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Final Exam, Spring 2010. Daytime MBA. Each question 10 points. 100 points total. SHOW WORK. 1. Steve and Erwan have the following production possibilities schedule Beef Poultry Steve 10/hour 8/hour Erwan 8/hour 7/hour a. 2 points. Suppose Steve and Erwan do NOT trade and they each spend 4 hours a day making beef and 4 hours a day making poultry. How much beef and poultry do Steve and Erwan each produce (and immediately consume). b. 4 points. Prior to trade, what is the cost of Beef in units of Poultry for Steve? What is the cost of Beef in units of Poultry for Erwan? c. 4 points. Now Suppose Steve and Erwan start to trade. What does Steve export to Erwan? What does Erwan export to Steve? Explain why. 2. Steve and Erwan have the following production possibilities schedule Consumption today Consumption tomorrow Steve 10.00/hour 10.20/hour Erwan 8.00/hour 8.40/hour a. 2 points. Suppose Steve and Erwan do NOT trade and they each spend 4 hours a day making Consumption today and 4 hours a day making Consumption tomorrow. How many units of Consumption today and Consumption tomorrow do Steve and Erwan each produce. b. 4 points. Prior to trade, what is the implied interest rate for Steve? What is the implied interest rate for Erwan? c. 4 points. Now Suppose Steve and Erwan start to trade. Who runs a trade deficit? Explain why. 3. On January 1, 2008, the price of a Big Mac is $3.00 in the United States and the exchange rate is 1.5 U.S. dollars per English pound. The inflation rate in the United States in 2008 is 2 percent and the inflation rate in England in 2008 is 4 percent. Assume purchasing power parity holds. a. 5 points. What is the price of a Big Mac in England on January 1, 2008 and January 1, 2009 b. 5 points. What is the Exchange rate in U.S. dollars per English pound on January 1, 2009. 4. On January 1, 2009, one English pound can buy 1.5 U.S. dollars. The one-year real risk-free interest rate in England and the United States is 3 percent. The expected inflation rate in 2009 is 1 percent in the United States and the expected inflation rate in England is 5 percent. Assuming that the Fisher equation, purchasing power parity, and covered interest party all hold, what is the forward exchange rate in dollars per pound for January 1, 2010, when contracted on January 1, 2009. 5. You have been given the following information for the country of Costa Rica: Year Apple Prices Apple Quantities Banana Prices Banana Quantities 2000 3 4 5 6 2001 3.2 4.1 5.2 6.1 Fill out the following table (in your blue book), make sure to show work. Year Expenditures on Apples Expenditures on Bananas Nominal GDP 2000 2001 6. Given your answer from question 5, fill out the following table in your blue book. Make sure to show work. Growth Rate of Real GDP (in Percent) 2000-2001 Inflation Rate (in Percent) 7. Given your answer from questions 5 and 6, fill out the following table in your blue book. Make sure to show work. Year Real GDP, BASE YEAR 2000 Real GDP, BASE YEAR 2001 2000 2001 8. Explain why government tax revenues and deficits are not the same thing as “government spending” in the National Income and Product Accounts. 9. An acquaintance named Lutz hands you the following data on sources of income in the year 2009 in Germany: Unambiguous Labor Income 60 Marks Unambiguous Capital Income 25 Marks Ambiguous Income Source 1 7 Marks Ambiguous Income Source 2 8 Marks Total Income 100 Marks Using the method we discussed in class and in the book, estimate the fraction of total income accruing to capital in Germany in 2009. Show work. 10. You have been told that a firm produces output Y using Labor L according to the production function: Y = 100 Lα. The available data suggest α=0.5 for this firm. You also know that the marginal cost of an additional unit of labor is $15. How many units of labor (fractional units of labor are OK) should the firm employ to maximize profits? Show work!