash equilibrium for the one-shot game?
Explain your answers.
5. Wilson has been producing tennis racquets for many decades and continues to implement strategies that make it a leader in the tennis racquet industry. Suppose that when Wilson and its largest rival,Babolat, advertise, each company earns $0 billion in profits. When neither company advertises, each company earns profits of $8 billion. If one company advertises and the other does not, the company that advertises earns $48 billion and the company that does not advertise loses $1 billion. Under what conditions could collusion be profitable? Explain.