The U.S. and many other governments spend more then it raises in taxation almost every year. Since 1965 the federal government has balanced its budget 4 times (1969, 1998-2000). What are the moral aspects of this? What are the moral failings of the people (government and voters) that allow us to justify non-stop borrowing from the future to pay for current consumption? What should we do and why don't we do it?

Question 4: People decide how to “budget” their time in much the same way that they decide how to budget for different goods. Each person decides how much they “value” their leisure time versus their work time. The more people work, the more they tend to value their remaining leisure time. This is the justification for paying overtime to people working over 40 hours per week.

1. How might we model this trade-off economically using the basic labor supply model by showing the budget line and utility curves or indifference curves? In your graph of the basic labor supply, be sure to identify the optimum point of the budget line and the indifference curve.
2. Suppose that the government imposes a tax on labor. If a tax is imposed on labor, the worker will perceive this tax as a reduction in his or her wage. For every hour worked, the individual worker receives a lower return on his or her labor. Demonstrate the effects of this tax on labor supply using the graph in part a showing a graph of the income effect and the substitution effect. That is, there are two graphs. Summarize the impacts of this tax on labor.

Analyze the effect of the following events on the economy. Make sure to explain everything step-by-step. The example is provided in the first task.

a) The central bank increases the money supply.

Ms increases => interest rate decreases => investment increases =>Y increases

On the graph: LM shifts to the right; at the new equilibrium point, Y increases, interest rate decreases.

b) The government increases taxes.

c) The government increases government spending.

d) MPC increases.

e) the tax rate decreases.

2. The real demand for money (Md = Md (nominal)/P) is expressed as a linear function:

(1) Md = kY-hr

(2) Ms = Md

a)         Explain the sign of coefficients k and h. What types of money demand do they refer to?

b)         Explain why there is no equation for the money supply.

c)         Using equation (1), express i as the function of Y (simply solve it for r variable).

d)         Draw the function obtained in point (c)

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4. Which of the following responses would an economist expect to result from an increase in interest rates?
(x) Thelma puts less money into savings accounts and bonds because a higher interest rate scares her since it is always an indication that the assets are more risky.
(y) Since the interest expense on any given loan increases as the interest rate increases, Beatrice decides to purchase a smaller home than she had initially planned because her monthly income is fixed.
(z) Ford Motor Co decides to delay a bond sale that would have raised the necessary funds to expand a factory because it is now more expensive to borrow.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (z) only
5. Which of the following statements is (are) correct?
(x) If the Fed targets the interest rate, it must reduce the money supply if the interest rate is above its target.
(y) In recent years, the Fed has conducted policy by setting a target for the federal funds rate.
(z) In recent years, the Fed has chosen to target interest rates rather than the money supply because the money supply is hard to measure with sufficient precision.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (z) only

Marginal analysis and decision-making:

Concept: The Fundamental Assumption of Economics

All social phenomena emerge from the actions and interactions of individuals who are gathering in response to expected marginal benefits and expected marginal costs to themselves.

Definition: Marginal is additional or incremental (amount of increase) or decremental (amount of decrease).
Should I do (choose) activity x?
MC (x) = the additional costs of doing x
MB (x) = the additional benefits of doing x
Rule:

If Expected MB (x)> Expected MC (x), do x; otherwise don't.
Application:

Would an employer ever hire anyone if the additional cost of his or her employment were greater than the marginal / additional benefit? Of course not, to do so would be irrational.

Assumptions:

- Are you married? When will you get married? You will make that decision using marginal analysis, right? Explain.

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Turkish Economy (ECON422)

What does Doctrinaire mean? How was it different from Atatürk’s version of étatism ?

Turkish Economy (ECON422)

What was the final outcome of étatism during the Atatürk period? In other words, which sectors' shares increased and decreased in the Turkish economy?

3. Which of the following statements is (are) correct?
(x) If at some specific interest rate the quantity of money demanded is more than the quantity of money supplied, people will desire to sell interest-earning assets causing the interest rate to increase.
(y) Ceteris paribus, as the price of bonds falls, the interest rate on bonds falls.
(z) A decrease in the interest rate induces firms to borrow more, which will result in more investment spending and an increase in the aggregate demand for goods and services.
A. (x), (y) and (z) B. (x) and (y) only
C. (x) and (z) only D. (y) and (z) only
E. (x) only
4. Which of the following responses would an economist expect to result from an increase in interest rates?
(x) Thelma puts less money into savings accounts and bonds because a higher interest rate scares her since it is always an indication that the assets are more risky.
(y) Since the interest expense on any given loan increases as the interest rate increases, Beatrice decides to purchase a smaller home than she had initially planned because her monthly income is fixed.
(z) Ford Motor Co decides to delay a bond sale that would have raised the necessary funds to expand a factory because it is now more expensive to borrow.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (z) only
5. Which of the following statements is (are) correct?
(x) If the Fed targets the interest rate, it must reduce the money supply if the interest rate is above its target.
(y) In recent years, the Fed has conducted policy by setting a target for the federal funds rate.
(z) In recent years, the Fed has chosen to target interest rates rather than the money supply because the money supply is hard to measure with sufficient precision.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (z) only

Write recommendations for government fiscal policy (specific spending and taxation changes) that you feel would be best for the Canadian economy using your understanding of the economics concepts taught in the course. Use the following guidelines as you write your recommendations:

Give consideration to the impact your decisions would have on each of the economic indicators. Your discussion might consider some of the following topics: government debt and the budget surplus or deficit; the impact of these recommendations on government services; how Canadians will benefit from the recommended policies in the short term and in the long term; the multiplier effect; any potential problems with your recommendations. These are just some suggestions. Your argument should discuss several ways that your ideas will impact the economy. The recommendations you discuss could include several of these areas but you can use any relevant course concepts to justify your recommendations.

Give an example of a market/industry where a negative externality in present.

a. What is the difference between the private, unregulated, market output (Q)/price (P) and the optimal, regulated, market output (Q)/price (P). Explain why/how this differencecomes about. Use and explain private cost, social cost, and external cost.

b. Explain the source of dead weight loss in such a market. Interpret this dead weight loss.

c. Provide two policy solutions to this problem. Use a command-and-control option and a market-based option.

QUESTION 1

The relentless drive towards big business in recent decades has seen markets become more concentrated and increasingly dominated by large producers. However, forces are at work that are undermining this dominance, and bringing more competition to markets. One of these forces is e-commerce.

1. Give THREE (3) examples of products that are particularly suitable for selling over the Internet and THREE (3) that are not. Explain your answer.
2. Provide TWO (2) justification why the Internet may work better for replacement buys than for new purchases.       
3. Explain how eBay can both increase competition across the economy and simultaneously acquire very substantial monopoly power.

Consider a market where inverse demand is given by P = 40 − Q, where Q is the total quantity produced. This market is served by two firms, F1 and F2, who each produce a homogeneous good at constant marginal cost c = $4. You are asked to analyze how market outcomes vary with industry conduct: that is, the way in which firms in the industry compete (or don’t). First assume that F1 and F2 engage in Bertrand competition. 1. (6 points) What will be the equilibrium price, and the profits for each firm? Next assume that F1 and F2 engage in perfect collusion: that is, they both agree to charge a common price P to maximize the sum of their profits. 2. (6 points) What price will the firms set, and what total quantity will be produced? Now assume instead that F1 and F2 engage in Cournot competition: that is, they compete by choosing quantities rather than prices. 3. (6 points) Suppose that F1 believes that F2 will produce a given quantity q2. Show, by analyzing F1’s profit-maximizing output choice, that F1’s best response is to produce the quantity q1 = 36−q2 2 . [Hint: For full credit, you should derive this result from the relevant optimality conditions; don’t just plug in to the formula from lecture.] 4. (6 points) Using the fact that in equilibrium F1 and F2 should both produce the same quantity, find the Nash equilibrium quantity q ∗ produced by each firm. Based on this, find the equilibrium market price. [Hint: in general, q ∗ = a−c 3 . You may use this formula to check your answer, but for full credit you should derive the result yourself.] Finally, suppose that each firm in this industry emits one ton of carbon per unit produced. The government is considering a carbon tax of $6 per ton, which will increase each firm’s effective marginal cost by $6, to a final marginal cost of c = $10 per unit produced. You are asked to analyze how this proposed carbon tax will impact consumer prices. 5. (10 points) What will be the new equilibrium price if F1 and F2 compete a la Bertrand? If F1 and F2 compete a la Cournot? If F1 and F2 are perfectly collusive? [Note: for this part, it is fine to use formulas given in lecture.] 6. (6 points) How does the change in price induced by the tax relate to the nature of competition in the market? Briefly discuss.