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Economics Two Questions Set




Question;A3-9. Consider the problem of a household that will earn $I during its working life the presentand values consumption goods both in the present (Cp) and during its retirement years thefuture (Cf). Supposethe real after-tax interest rate between the two periods is r.(a) Write out the equation for the households budget line and illustrate it in a diagram with Cpon the horizontal axis and Cf on the vertical axis. Identify the intercepts. What is the relativeprice (opportunity cost) of Cp? Identify it on your diagram. (b) Suppose the households preferences are such that it chooses positive consumption in eachperiod.Illustrate this choice with an indifference curve and identify the level of saving in your diagram.Comment on the households consumption pattern over time versus its income-earning pattern.(c) One of the criticisms of monetary policy since the financial crisis of 2008 is that central banksaround the world have been pursuing a policy of financial repression. This line of argumentholds that that the policy-makers are reducing real after-tax interest rates (perhaps below zero)in an effort to reduce the burden on borrowers (including governments) and thereby punishingsavers. Assuming that the household thinks of Cp as a normal good, show that such a policymight result in the household choosing to save more or less in response to the reduction in theinterest rate. Make sure you illustrate and discuss the substitution and income effects. (d) Now imagine a household that will earn income of $Ip in the present an $If in the future. In anew diagram show that this household may switch from being a saver to becoming a borroweras a result of the financial repression as discussed above. Be sure to explain the substitutionand income effects that explain this change in behaviour. A3-10. Suppose the output (q) produced by different amounts of labour (L) hired by a firm isgiven below:L0123456q 0 3 9 18 24 27 28(a) Calculate and graph the marginal product curve for labour levels from 1 to 6. Does the firmexperience increasing marginal product? Decreasing marginal product? [4](b) Assume the firm has fixed costs equal to $192 and that each unit of labour costs $36. Foreach of the 7 possible output levels calculate fixed cost (FC), variable cost (VC), and total cost(TC). Show your full calculations for the output level q =24. Graph the FC, VC, and TC curves.(c) At each of the possible (positive) output levels calculate average variable cost (AVC),average total cost (ATC), and marginal cost (MC). Show your full calculations for the outputlevel q =24. In a new diagram, graph these values. [Hints: (i) If X additional units cost Yadditional dollars, then the appropriate MC number is Y/X. (ii) MC numbers are traditionallyplotted halfway between output levels since they apply to the move between these two levels(they are not a measurement at a level).In this case, because the gaps between output levelsare uneven, this procedure would be complicated, so just graph MC at the end output level.](d) Suppose this firm operates in a perfectly competitive market where the market price is $4.00per unit of output. How many units will the firm produce? What if the market price is $12.00?What if the market price is 36.00? [4](e) Assume that the short-run cost curves are drawn for the long-run efficient plant size and thatall firms in the industry are identical. Are any of the market prices from part (d) a long-runequilibrium price? Explain.


Paper#56064 | Written in 18-Jul-2015

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