Real Shocks and the ‘Keynesian Cross’

Suppose the economy of Canada has reached the long-run equilibrium (i.e. full employment) and assume that the function of exports and imports are as follows:

(1) EX =α0 +α1q+α2(Y∗ −T∗)

(2) IMP =β0 −β1q+β2(Y −T)

where q is the real exchange rate between Canadian and US goods, Y − T is the Canadian disposable income, Y ∗ − T ∗ is the US disposable income, and the α’s and the β’s are positive parameters.

Assume that Prime Minister Trudeau decides to implements a temporary policy that convinces Canadians to buy less imported goods at any given real exchange rate and any given level of disposable income. In particular, assume that this policy lowers β0 in the import function shown above.

Explain how this temporary shock affects the level of output, consumption, investment, government expenditure, the nominal interest rate, the nominal and real exchange rates, and the level of prices in the short run. Use the AA-DD model to answer this question and do not forget to use a diagram to support your answer.

Normative Economics (Efficiency vs, Equity)

there are two types of economic Efifficence Vs Equity why it is more important than the efficiency goal than equity?

why it is more important than the equity goals than efficient too ?

Answer the following questions completely.

Describe some of the differences between tariffs and quotas.

What are the intent and impact of domestic content requirements?

Is a tariff-rate quota a two-tier tariff? Why?

What is an OMA?

Most calculators come with a book of instructions. Unfortunately, if you misplace the book, you’re left to your own devices in figuring out how to use the calculator. Wouldn’t it be easier if the calculator had a built-in “help” function similar to the one on your computer? You could just punch the “Help” key on your keypad and call up the relevant instructions on your display screen. You just invented a calculator with this feature, and you’re ready to roll it out. First, however, you have to make some pricing decisions: When you introduce the product, should you use skimming or penetration pricing? Which of the following pricing methods should you use in the long term: cost-based pricing, demand-based pricing, target costing, or prestige pricing? Prepare a report describing both your introductory and your long-term alternatives. Then explain and justify your choice of the methods that you’ll use.

The demand function for a truckload of firewood in a small town with a college is Q = 200 - 1.5p for non-students and Q = 200 - p for students, where p is the price of firewood, in $/truckload.

At a price of $150 per truckload, will college students buy any firewood?

At a price of $150 per truckload, will non-students buy any firewood?

The (inverse) demand curve for the town as a whole has a kink at Q =

For the town as a whole, including the students, the slope of the inverse demand curve to the left of the kink is For the town as a whole, including the students, the slope of the inverse demand curve to the right of the kink is

For the town as a whole, including the students, the slope of the inverse demand curve to the right of the kink is

League Competition: Suppose the demand for soccer teams in the US is given by: P(Q) = 320−10Q where Q is the total number of soccer teams and Pi s the marginal willingness to pay for the Qth team (in millions). The cost to start a new team is c= 20

Two Leagues: First, suppose are two leagues (Major League Soccer and the National Soccer League) that are choosing how many teams to have, so that Q=qm+qn.

a Find the equilibrium number of teams for the MLS.

b Find the equilibrium number of teams for the NSL.

c What are profits for the MLS?

d What are profits for the NSL?

e What is consumer surplus?

Merger: Now assume the leagues merge to form one league (Premier USA). After the merger demand increases to:P(Q) = 360−10Q

a What is total surplus (consumer surplus and profit)?

b Is consumer surplus more or less than the pre-merger surplus?

Describe the market for telephony services prior to the enactment of the 1996 Telecommunication Act in Germany. Why is it unlikely that DT would face new competition in the market for retail fixed-line telecommunication services prior to 1996?

You have been offered a 6% 5 year Medical Lake water bond priced at $1150 and a 8% 7 year Cheney sewer bond priced at $1200.

a. Which bond would you purchase if the current interest rate is 3%?

b. Which bond has the greatest interest rate risk when the rate increases to 6%?

Problem 2. Consider a duopoly with identical firms with no fixed cost and marginal cost of c. Let the
inverse demand curve for the industry be p(Y ) = A − bY , where Y is the total industry output. Let y1 and
y2 be the output of each firm. Assume that the firms in the industry each choose quantity, and then let the
market determine the price they will receive.
(a) Compute the total market output, the price, the quantity for each firm, and the profit for each

firm, under Cournot competition. Make sure to start at the beginning, setting up each firm’s profit-
maximization problem and proceeding from there.

(b) Compute the total market output, the price, the quantity for each firm, and the profit for each firm, if
the firms collude and choose their quantities together to maximize total profits. Assume that they split
the total output evenly. Again, make sure to set up the joint profit-maximization problem and proceed
from there. [Hint: you will find that you cannot solve the system of two first-order conditions. Indeed,
you will find that the two first-order conditions are identical, leaving you with only one equation with
two unknowns. To solve this problem, simply take advantage of the assumption that they split the
market evenly, y1 = y2. Now you have two equations with two unknowns.]
(c) Now suppose that one firm sticks to the collusive quanity, while the other one cheats. Compute the
profit maximizing output of the cheater, the market price, and the profit for each firm.

Econ 100A, Fall 2019
Prof: Dan Acland

Problem Set #12
Page 2

(d) Using the results you have computed above, argue that the collusive agreement is not a Nash equi-
librium. In addition, argue that if firms have common knowledge of rationality (each knows that the

other is rational, and knows that the other knows they are rational, etc) the only Nash equilibrium is
for both firms to choose the Cournot equilibrium quantity.
(e) Again, using the results you have computed above, argue that this situation can be thought of as a
prisoner’s dilemma. (Recall that we characterized a prisoner’s dilemma as a situation in which agents
are unable to cooperate, even when to do so would maximize their individual payoffs, because the
private cost of cooperation is greater than the private benefit of cooperation.)

Define dumping. Differentiate the tree types of dumping which one is to be welcomed and which one is to be opposed and why?

• The new market equilibrium price and the new market equilibrium quantity is as follows

  • Dx = 140 - 4p

  • Sx = 120 + p

• At which of the following price for packages of herbal tea:

  • P=$10, $15, $8 is there a surplus, a shortage, or at equilibrium? Use a graph to help explain your answer

    • My thought process is that all these prices will result in a surplus because it will be greater than the MCP.

Why do lawyers and accountants not typically post prices for their service?

2. Explain, with examples, the different types of powers held by Congress. Argue whether you believe Congress has unlimited powers or whether it should be constrained, and how, by other branches of government.