22Thank you.

1. (60 points) Suppose an industry with inverse market demand P = 300-2Q is comprised of three firms which compete in quantities. Firm 1 is a Stackelberg leader and therefore acts first. Firms 2 and 3 observe Firm l's decision, then act simultaneously. Firms produce output with constant marginal cost c = 60. (a) (10) Write the profit functions for the three firms as a function of choice variables (quantities for each firm) only. (b) (15) For any value of 91, find the best response functions for firms 2 and 3. (c) (10) Use your answers to part (b) to express q2 and qa as functions of q only (i.e. not as functions of each other). (d) (10) Find the subgame perfect Nash equilibrium of this game (i.e. the optimal choices which characterize what all firms are doing in equilibrium), equilibrium profits, and market clearing price. (e) (15) Suppose that firms 1 and 2 act simultaneously in the first period, then Firm 3 observes their choices before making its decision. Does social welfare increase or decrease relative to the previous model? (Hint: which is closer to how a perfectly competitive market would behave?) 2. (40 points) Consider a Hotelling model of the type discussed in class: there is a beach that is one mile long, with customers evenly distributed along the beach. Two dif- ferent ice cream shops are located at the endpoints of this beach (at points 0 and 1). Consumers dislike walking down the beach and pay transportation costs t = 2 per mile walked. All consumers have a value of V = 10 for an ice cream. Ice cream shops have constant marginal cost c = 2. (a) (5 points) Consider a consumer who is at the midpoint of the beach, r = }. Write down their total cost (including transportation costs) of buying from each firm, assuming firm 1 (located at 0) sets price Pi and firm 2 (located at 1) sets price (b) (10 points) A consumer is indifferent between the two shops if the total cost they face at both shops is the same. Call this indifferent consumer's location rm. Find I'm for any pair of prices Pi and P2. (c) (15 points) All customers to the right of i'm buy from firm 2, and all customers to the left of I'm buy from firm 1. Write down each firm's profits as a function of Pi and Pr. (d) (10 points) Find the Bertrand equilibrium prices of this market.7. The short-run effects of a change in the money supply on output is reduced when the IS curve becomes steeper? (5 points) + 8. Bonus question: Consider a closed economy where government spending is endogenous in the sense that government must spend all its tax revenue. The latter is a fixed prop tion t of output: G = tY. An increase in the marginal tax rate, t, will reduce equilibrium.. output. (2 points)Problems 1. Suppose the following data for the fictitious country Growland: 2016 2017 Real GDP (in 2009 U.S. dollars) 286.9 billion 301.3 billion Population 220.5 million 223.0 million a Calculate the growth in real GDP between 2016 and 2017. b. Calculate the GDP per capita for 2016 and 2017. (Note that GDP is measured in billions, while population is measured in millions. c. Calculate the population growth rate between 2016 and 2017. d. Calculate the growth rate of GDP per capita. 2. Draw a graph with shifts in the AD/AS curves to illustrate each of the following: a Economic growth with inflation rising. b. Economic growth with inflation falling.1. We say that whereas the government deficit is a flow variable, the debt is a variable. 2. The gross federal debt results from an accumulation of over the years. 3. The Department of the Treasury issues in order to pay for its budget deficits. 4. President Reagan favored policies based on economics, which presumed that offering more benefits to the rich would help the economy. 5. The debt refers to the total amount owed by the federal government to all claimants. 6. When the Federal Reserve buys the government debt as it is issued, it is referred to as the debt. 7. Were it not for low in recent years, the growing debt would have been a greater burden on the annual federal budget. 8. The two countries that hold the greatest share of the U.S. gross federal debt are and 9. A policy of involves cutting deficits by cutting social spending and/or raising taxes. 10. The rules by which EU member countries must abide as a condition for participating in the Eurozone are known as the _ True or False 1 1. An accumulation of government debts will ultimately lead to a deficit. 12. Alexander Hamilton believed that the national debt had the potential to strengthen the country. 13. The debt held by the public refers to the portion of the debt not held by foreign countries. 14. China holds a minority of the external debt of the United States. Chapter 16 - Deficits and Debt 2 15. The United States recently passed a balanced budget amendment to the Constitution. 16. United States policy has, over the past 10 years, preferred deficit spending to austerity. Short Answer 17. Explain the difference between deficits and debt, and discuss how they are related. 18. Has the federal debt increased over the past century in absolute terms? How about as a percentage of GDP? Discuss. 19. Explain how supply-side economic policies have impacted the U.S. federal budget. 20. Discuss in detail how *gross federal debt' is different from "total U.S. indebtedness." 21. What are some of the main problems associated with too much borrowing by the federal government?3. Whether worldwide inequality is increasing or decreasing much debated in the press and popular writings. Some commentators claim that the world is getting much more equal-"just look at the progress of India and China!" Others claim that the world is getting much more unequal-"just look at the problems in Sub-Saharan Africa!" This exercise has you explore data regarding such claims. a Using the data in the following table, create a graph showing real GDP per capita on the horizontal axis and the rate of real GDP per capita growth for 1980-2011 on the vertical axis. Plot the data for each country. GDP per Capita, 2016 Percent Growth in GDP Per Capita (PPP, Annual Average, Country (PPP, 2011 US $) 1990-2016) United States 53,342 1.4 Hong Kong 54,279 2.8 Japan 38,252 1.1 France 38,059 1.0 China 14,399 8.8 India 6,093 4.9 Bangladesh 3,319 3.7 Source: World Bank, World Development Indicators Database, 2017 b. Examining just these selected countries, is there evidence that convergence is occurring? Chapter 17 - How Economies Grow and Develop 6 c. Now re-do your diagram for the following countries: GDP per Capita, 2016 Percent Growth in GDP Per Capita (PPP, Annual Average, Country (PPP, 201 US $) 1990-2016) United States 53,279 2.8 Japan 38,252 1.1 France 38,059 1.0 Turkey 23,756 3.1 Brazil 14,024 1.0 Haiti 1,654 -0.2 Ethiopia 1,608 3.6 Congo, Dem. Rep. 744 -2.2Problems 1. Suppose in a simple economy with no foreign sector, the mpe equals 0.8. Intended investment spending has suddenly fallen, reducing AE and output to a level that is 100 million below Y*. a. If the government decided to try to get the economy back to full employment using only an increase in government spending (AG), by how much would G need to be increased? b. If the government, instead, decided to try to get the economy back to full employment using only a lump-sum tax cut (47), how big of a tax cut would be needed? c. Alternatively, if the government decided to try to get the economy back to full employment using only an increase in transfers (ATR), how large would this increase need to be? Chapter 10 -Fiscal Policy d. Which fiscal policy--increasing G, decreasing T, or increasing TR-would do the least amount of damage to the government budget deficit? . Suppose it was found that the mpe varied by income level in the following manner, with lower income households spending a greater portion of every dollar of income than higher income households. Household income mpc Income/spending| Tax multiplier multiplier 0-$30,000 0.9 $31,000 - 50,000 0.8 $51,000- 80,000 0.75 $80,000 and above 0.6 a. Calculate the government spending and tax multipliers for each income bracket, considered separately. b. Suppose the government decided to use tax cuts to expand the economy, and was debating whether to direct tax cuts to high income households or low income households. Which choice would provide a greater stimulus? Thus, which would do the least amount of damage to the government budget deficit to achieve a given amount of stimulus