Download Agricultural Economics 430 - Department of Agricultural Economics

Agricultural Economics 430
Macroeconomics of Agriculture
Fall 2008
Penson
First Hour Examination
September 18, 2008
NAME:_______ANSWER KEY___________________________
This examination consists of five questions. Please read each question
carefully. The term “describe fully” asks that you answer all aspects of the
question. Avoid giving extraneous information (i.e., “filler”). Use
graphs/formulas whenever possible to help tell your story. Make sure you
fully label all graphs. Use the back of the page if necessary.
Question 1 _____ of 20 points
Question 2 _____ of 25 points
Question 3 _____ of 20 points
Question 4 _____ of 20 points
Question 5 _____ of 15 points
TOTAL
_____ of 100 points
1
1.
Given the following model for planned consumption expenditures,
please answer the questions below:
Ct = 140 + 0.95(Yt - Tt)
where:
Ct
Total planned consumption expenditures in year t
Yt
Personal income in year t
Tt
Total personal taxes due in year t
Gt
Total government spending in year t
and where:
Yt = 1,200
Tt = 50 + 0.25(Yt-1)
Gt = 250
(Show all work for full credit)
a. If personal income last year was $800, what is the level of total
consumption expenditures in the current year (year t)? (10 points)
Tt = 50 + 0.25(800) = 50 + 200 = 250
Ct = 140 + 0.95(1,200 – 250) = 140 + 0.95(950) = 1,042.5
St = Yt – Tt –Ct = 1,200 – 250 – 1,042.5 = - 92.5
b. How much would consumption expenditures and savings in the
economy change if the income tax rate was 30 percent instead of
25 percent? (8 points)
Tt = 50 + 0.30(800) = 50 + 240 = 290
Ct = 140 + 0.95(1,200 – 290) = 140 + 0.95(910) = 1,004.5
Therefore consumption fell from 1,042.5 to 1,004.5
St = Yt – Tt –Ct = 1,200 – 290 – 1,004.5 = - 94.5
Therefore saving fell from -92.5 to -94.5
c. What is the marginal propensity to save in year t? (2 points)
The marginal propensity to save is .05 or 5 cents per dollar.
2
2.
Given the following demand and supply equation for a market, please
answer the questions below:
QD = 100 –2(P) + 2.5(Y – T)
QS = 20 +4(P)
where P represents price of the product, Y represents personal income
and T represents personal taxes.
Assume disposable personal income in 2007 in this economy was
$700 and is projected to be 10 percent higher in 2008.
(Show all work for full credit)
a. What equilibrium price and quantity would you expect in this
market in 2008? (10 points)
100 - 2(P) + 2.5(Y-T) = 20 + 4(P)
100 + 2.5(1.10 x 700) – 20 = 6(P)
100 + 2.5(770) – 20 = 6(P)
6(P) = 2,005
Q = 20 + 4(334.17)
P = 334.17
Q = 1,357.
b. If Congress enacts a tax increase in 2007 that cuts disposable
personal income by 10 percent, what price would you expect in
2008? How much would the quantity demanded by consumers in
this market change as a result of this tax hike? (10 points)
100 + 2.5(.90 x 770) – 20 = 6(P)
100 + 2.5(693) – 20 = 6(P)
6(P) = 1,812.5
Q = 20 + 4(302.08)
P = 302.08
Q = 1,228 therefore ∆Q = - 122.9
c. What is the income elasticity over this range of the demand curve
for this market? (5 points)
%∆Q = (1,228 – 1,357)/1,357 = -122.9/1,357 = -.09056
%∆Y = -10.0%
EY = %∆Q/%∆Y = -.09056/-.10 = 0.9056.
3
3. Please define or graphically illustrate each of the following terms.
Make sure you correctly label all graphs used in your answers: (4
points each)
% of
original
capacit
y
Capacity depreciation
One Hoss Shay
Straight line
Geometric
Decay
0
Service life
Life cycle hypothesis of consumption
This reflects the observation that young consumers tend to have a
much higher level of consumption that older consumers. Their
number of remaining earning years is greater.
Recessionary GDP gap
Recessionary gap = YE < YFE
You could also have drawn the aggregate demand and supply
curves to illustrate this relationship
Price
Autonomous consumption
S2
S1
1
Bottleneck in supply
Draw graph to right or
explain or state that
actual output is less than
economic capacity
D
P2
Bottleneck
P1
Actual
output
Economic
capacity
Engineering
capacity
Intercept of the consumption curve or level of consumption if
disposable income was equal to zero.
4
4.
Given the following equation for total investment expenditures, please
answer the questions below:
It = 500 – 20(it)
where:
It
Total investment expenditures in year t
Kt-1 Capital stock at the start of year t
Dt
Depreciation in year t
it
Interest rate in year t
and where:
Dt = 100
Kt-1 = 1,000
(Show all work for full credit)
a. What is the level of net investment expenditures if interest rate is
5 percent? (HINT: use 5.0 rather than 0.05) (8 points)
It = 500 – (20(5) = 500 – 100 = 400
NIt = 400 – 100- = 300
b. What is the level of the capital stock at the end of year t? (6
points)
Kt = Kt-1 + NIt = 1,000 +300 = 1,300
c. Describe the factors that influence the desired capital stock at the
end of the year. What is the relationship between the desired
capital stock and the level of investment expenditures in the
current year? (6 points)
K*t = β[E(Pt) x E(Ot)]/E(Ct) or expected revenue and the
expected cost of capital (which includes the cost of debt and
equity capital, tax and capacity depreciation, the purchase
price of the asset and the income tax rate).
K*t = Kt-1 +It - Dt
5
5. We discussed the macro-to-market-to-micro linkage in the economy.
Assume conditions of perfect competition. Please illustrate the effects
that a tax cut passed by Congress and sighed by the President would
have upon the price of price of corn received by a corn farmer. Make
sure you correctly label all graphs. (15 points)
To answer this question, I would
a. Draw the consumption graph showing a increase in
consumption expenditures by consumers.
b. Draw the market demand and supply curves for the corn
market showing the demand curve shifting to the right as
disposable income increases and price of corn rising.
c. Draw the MR and MC curves for a perfectly competitive corn
producer showing the increase in production in respond to the
higher price taken from the corn market
I will illustrate this in class.