Download Exam 11th Febraury 2005: Solution

Exam 26th January 2006: Solution
1.A) Disagree
By the law of demand an increase in the price of a good provokes
a decrease in the quantity demanded, and we cannot say
anything about the elasticity of the good. Just in the case of a
totally inelastic demand, a change in the price of the good will
not provoke any change in Tue quantity demanded.
B) Disagree
Even it is absolutely true that a tax on a good places a wedge
between the price buyers pay and the price that sellers receive, it is
false that the quantity bought and sold doesn’t change. As a
consequence of the tax this quantity will always be less than before
the imposition of the tax.
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
Accounting cost and economic cost are different. Accounting costs
consider the explicit cost whereas economic cost consider the explicit
and the implicit cost, then, economic cost will be greater than
accounting cost.
2.- Graphically
In the figure above we show the equilibrium for a monopolistic firm.
This equilibrium is found when :
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*). 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 (Q’). The price should to be equal to marginal cost,
this price would give consumers an accurate signal about the cost of
producing the good and consumers would buy the efficient quantity.
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).
3.
Xd = 300 – 4px
Xs = -90+ 6px
a) In equilibrium Xd = Xs
300 – 4px = -90+ 6px
390 = 10 px then px = 39; X = 144
When Xd = 0, then px = 75
When Xs = 0, then px = 15
In equilibrium Xd = Xs , that is, 22 – 4px = -2 + 4px and we get
px = 3 and Xd = Xs = 10
b)
Consumer surplus =
(bxh)/2
b= 144
h = (75 -39)
[(144 x (75 -39)]/2 = 2592 (grey shaded area)
B = 144
Producer surplus = (b.h)/2
H = (39 – 15)
[(144 x (39 - 15)]/2 = 1728 (yellow shaded area)
Total surplus = 2592 + 1728 = 4320
c) When government sets a maximum price of 40 as it is above the
equilibrium price, it is not binding, then, it produces no effect
whatsoever. Consumer, producer and total surplus are unaffected.
We know that an economy in equilibrium is described by:
d) When government sets a maximum price of 20 as it is under the
equilibrium price it will be binding, and the consequences are the
following:
px = 20
Xd = 300 – 4 x 20
Xs = -90+ 6 x 20
Xd = 220
Xs = 30; in the demand function 30 = 300 – 4 px
4 px = 270, px = 67.5
Consumer surplus =
(bxh)/2
b= 30
h = (75 -67.5)
Plus rectangle’s area = (bxh) = (75 -67.5) x 30
[(30 x (75 -67.5)]/2 + (75 -67.5) x 30
= 1537.5 (red shaded area)
B = 30
Producer surplus = (b.h)/2
H = (20 – 15)
4.
a) Disagree. They are not equivalent.
b) Disagree. Both are price index.
c) Disagree. It could only be true if inflation = 0.
5.
a)
2000 Nominal GDP = 400x40+1200x30+120x60+1600x80=187200
2001NominalGDP=440x44+1060x36+140x56+1620x90=211160
2002 Nominal GDP = 460x50+1220x40+140x60+1640x88=224520
Real GDP 2000: 1995 prices x 2000 quantities:
2000 Real GDP = 187200, they are the same, nominal = real
2001 Real GDP=440x40+1060x30+140x60+1620x80=187400
2002 Real al GDP = 460x40+1220x30+140x60+1640x80=194600
Because prices are the same. Real GDP 2000 is the same a
nominal GDP 2000, for the base year (2000), always, both nominal
and real are the same, so real GDP = 187200.
b) 5)
Real growth rate=[(Real GDP2001 - Real GDP2000 )/Real GDP2000]100
Then = [(187400 – 187200) / 187200] 100 = 0.10%
Nom.
Growth
rate=[(Nom.GDP2001
–
Nom.GDP2000 )
/
Nom.GDP2000]100
Then = [(211160 – 187200) / 187200] 100 = 12.79%
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.
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.
6.
There are three main tools:
1. Open-market operations
2. Reserve requirements
3. the discount rate
1. Open-market operations are referred to the purchases and
sales of Government bonds. These operations can be used to
change the money supply. To increase the money supply the
Bank of Spain buy bonds from the public in the nation’s bond
market. The euros the bank of Sapin pays for the bonds
increase the number of euros in circulation. Some of these new
euros are held as currency, some are deposited in banks. Each
euro held as currency increases the money supply by exactly
one euro. Each new euro deposited in a bank increases the
money supply to an even greater extent because it increases
reserves and, thereby, the amount of money that the banking
system can create. To reduce the money supply the Bank of
Sapin does the opposite.
2. The bank of Sapin can influence the money supply with reserve
requirements, which are regulations on the minimum amount of
reserves the banks must hold against deposits. Reserve
requirements influence how much money the banking system
can create with each euro of reserves.
3. The discount rate is the interest rate on the loans that the
Bank of Spain makes to banks. When the Bank of spain makes
a loan to a bank, the banking system has more reserves than it
otherwise would, and these addiotional reserves allow the
banking system to create more money. The Bank of Spain can
alñter the money supply by changing the discount rate. A
higher discount rte discourages banks from borrowing reserves
from the bank of Sapin, that reduces the quantity of reserves in
the banking system, which in turn reduces the money suspply.
Conversely, a lower discount rate encourages banks to borrow
from the Bank of Sapin, increases the quantity of reserves, and
increases the money supply.