Economics 102:
Prof. E. Kelly Student
name:
Spring 2000 ID#:
Homework #2 T.A.
Name:
Due Feb. 28 at
lecture Sec.
Code:
Problem
#1. Table 1 below
provides basic information for the VHS recorders’ market.
Assume that the demand and
supply equations are linear.
Quantity demanded (Units) |
Quantity supplied (Units) |
Price (US$) |
400 |
250 |
100 |
200 |
300 |
200 |
0 |
350 |
300 |
(a)
(1
point). Fill in the missing information
in the table above.
(b)
(2
points). Find the demand and supply equations for this market.
Qd=
600-2P or Pd=300-1/2Qd
Qs=
1/2P+200 or Ps=-400+2Qs
(c)
(1
point). Find the market equilibrium. Pe=160;Qe=280.
(d)
(2
points). 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. Pe=155;Qe=290;
(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)
(2
points) 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? Qd=200; Qs=312.5; Pe=200. No the market has
excess supply.
ii)
(2
points) Calculate the policy’s effect on the consumer surplus. From a
consumer’s point of view would you agree with this policy? Consumer surplus falls from $19,600 to $10,000 (i.e. a change
of $9,600). As a consumer you will be paying more for this product, so as a
consumer this policy harms you. A completely different issue is whether from a
normative point you think that it is important to protect this industry.
(f)
(2
points). Assume that the development of DVD’s (Digital Video Disc) reduces the
consumption of VHS recorders by 100 units at each price level. Given the
initial equilibrium (that of point a) graph and calculate the new equilibrium. The Demand curve shifts to the left. Pe=120;Qe=260.
Problem #2. The economy of Monona produces three goods:
books, bread and beans. Production and prices in 1998 are shown in Table 2 below:
|
1998 |
1999 |
||
Quantity
1/ |
Price
($) |
Quantity
1/ |
Price
($) |
|
Books
|
100 |
10.0 |
110 |
10.0 |
Bread (Loaves) |
200 |
1.0 |
200 |
1.5 |
Beans (pounds) |
500 |
0.5 |
450 |
1.0 |
1/ Thousands. |
(a)
(1
point). What is the nominal GDP in 1998?1,450
(b)
(1
point). What is the nominal GDP in 1999?1,850
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)
(2
points). Determine the value of profits. $510.
(d)
(2
points). What is the value for Government purchases? $675.
(e)
(2
points). Determine Monona’s population if GDP per capita is $5.8. 250 inhabitants.
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)
(2
points). Using the “production of final goods” approach, what is GDP? The value of the final good = $400,000.
(b)
(4
points). What is the value-added at each stage of production? VA in first stage VA1= $100,000 ($25,000 in profits and
$75,000 in wages);Value added in second stage VA2= 300,000 ($250,000 in profits
and $50,000 in wages).
(c)
(2
points). Using the value-added approach, what is GDP? 400,000
(VA1+VA2=100,000+300,000)
(d)
(2
points). What are the total wages and profit earned from this activity? Using
the income approach, what is GDP? $125,000 from wages
$275,000 from profits.
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)
(3
points). What is the value of GDP? $8,960.9 Billions of
1996 chained dollars.
(b)
(2
points). If the total GDP in the last quarter of 1998 was $8,469.6 what was the
annual growth rate for the economy? 5.8%.
(c)
(2
points). What is the Consumption/GDP ratio? Interpret your result. 68.3% of what is produced is being consumed.
(d)
(2
points). What is the Gross private domestic investment/GDP ratio? Interpret
your result 18.73% of what is being produced in the
economy is invested and therefore used to increase the economy’s capital stock.
Do you think the ratio is too high? For a
developed and rapidly growing economy as the US this rate doesn’t seem low.
However, Asian countries, which have grown at very high rates during the last
30 years, had investment rates of over 30% of GDP.
(e)
(1
point). What is the Government purchases/GDP? 16.93%. Do
you think the ratio is too high?