Download Exam 11th Febraury 2005: Solution

.Exam 27th January 2006: Solution
1.A) Agree
When the government establishes a price ceiling under the
equilibrium price it will be binding, then it will provoke a
shortage, and the other way round, if the government
establishes a price floor above the equilibrium it will be binding,
then it will provoke a surplus.
B) Disagree
The market demand curve provides a constraint on a monopoly’s
ability to profit from its market power. A monopolist would prefer, if it
were possible, to charge a higher price and sell a large quantity at
that high price. The market demand curve makes that outcome
impossible. In particular, the market demand curve describes the
combinations of price and quantity that are available to a monopoly
firm. By adjusting the quantity produced (or, equivalently, the price
charged), the monopolist can choose any point on the demand curve,
but it cannot choose a point off the demand curve.
C) Agree
Sunk cost is defined as the cost that you cannot recover, then, the
adage explain perfectly clear the same idea of those costs that you
can do nothing about then.
D) Disagree
A normal good is a good for which, other things being equal, an
increase in income produces an increase in its demand.
2.- Graphically
In the figure above we show the downward-sloping line relating price
and quantity demanded which is called the demand curve. In the
vertical axis we represent for example the price of ice- cream and in
the horizontal axis the quantity of ice-cream demanded. As the price
rises the buyer buys less and the other way round.
Law of demand, the claim that, other things equal, the quantity
demanded of a good falls when the price of the good rises.
Demand schedule, a table that shows the relationship between the
price of a good and the quantity demanded.
3
a) We define profit, in fact it can be defined in two ways:
1)  = TR – TC
2)  = (P – ATC) Q
Where  = benefit, TC = total cost, TR = total revenue, P = price,
ATC = average total cost, Q = quantity.
1) TR = P Q
Given the information we have, we know that Q = 30- P, from here
we can get P, such as P = 30 – Q, then
TR = (30 – Q) Q, multiplying, TR = 30Q – Q2
In order to get the equilibrium price and quantity, we ought to
figure it out, so:
In equilibrium: MR = MC
Additionally we know that TC = 10Q
From TC and TR we obtain, just with the derivative of the two
functions MC and MR:
MC = 10
MR = 30 – 2Q
Equating both expressions, 10 = 30 - 2Q, from here we get Q = 10
and substituting in demand function, P = 20.
Substituting, the value of Q in TC, TC = 100, and doing identically in
TR, then TR = 200, so:
 = 200 – 100, profit equal to 100.
According to procedure 2, we should first obtain ATC, we know that
ATC = TC/Q, that is, (10Q)/10 = 10
Than profit will be = [20 – (10)]10 = 100
b) Perfect competition: Equilibrium P = MC = 10
for P = 10; Q = 30 –P, then Q = 20
TR = P Q = 10 x 20 = 200
TC = 10 x 20 = 200
 = 200 – 200, profit equal to 0, zero profit, i.e. long run
equilibrium.
c) Consumer surplus under monopoly
MC = MR, from that point we get the equilibrium quantity Q* , then,
uses the demand curve to find the price that will induce consumers to
buy that quantity (P*).
Given the demand function Q = 30 – P, when Q = 0, P = 30
Consumer surplus =
(bxh)/2
b= 10
h = (30 -20)
[(10 x (30 -20)]/2 = 50 (grey shaded area)
Consumer surplus under perfect competition
If instead of being a monopoly it were a competitive firm equilibrium
will be found when marginal cost curve cross the demand curve, and
that will produce the socially efficient quantity of output (20)
Consumer surplus =
(bxh)/2
b= 20
h = (30 -10)
[(20 x (30 -10)]/2 = 200
Deadweight loss = (10 x 10) / 2 = 50
Summing up, we can say that, because a monopoly charges a price
above marginal cost, not all consumers who value the good at more
than its cost buy it. The deadweight loss is represented by the area of
the shaded triangle, which is the triangle between the demand curve
(which reflects the value of the good to consumers) and the marginal
cost curve (which reflects the costs of the monopoly producer, green
shaded area).
4.
a) Disagree. They are not equivalent.
b) Disagree. Nominal GDP uses current prices to place a value on the
economy’s production of goods and services. Real GDP uses constant
base-year prices to place a value on the economy’s production of
goods and services. Because Real GDP is not affected by changes in
prices, changes in real GDP reflect only changes in the amounts being
produced. Thus, real GDP is a measure of the economy’s production
of goods and services.
c) Disagree. GDP is the market value of all final goods produced
within a country in a period of time
5.
2001
2002
2003
2004
2005
= 100
= 464,23
= 466,10
= 108,20
= 562,09
Base year 2001
6.
The amount of money the banking system generates with the
reserves is called the money multiplier. We can express the financial
position of the first bank, assuming it has 1000€ in deposits, and all
deposits are held as reserves, its situation will be:
Suppose the 1st bank decides to keep 10% of its deposits in reserve
and to loan out the rest, the new T-account:
Now, the bank has two kinds of assets: it has 100€ of reserves and
its loan of 900€. We consider the money supply, currency plus
demand deposits, it will be 1900€, thus when banks hold only a
fraction of deposits in reserve, banks create money. We assume now,
that the 1st bank uses the 900€ to buy something from someone who
deposits the currency in a 2nd bank. The T-account for the 2nd bank:
Second Bank
The process goes on and on. Every time money is deposited and a
bank loan is made, more money is created.
The money eventually created in the economy is:
Original deposit
= 1000€
st
1 bank lending
= 900€ = [.9x1000]
nd
2 bank lending
= 810€ = [.9x900 ]
3rd bank lending
= 729€ = [.9x810 ]
………… and so on
……………….
Total money supply . . . . . . . . 10.000€
The process the money creation can continue forever. In this
economy, where the 1000€ of reserves generates 10000€ of money,
the money multiplier is 10. The money multiplier is the reciprocal
of the reserve ratio. If R is the reserve ratio and is equal to 1/10,
then the money multiplier is 10.