Question

1. Imagine that it is year 2022 and our economy has been enduring a severe recession due to the current crisis. But then the U3 unemployment rate begins to decline. From this information alone, what should we conclude about the near-term outlook for the economy? Why? (To answer this question you will want to explain about the U3 unemployment rate and what could lead to this decline.)

2. Product X is made in a perfectly competitive industry that is initially in long-run equilibrium with a market price of $10 per unit. Suddenly (as has been the case with face masks and hand sanitizer) the demand for product X rises permanently.

Trace out the immediate short-run and ultimate long-run consequences for these items: price of product X market output of product X output of a typical company producing product X the profitability of companies in the market Explain why these items change in the way they do. (We are not given enough information to figure out exact amounts, just the direction of change.)

Answer 1

1

a. U3 unemployment is the number of people actively seeking a job.

b. Given data -> Recession in economy. U3 unemployment rate declines.

c. U3 unemployment rate declines majorly because of low labor force participation rate. i.e. many of the people who were looking job in 2020 are no longer looking for a job in 2022.

d. The reason for the outcome as in point 3 could be lower wages. People working at higher salary before they get unemployed would not like to join a job at say, 50% of the salary. This may reduce the labor force participation rate.

i.e. there will be increase in discouraged workers.

2

a. Given : Product X, price = 10. Demand rises suddenly.

b. Increase in sudden demand will increase the prices in the short run. Margins in the short run will be very high. As the supply cannot be increased suddenly, the mismatch of demand and supply with increase the prices very much. Suppliers will be happy to gain margins.

c. In long run, many different players will enter into this business. As there are no barriers to entry many suppliers will increase the supply in long run. Now, because of this there will be match between supply and demand in long run and prices will come back aroung 10, making the economic profit zero again.