Download Homework 2

Homework 1
Economics 503
Foundations of Economic Analysis
Practice
1.
Real Hong Kong Box Office. It is 2004. You are analyzing the profitability of
Hong Kong’s movie industry. You hear that Steven Chao’s Kung Fu Hustle is the
top grossing Hong Kong film of all time. You are given a list of local gross box
office receipts for a number of Hong Kong movies.
1. Kung Fu Hustle
2. Shaolin Soccer
3. First Strike
4. Rumble In The Bronx
5. Infernal Affairs
6. God of Gamblers Return
7. Justice My Foot
8. All's Well, End's Well
9. Thunderbolt
10. Mr. Nice Guy
11. Fight Back to School
12. All for the Winner
13. Drunken Master II
14. God of Cookery
15. God of Gambers II
16. Flirting Scholar
17. All's Well, End's Well 1997
Box Office Revenues
HK$60,830,000
HK$60,770,000
HK$57,519,000
HK$56,911,000
HK$55,030,000
HK$52,540,000
HK$49,880,000
HK$48,990,000
HK$45,650,000
HK$45,420,000
HK$43,830,000
HK$41,330,000
HK$40,970,000
HK$40,860,000
HK$40,340,000
HK$40,170,000
HK$40,160,000
Year
2004
2001
1996
1995
2003
1993
1992
1992
1995
1997
1991
1990
1994
1997
1990
1993
1997
Year
CPI
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
63.5
70.8
77.4
84.0
90.8
98.7
104.6
110.6
113.5
109.8
106.6
104.8
101.4
99.3
99.3
(Source: www.Asianboxoffice.com)
Adjust these for inflation using the Hong Kong CPI. Convert all of these film
grosses into 2004 dollars (i.e. use 2004 as the reference year) and rank the films
by their grosses in 2004 dollars.
2.
Construct a CPI You are given some statistical accounts for the country of
Fruitopia which produces two goods, Apples and Oranges. The accounts contain
information on the price of apples and the price of oranges for the years 1995 to
2005. You are asked to calculate a CPI, nominal GDP, real GDP and the GDP
deflator using 1995 as the base year. Note that there is no investment, government
spending, exports or imports in Fruitopia so GDP is equal to consumption.
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Apples
price
quantity
$1.00
100
$1.10
105
$1.21
110
$1.33
115
$1.46
120
$1.61
125
$1.77
125
$1.95
130
$2.14
135
$2.36
140
$2.59
145
Oranges
price
quantity
$2.00
100
$2.40
105
$2.88
100
$3.46
100
$4.15
100
$4.98
95
$5.97
90
$7.17
90
$8.60
85
$10.32
80
$12.38
75
a. Calculate the CPI. The representative market basket for the Fruitopian
consumer is 100 apples and 100 oranges. Calculate the cost of this market
basket in 1995. The CPI in subsequent years is the price of this same
market basket (100 apples and 100 oranges) relative to price of that basket
in the base year (multiplied by 100).
b. Calculate the nominal GDP which is the sum of the market value of apples
(price × quantity) plus the market value of oranges in each period.
c. Calculate real GDP which is the sum of the market value of apples
calculated using the 1995 price (1 × quantity of apples) plus the value
oranges calculated using the 1995 price (2 × quantity of oranges).
d. Calculate the GDP deflator as the ratio of the nominal GDP to the real
GDP.
e. Calculate the average inflation rate over the period of 1996-2005 using
both price measures. Which price index increases the most over time?
Explain. Notice that the market basket has switched toward apples whose
price has not risen sharply over time.
CPI
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
CPI
Inflation
N/A
Nominal
GDP
Real
GDP
GDP
Deflator
GDP Deflator
Inflation
N/A
3.
Deflate Soccer Transfer Fees In European soccer leagues, teams will acquire
players from other clubs by agreeing to pay a transfer fee. The below table shows
the top 10 transfer fees paid by English Premier League sides along with the fee
paid measured in British pounds and the year of the transfer. Use the
accompanying table with the British CPI to convert all transfer fees to 2008
pounds. Who has the highest transfer fee in constant dollar terms?
Player
1
Robinho
2 Dimitar Berbatov
3 Andriy Shevchenko
4 Rio Ferdinand:
5
Juan Sebastian Veron:
6
Michael Essien
7
Didier Drogba:
8 Wayne Rooney
9 Shaun Wright-Phillips
10 Fernando Torres:
From:
Real Madrid
Tottenham
AC Milan
Leeds
Lazio
Lyon
Marseille
Everton
Manchester City
Atletico Madrid
To
Manchester City
Manchester United
Chelsea
Manchester United
Manchester United
Chelsea
Chelsea
Manchester United
Chelsea
Liverpool
British CPI
4.
2000
2001
2002
2003
2004
2005
2006
2007
2008
93.7
94.7
96.3
97.5
99.1
101.0
104.0
106.2
109.5
Fee
£32.50m
£30.75m
£30m
£29.1m
£28.1m
£24.43m
£24m
£23m
£21m
£20m
Year
2008
2008
2006
2002
2001
2005
2004
2004
2005
2007
4.
Cakeland GDP An economy called Cakeland produces three products at three
separate products: cake mix, frosting, and birthday cakes. All of the cake mix and
frosting are sold to the birthday cake company. The cake mix and frosting
companies grow all the inputs they need to make their product; their only expense
is wages. Define profits as the value of sales less wages and cost of inputs. The
following charts outline the activities of each of these firms.
Cost of Inputs
Cake Mix
0
Frosting
0
Wages
$30
$40
Sales
$100
$70
a. Solve for GDP using the expenditure method
Final Expenditure
Cake Mix
Frosting
Birthday Cakes
GDP
b. Solve for GDP using the production method
Value Added
Cake Mix
Frosting
Birthday Cakes
GDP
c. Solver for GDP using the income method
Income
Wages
Profit
GDP
Birthday Cake
$100 Cake Mix
$70 Frosting
$150
$400
5.
Luxury Goods We observe the income of the consumers of diamond rings
increase by 10%. We observe that the equilibrium consumption of diamond rings
goes up by 5%. Assume that nothing else happens to cause a change in the
equilibrium in the diamond ring market. Explain why, we can infer that diamond
rings are normal goods, but why we can’t say if they are income elastic luxury
goods or income inelastic. Use at most 1 paragraph and 1 graph.
6.
Energy Markets For reasons of safety, the Chinese government orders the
closure of 75% of the coal mines currently operating in the PRC. Draw a graph of
the effect of this on closure on the world coal market. Draw a graph of the effect
of this on the world oil market. Explain your graphs in 1 paragraph or less.
7.
Equilibrium: Algebra The demand for widgets is represented as QD = 100 – 8 P
and the supply of widgets are given by QS = 40 + 4P. Calculate equilibrium price
and quantity. Calculate the change in equilibrium price and quantity if a shift in
the demand curve gives a demand schedule of QD = 124 – 8 P.
8.
Supply Shift Below are short-term and long-term demand schedules for
petroleum as well as a supply schedule. Assume that the supply schedule is the
same in the long-term and the short-term. Calculate the equilibrium level of price
and quantity for oil in the short and the long term within the range of $10 per
barrel (Hint: the answer is the same for the short-term and the long-term). .
Assume that a conflict in the Middle East permanently reduces the amount of oil
that can be supplied at any price level. After the shock, only 94% of the previous
level is supplied at any price level. Calculate the new supply schedules. Assuming
the short-run and long-run demand curves are unchanged, calculate the new price
of oil in the short-term and in the long-term (within a range of $10).
QD
P
60
70
80
90
100
110
120
130
140
150
Short-term Long-term
83,033.06
89,314.83
81,762.92
82,689.46
80,678.38
77,348.91
79,733.70
72,925.25
78,898.04
69,182.97
78,149.63
65,963.37
77,472.59
63,155.12
76,854.95
60,677.48
76,287.50
58,470.28
75,762.98
56,487.66
QS
80,059.86
81,303.55
82,396.49
83,372.72
84,255.78
85,062.66
85,806.03
86,495.60
87,138.99
87,742.26
9.
Equilibrium: Tabular A market faces a demand function of the form
Q D  28  .2  P and a supply function of the form Q S  10  .2  P . Use these
functions to fill out a supply and a demand schedule. Identify the equilibrium
price and quantity.
P
Quantity
Demanded
Quantity
Supplied
20
25
30
35
40
45
50
10.
Revenue and Elasticity Posit a simple demand curve for breakfast cereal of the
form Q = 100 - 5P where Q is the quantity of breakfast cereal and P is the price
per box. Calculate Q and Revenue (R) at each of the following price points. What
is the price elasticity of demand as we move from price point to price point (use
the mid point method)? What is the price point where revenue is largest? Explain
why raising prices above that point does not increase revenues.
Price
Q
R evenue
Elasticity
5
6
7
8
9
10
11
12
13
14
15
;