:Answer all Correctly .
Exercise 20-15 Larkspur Company provides the following selected information related to its defined benefit pension plan for 2020. Pension asset/liability (January 1) $26,800 Cr. Accumulated benefit obligation (December 31) 400,000 Actual and expected return on plan assets 10,200 Contributions (funding) in 2020 150,700 Fair value of plan assets (December 31) 792,200 Settlement rate 10 % Projected benefit obligation (January 1) 694,400 Service cost 79,220
a) Compute pension expense
b) Indicate the pension-related amounts that would be reported in the company's income statement and balance sheet for 2020
30. The demand curve shows the relationship between: A) money micome and quantity demanded. By price and production costs. C) price and quantity demanded. Dj consumer tastes and the quantity demanded. 31. Countercyclical discretionary fiscal policy calls for: A) surpluses during recessions and deficits during periods of demand-pull inflation. 1) deficits during recessions and surpluses during periods of demand-pull inflation. C) surpluses during both recessions and periods of demand-pull inflation. D) deficits during both recessions and periods of demand-pull inflation. 32. As real estate prices plunged in 2007, mortgage defaults and foreclosures rapidly escalated and mortgage-backed financial assets lost much of their value, casting doubts on the solvency of many banks and financial institutions which held them in their portfolios. Concerns about the soundness of U.S. credit and financial markets led to tightening credit around the world, while losses in the stock markets and housing value declines placed further downward pressure on consumer spending, slowing down economic growth and causing a global recession. 1. Using the AS-AD model, describe the above macroeconomic shock, clearly spelling the causal relationship between changes in underlying parameters and resulting changes in GDP, employment and price level. 2. Because of the Fed's aggressive monetary stimulus, short term interest rates dropped to near zero since the end of 2008, still failing to reduce idle capacity and stop the fall, a scenario that many economists considered consistent with the presence of a "liquidity trap". Explain why monetary policy was not entirely effective to neutralize the shock but, as most economists thought, fiscal policy may be helpful in such scenario (use AS-AD and money market graphs to supplement your answer). 3. In early 2009, economists estimated a spending multiplier m=1.5, and they also concluded that GDP had fell 2.1 trillion dollars below the "full employment GDP". The new government then managed to pass through Congress a fiscal stimulus package amounting to about 0.75 trillion dollars of new spending composed of new government purchases and tax cuts in approximately equal parts. Would you expect this new spending to be sufficient to bridge the gap between actual and potential GDP? (In order to answer this question compute the expected increase in GDP for a stimulus package entirely composed of government purchases, and then argue whether the stimulus would be larger or smaller when it partly involves tax cuts). the GDP gap. If the stimulus above is insufficient, propose a stimulus package that would be "exactly" sufficient to bridge 4. Because the government's budget deficit had increased during the recession (partly through automatic fiscal stabilization), many conservatives argued for the urgent need to reduce government spending. However, liberals argued that rushing such austerity measures may not contribute much to reduce the deficit because they may hurt the recovery. Explain. Answer in the next page.3. Consumer Theory - Utility Maximization Let Abe's utility function be U(X, Y)= XY, where X is an quantity of good X consumed and Y is the quantity of good Y consumed. The marginal utility from consuming X is MUx=Y and marginal utility from consuming Y is MUy=X. (For those of you have learnt about calculus and differentiation, you will recognize that these are the first derivatives with respect to X and Y respectively). a) Fill out the following table and graph these two indifference curves. For example, on line 1 of the table you have that U(X, Y) = 10. So since U(X, Y) = XY you have XY = 10. What combination of X and Y will make this equation true? An infinite number of combinations: for example, when X = 1 and Y = 10 then XY = 10. 2 U(X, Y)=10 X 1 2 5 Y 2.5 U(X, Y)=20 X 8 20 Y 10 Suppose Px = $2 and Py =$2 and Abe has income of $20. b) Which consumption bundle of X and Y would Abe choose? What's his total utility at this bundle? c) Suppose the government decides to levy an excise tax of $1 per unit on good Y. What's Abe's budget constraint now that he is facing this tax? d) Which consumption bundle would Abe choose now that this tax on good Y has been implemented? What's his total utility at this bundle? e) What is the tax revenue collected by the government given the tax on good Y described in (c)? f) Now assume that instead of the excise tax on good Y, the government wants to impose an income tax. To generate the same tax revenue, what must be the income tax rate? g) Facing this income tax, what consumption bundle would Abe choose? What's his total utility when he maximizes his utility given the income tax? h) Comparing your answers from (d) and (f), which tax would Abe prefer? Why? i) For the previous part we did not specify what the government would do with the tax revenue collected. If the government plans to give the tax revenue collected back to Abe as a lump-sum subsidy, which tax do you think Abe would prefer now? Briefly explain your answer.PART II: THE MONOPOLIST'S PROBLEM 1. A monopolist sells its good in the US and French markets. The US inverse demand function is Pus = 20 - Qus and the French inverse demand function is Pp = 18 - .25Q F where both prices Pus and Pp are measured in dollars. The firm's marginal cost of production is constant at MC = 4 in both countries. If the firm can prevent re-sales, what price will it charge in both markets? (Hint: The monopolist determines its optimal (monopoly) price in each country separately because customers cannot re-sell the good). 2. Suppose a monopolist's costs are described by the function C(Q) = 4 + 20' and the monopolist faces a demand curve of Q = 20 - p. Suppose that the firm is able to practice perfect price discrimination. What are the values of output, profit, and consumer surplus? 3. Consider a monopolist facing two customer groups. The first has demand p1 = 10-q1/2 and the second has demand p2 = 20 - 92. The firm has marginal cost MC(q) = q, where q = q1 + 92 is the total amount sold. (a) Suppose it can separate customers into the two groups (third degree price discrimination), each with its own price per unit. How many units does it sell to each group? At what prices? (b) Suppose instead of MC(q) = q , the firm had exactly 4 units to sell to the two groups (and no costs to worry about; the 4 units are already produced). How should it split the units between the goods? (c) Suppose it could first degree price discriminate and charge the full willingness to pay for every unit. How many units does it sell to each group? (Back to MC(q) = q = q1 + 92.) (d) Suppose a regulator could set one per unit price for everyone and knows the demand and marginal cost curves. What price should it set for the two groups to minimize deadweight loss?Microsoft and a smaller riyal often have to select from one of two competing technologies. The rival always prefers to select the same technology as Microsoft [because compatibility is important}, while Microsoft always wants to select a different technology from its rival. Describe the equilibrium of this game. Consider the production functions given below: a. Suppose that the production function faced by a 30-weight ball bearing producer is given by ( where MP = 2K L and MP, = 2105L-05. Do both labor and capital display di- minishing marginal products? Find the marginal rate of technical substitution for this production function. (Hint: The MRTS = MP,/MPR.) Does this production function display a diminishing marginal rate of substitution? b. Suppose that the production function faced by a 40-weight ball bearing producer is given by (= 4KL, where MP = 4L and MP, = 4K. Do both labor and capital display diminishing marginal products? Find the marginal rate of technical substitution for this production function. Does this production function display a diminishing marginal rate of substitution? c. Compare your answers to (a) and (b). Must labor and capital display diminishing marginal prod- ucts in order for the MRTS to diminish
