Economics 102: Prof. E. Kelly                       Student name:

Spring 2000                                                     ID#:

Homework #2                                                 T.A. Name:

Due Feb. 28 at lecture                                                Sec. Code:

 

 

ANSWER KEY

 

Problem #1.  Table 1 below provides basic information for the VHS recorders’ market.

Assume that the demand and supply equations are linear.

TABLE 1

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:

TABLE 2

 

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?