Download SOLUTION EXAM 08/07/04

SOLUTION 08/07/04
INTRODUCTION TO ECONOMIC ANALYSIS
1. a) Disagree. If an increase in the price of butter leads, by demand law, to an
increase in the quantity demanded of margarine that means that a fall in the
demand of butter will provoke an increase in the demand of margarine, then
margarine and butter are substitutes
b) Agree. The marginal cost curve crosses the average total cost (ATC) curve at
the minimum of ATC, and it is the efficiente scale.
c) Agree. If demand has a negative slope marginal revenue will always be below
average revenue
2. a) Frontier
Production Possibilities Frontier
OUTPUT OF CONSUMER GOODS
(units per year)
Production Possibilities Curve
A
Limited resources necessitate
choices about WHAT to produce.
C
D
X
F
O
E
G
B
OUTPUT OF MILITARY GOODS (units per year)
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b) 100 more cars will cost 40 houses; 40/100 = 0.4 houses
c) 100 more cars will cost 100 houses; 100/100 = 1 house
d) Because in c we are using more resources in the production of cars than in d.
If in c we want to produce more cars we will have to divert resources from other
uses in which they are more productive than in d.
e) 100 cars, 60 houses
f) No, if from a given position you can increase the production of one good
without decreasing the production of another, then the position is not efficiente.
3. A monopolist will produce till marginal revenue (MR) equals marginal cost
(MC), i.e.
MR = MC, which implies profit maximization, but a monopolist’s MR is always
less than the price of its good, because the monopolist faces a downward-sloping
demand curve. So, the MR curve lies below its demand curve.
The different ways of regulating the monopolistic market are.
i)
By trying to make monopolized industries more competitive.
ii)
By regulating the behaviour of monopolies.
iii)
By turning some private monopolies intro public enterprises.
iv)
By doing nothing at all.
4) a) Disagree. Not consumed but produced.
b) Disagree. The statement could be correct, just in case, prices had not changed
between 1965 and 2000, which clearly is not the case.
c) Disagree. Money supply 1,000. The multiplier =10.
5) i) GDP deflator = ( Nominal GDP/ Real GDP ) 100
First, we calculate nominal GDP:
1995 Nominal GDP = 1 x 100 + 1 x 100 + 1 x 100 = 300
2000 Nominal GDP = 1 x 120 + 1.4 x 150 + 0.8 x 110 = 418
Second, we calculate real GDP:
Real GDP 1995 is the same a nominal GDP 1995, the base year (1995), both
nominal and real are the same.
Real GDP 2000: 1995 prices x 2000 quantities:
1 x 120 + 1 x 150 + 1 x 110 = 380,
Then GDP deflator will be: (418/300) 100 = 110
Increase over the period = [(110 – 100) / 100] 100 = 10%
ii) CPI in 1995 (base year) = 100
CPI in 2000 (base 1995 = 2000 prices x shares A B C,
1 x 40 + 1.4 x 30 + 0.8 x 30 = 106
CPI growth = [(106 – 100)/ 100] 100 = 6%
iii) None is better than the other. The two are good depending on the purpose for
which they are to be used.
The GDP deflator is the adequate index to correct nominal figures of output, in
order to isolate real growth of this output. The CPI is good to identify the evolution
of the prices of the goods and services we consume.
The main differences between the two indices are:
a) The GDP deflator is an index of prices with variable weights (the extent of
production of each year), the CPI, on the other hand, is an index with fixed
weights (the consumption shares of the base year) and it is a Laspeyres index.
b) CPI includes the price of imports and excludes the prices of exports. GDP
deflator, on the other hand, includes the price of exports and excludes the price
of imports.
6. a) Shares of capital and labour.
First we work out the rate of growth of output, stock of capital, and labour:
Output: [(2350 – 2000) / 2000] 100 = 17.5%
Stock of capital: [(1300 – 1000) / 1000] 100 = 30%
Labour: [(105 – 100) / 100] 100 = 5%
Additionally, we know that technological progress has contributed 5% to the growth
of output, then:
17.5 = 5 + α 5 + (1 – α) 30; α = 0.7 that will be the income share of labour
; (1 – α) = 0.3 income share of capital.
c) Contribution of labour to the growth of output: 0.7 x 5 = 3.5%
Contribution of stock of capital to the growth of labour: 0.3 x 30 = 9%
Then, we can figure out the percentage of growth explained by labour and by stock
of capital:
Labour (3.5/17.5) 100 = 20%
Stock of capital (9/17.5) 100 = 51.42%