Download Problem Set 3

Economics 102
Professor McClelland
Fall 2007
Problem Set #3
DUE MONDAY, SEPT. 24, IN LECTURE, URIS G-01
Problem sets are to be turned in AT THE BEGINNING OF THE LECTURE.
Boxes will be provided at the back of Uris G-01.
Place your problem set answers in the box with your TA’s name and section on it.
NO CREDIT WILL BE GIVEN FOR LATE PROBLEM SETS.
1.
Using a demand-and-supply diagram, explain what is wrong with the
following statement:
“If flour prices rise, raising the price of bread, that will shift the demand
curve for bread because at higher prices, people will consume less bread.”
2.
State which of the following transactions would NOT be counted as part of
the Gross Domestic Product (GDP) of the USA. (Unless otherwise
specified, all transactions take place in America.)
(a)
(b)
(c)
(d)
(e)
You purchase a newly published economics textbook for $50 with
the intent of selling it after your course is over.
You purchase a 1999 Honda Accord from your friend Sarah for
$6,000.
The sale of $10,000 of newly produced marijuana by a drug dealer.
Susan bakes a chocolate cake (priced $20 in market) for her brother.
A timber company purchases land for $300,000 in Oregon. Assume
no brokerage fees.
OVER
Economics 102
Problem Set #3
3. Consider the economy of Chevronia, a small country with only three citizens –
George, Martha and Franklin. In 2005, the following transactions take place.
(1) George grows 200,000 pounds of wheat. On 9/1/05 he sells 150,000
pounds of wheat to Martha for 20 cents per pound.
(2) Martha uses 100,000 pounds of wheat to produce 80,000 pounds of flour.
On 10/1/05 she sells 40,000 pounds of flour to Franklin for 30 cents per
pound.
(3) Franklin uses 10,000 pounds of flour to bake 20,000 loaves of bread. On
12/31/05 he sells 10,000 loaves of bread to George and Martha for one
dollar per loaf. He plans to sell the rest of the bread, next year.
(a)
Answer the following questions.
(i) What is the value added by George, Martha, and Franklin,
respectively, in the year 2005?
(ii) What are the final sales in the economy?
(iii) What is the dollar value of the increase in inventories?
(Assume that the inventories are valued at their retail price, not
at their wholesale price.)
(iv) What is the value of GDP in 2005?
Suppose Japanese entrepreneurs buy the plant Franklin uses to produce bread
(one building and one baking oven) on 1/1/06, and they pay him a yearly salary
of $5,000 to continue to operate the plant.
(b) Under the new foreign owner, Franklin uses the same factors of
production as before to produce the same amount of bread. But at
the end of the year 2006, all of the profits except for the salary paid
to Franklin are paid as dividends to the foreign entrepreneurs.
Explain how this change in ownership will affect Chevronia’s 2006
GDP and GNP, respectively. Assume that the prices remain
unchanged.
(c)
The new Japanese owners realize that the previous owner, Franklin,
forgot to charge $1,000 each year for the wearing out (or the
depreciation) of the baking oven. How will this change affect the
2006 value of GDP of Chevronia? Why?