Spring 2000: Homework 2-
Problem 1- Table 1 below provides basic information for the VHS recorders' market. Assume that the demand and supply equations are linear.
TABLE 1
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Quantity demanded (Units)
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Quantity supplied (Units)
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Price (US$)
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|
400
|
|
100
|
|
200
|
300
|
200
|
|
|
350
|
300
|
(a) Fill in the missing information in the table above.
(b) Find the demand and supply equations for this market.
(c) Find the market equilibrium.
(d) After years of research a company in the market develops a technology that allows a cost reduction of $25/per unit produced. Graph and calculate the new market equilibrium.
(e) Domestic producers of VHS recorders claim that foreign competition is pushing them out of business. To continue in business they demand the government impose a price floor that is 29% higher than the actual market price (that of d).
i) Suppose the government imposes this price floor. Find the quantity demanded and the quantity supplied in this market and the price of the good to consumers. Is this market in equilibrium?
ii) Calculate the policy's effect on the consumer surplus. From a consumer's point of view would you agree with this policy?
(f) Assume that the development of DVD's (Digital Video Disc) reduces the consumption of VHS recorders by 100 units at each price level. Given the initial equilibrium (that of point a) graph and calculate the new equilibrium.
Problem 2- The economy of Monona produces three goods: books, bread and beans. Production and prices in 1998 are shown in Table 2 below:
TABLE 2
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1998
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1999
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Quantity 1/
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Price ($)
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Quantity 1/
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Price ($)
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Books
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100
|
10.0
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110
|
10.0
|
|
Bread (Loaves)
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200
|
1.0
|
200
|
1.5
|
|
Beans (pounds)
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500
|
0.5
|
450
|
1.0
|
|
1/ Thousands.
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(a) What is the nominal GDP in 1998?
(b) What is the nominal GDP in 1999?
Suppose in 1999 compensation for employees in Monona is $790, exports $250, personal consumption expenditure $650, rents $315, imports, 100, interest $235, gross domestic investment $375.
(c) Determine the value of profits.
(d) What is the value for Government purchases?
(e) Determine Monona's population if GDP per capita is $5.8.
Problem 3- During a given year, the following activities occur in an economy:
i) A silver mining company pays its workers $75,000 to mine 50 pounds of silver, which it sells to a jewelry manufacturer for $100,000.
ii) The jewelry manufacturer pays its workers $50,000 to make a silver necklaces, which it sells directly to the households for $400,000.
(a) Using the "production of final goods" approach, what is GDP?
(b) What is the value-added at each stage of production?
(c) Using the value-added approach, what is GDP?
(d) What are the total wages and profit earned from this activity? Using the income approach, what is GDP?
Problem 4- The data releases for the U.S. economy in the last quarter of 1999 show the following information (values in billions of chained 1996 dollars).
Consumption of durable goods $844.5
Fixed private investment $1,613.5
Exports $1,072.4
Government consumption expenditures and gross investment, $1,517.1
Net exports $-356.1
Change in private inventories $65.4
Consumption of non-durables and services $5,276.5
(a) What is the value of GDP in 1999?
(b) If the total GDP in the last quarter of 1998 was $8.469,6 what was the annual growth rate for the economy?
(c) What is the Consumption/GDP ratio? Interpret your result.
(d) What is the Gross private domestic investment/GDP ratio? Interpret your result. Do you think the ratio is too high?
(e) What is the Government purchases/GDP? Do you think the ratio is too high?