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Consider a firm with a production function given by q=187N, where q is the quantity produced and N is the number of workers hired. The firm sells its product in a competitive market, and the market price of its good is p=1.

The firm, however, is the only employer in the town where it operates, and hence it does not take the cost of labour as given. The inverse labour supply function in this town is given by w=45+0.04N2.

1.

a) Solve for the profit-maximizing choice of N.

b) What will the wage be in this town?

c) Is the wage equal to, greater than, or less than p MPN (where p is the price of the good and MPN is the marginal product of labour)? Explain intuitively why this is the case in this setting.

d)If the government were to intervene in this market by setting a minimum wage, what would be the optimal level at which to set the minimum wage, if the government's objective is to increase employment as much as possible?

Suppose that a bank has following balance sheet structure: capital = $2,000, borrowed funds = $4,000, demand deposits = $14,000, loans to businesses = $15,000, and $4,000 is held in triple-A U.S. Treasury securities. The remaining amount is held at the Federal Reserve as reserves.

a) Show the bank's balance sheet. What is the bank's leverage ratio and define it?

b) Assume that the regulator mandates that bank should have at least 10% of capital against its risk-weighted assets, what is the bank's capital-to-assets ratio in this example and does it meet the required minimum level? Explain. [Hint: see definition of risk-weighting in the pre-lecture PP notes for Meeting # 10 and assume that reserves held at the central bank have the same risk weighing as Treasury securities].

c) Because of widening budget deficits and rising public borrowing, assume that credit rating for U.S. Treasury securities is lowered single- A (which carry 20% risk-weighting). How would it affect the capital-to-risk-weighted asset ratio and does the bank continue to meet the statutory requirement?

d) Suppose that customers withdraw $5,000 from their bank account. Please discuss various ways the bank could meet the withdrawals.

e) Assume that the central bank's policy interest rate is 4%, yield curve is flat (implying that monetary policy is "neutral"), bank's deposits are prices 1% below the policy interest rate and loans to businesses are priced at 4% above the deposit interest rate. Reserves at the central bank do not earn interest, but any borrowing from central bank and market is charged 2% premium above the policy interest rate. What is the bank's profitable and how the deposit withdrawal might impact profitability? Show your results.

A positive externality of $120 per unit has been associated with the market described by the following equations: Supply: Qs = 2P - 100 Demand: Qd = 500 -P.

In order to eliminate the deadweight loss, should the government intervene by implementing a tax or a subsidy? What should be the amount (per unit) of such tax or subsidy?

Assume that government intervention eliminates deadweight loss as described in part (a). Fill in the following table. Show your procedure.

Consumer surplus Producer surplus Government revenue Benefit to third parties Total surplus Deadweight loss

Suppose the government, instead of the policy described in part (a), establishes a $240 subsidy for buyers in this market. Fill in the following table. Show your procedure.

Consumer surplus Producer surplus Government revenue Benefit to third parties Total surplus Deadweight loss

Question 1 Which of the following is NOT benefit of an incentive compatible contract? Group of answer choices Some borrowers may be able to get loan only because the contract reassures the lender of repayment. Car drivers may get a lower insurance premium because of a larger deductible. The Principal can spend less monitoring and share some of this savings with the Agent. Fewer transactions between Principals and Agents will take place. Question 2 Which of the following is true in the principal agent model? Group of answer choices The principal has less information and may shirk by behaving in a way contrary to the agent's interest. The agent has less information and may shirk by behaving in a way contrary to the principal's interest. The agent has more information and may shirk by behaving in a way contrary to the principal's interest. The principal has more information and may shirk by behaving in a way contrary to the agent's interest. Question 3 Which of the following is a bribe but NOT a kickback as defined in the posted PPT? Group of answer choices All of the other four are examples of Kickbacks which are also bribes. A professor is paid half of all funds a publisher collects from students in their class for a required textbook. A police officer demands $100 payment from a driver in return for not giving a traffic ticket. Student pays $1,000 to financial aid officer in order to receive $20,000 of financial aid from a college. Pharmaceutical company pays a physician 10% of all money it receives from sales of a medicine which the doctor prescribes for their patients. Question 4 Most economics textbooks do not mention kickbacks since they assume: Group of answer choices Government officials are altruistic and do their best to help voters. Consumers are rational and respond to incentives. Property rights are well defined. Consumers spend their own money purchasing items they consume. Question 5 Which of the follow describes the basic problem of Adverse Selection? Group of answer choices It occurs "before the transaction," and is due to inherent unchanging characteristics of the agent. It occurs "before the transaction," and is due to a change in behavior of the agent. It occurs "after the transaction," and is due to a change in behavior of the agent. It occurs "after the transaction," and is due to inherent unchanging characteristics of the agent. Question 6 When the Chinese firm "eZubao" went bankrupt in 2016 it was called a "Ponzi scheme." It specialized in: Group of answer choices Health-Fitness studios. Multi-level marketing of consumer products. Peer-to-peer lending. Underwriting of new security offerings of high-technology firms. Question 7 What is the primary benefit of having CPA firms audit the financial documents of publicly traded firms? Group of answer choices It saves taxpayers money as then government accountants don't need audit the documents. It gives investors confidence that the firm is truthful and potentially profitable, and so it is easier for firms to sell stock and get loans as a result. It eliminates the chance a firm will go bankrupt. It gives information on how to cut costs to the firm audited. Question 8 George Akerloff focused the market for used cars and discussed an issue later generally called the "lemons problem." A "lemon" is a low quality used car, with the seller but not the potential buyer aware of this. Since sellers have more information about the quality of the car: Group of answer choices adverse selection causes an inefficiently small number of transactions to occur. adverse selection causes an inefficiently large number of transactions to occur. moral hazard causes an inefficiently large number of transactions to occur. moral hazard causes an inefficiently small number of transactions to occur. Question 9 Which of the following is not required for the "invisible hand" described by Adam Smith to benefit society? Group of answer choices Both parties to a transaction must care about each other, and want to make the other person happy. Property rights must be well defined. Property rights must be clear and enforced by law. Both parties to a transaction must be rational and well informed. Question 10 In order for a kickback to take place: Group of answer choices Rich people must have more political power than poor. Government officials must be corrupt (but those in private business may be honest). Someone must have the authority & responsibility to decide how to spend money of others. Those in private business must be corrupt (but government officials may be honest).