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Section C Question 5 Production Function Estimation. Suppose that you have a random cross section of firm- level data, with information on output, labor and capital. In logs, (uni, hi, k : i = 1, 2, ..., N} You are interested in estimating the Cobb-Douglas production function: wi = auditakkitwiter 1. Discuss the issues with estimating this PF using OLS. 2. What are the two main reasons (in terms of identification, not availability) why input prices are likely poor candidates for instruments? 3. Now suppose that you have panel data and want to estimate the Olley & Pakes (1996) model. Describe clearly how to implement the two-step approach that they propose. 4. What are the three assumptions/requirements for identification of az? 5. What is the basis of the Ackerberg, Caves, & Fraser (2006) critique of the OP model? 6. What assumptions do they suggest that allow the OP approach to be salvaged? How does the two-step procedure change in this context? Question 6 Dynamic Discrete Choice Models. 1. Discuss the main challenges inherent in empirical estimation of dynamic games. Pick the two or three most important, in your view. Be clear and concise. 2. Define a Markov Perfect Equilibrium. Explain why it is useful in estimation of dynamic games. Practically speaking (and in plain english), what does it imply about the beliefs of firms? 3. The next few questions relate to the Pakes, Ostrovsky, & Berry (2007) model, but touch on some common elements of dynamic estimation more generally. Below is the Bellman 2 equation for incumbent firms in the POB framework. What data are required to estimate the parameters of interest in the POB model? To which static entry/exit model is this most similar? Name the types of firms that this (static) paper examined. VC(n, z;0) = _ [#(m', ?'; 0) + BEsmart, VC(n', =';0)}]] P(n', ='In, z, x = 1) where w(n, 2; 0) is a one-period profit function, n is the number of active firms, z is a vector of exogenous profit shifters, 0 is the parameter vector, e and z are the number of entrants and exitors, respectively, $ is the sell-off (exit) value, and x is an indicator variable equal to one if an incumbent remains.2. HAL and JCN are the only producers of personal computers. Their computers are considered to be perfect substitutes by consumers. The demand function for computers is given by (Q denotes industry output and P price): Q =500 - - HAL and JCN compete in output levels (Cournot competition). JCN is a fully integrated firm (it produces all its inputs) and has a constant unit cost of production equal to 3. HAL, on the other hand, buys the CPUs from Entil (each computer requires one CPU). Entil publicly announces the (unit) price of CPUs and HAL takes that price as given and decides how many CPUs to buy. Besides the CPU, each computer requires a bundle of inputs that HAL produces internally at a (constant) cost of 1. Entil's (constant) cost of producing one CPU is 2. After many years of operation as separate firms, Entil and HAL apply to the government for permission to merge. Assume that the government is exclusively concerned with the welfare of consumers. Should the government allow the merger to take place? (give a detailed proof of your claim).Section A 1. This question deals with Chevalier and Ellison, "Risk Taking by Mutual Funds as a Response to Incentives" (1997, JPE), Chevalier and Ellison, "Career Concerns of Mutual Fund Managers" (1999, QJE), Hubbard, "An Empirical Examination of Moral Hazard in the Vehicle Inspection Market" (1998, RAND) and Ferrall and Shearer, "Incentives and Transactions Costs Within the Firm: Estimating an Agency Model Using Payroll Records" (1999, ReStud). (a) For Chevalier and Ellison (1997), discuss carefully what the empirical setting is and what their main research question is. Also, describe their data set and empirical strategy. (b) For Chevalier and Ellison (1999), explain why the (implicit) incentive structure for younger managers and that for older managers may differ? What are their empirical findings? Compare this paper (1999) with the previous one (1997). What are their similarities? What are the differences? (c) For Hubbard (1998), discuss carefully what the empirical setting is and what his main research question is. Also, describe the data set and empirical strategy. (d) What are empirical findings of Hubbard (1998)? Compare and contrast this paper with two papers by Chevalier and Ellison (1997, 1999). What do you think can be their common theme? How do they differ in their empirical approaches? (e) For Ferrall and Shearer (1999), discuss carefully what the empirical setting is and what their main research question is. Also, describe their data set and empirical model as fully as you can. (f) Why do you think Ferrall and Shearer (1999) employ a structural approach? Discuss a possibility of using non-structural(reduced-form) approaches as an alternative empirical strategy.1. (a) (1) Define the economic terms: individual (consumer) demand; market demand. (ii) Explain, with the aid of labelled diagrams, the relationship between individual (consumer) demand and market demand. (20) (b) (i) Distinguish between the economic meanings of a 'movement along a demand curve' and a 'shift in a demand curve' for concert tickets. Illustrate your answer using diagrams. (ii) State and explain two factors that would cause a shift in a demand curve for concert tickets. In each case explain how the factor affects the demand curve. (30) (c) The Law of Diminishing Marginal Utility states that as more of a product is consumed, eventually each additional unit of the good provides less additional utility (marginal utility). (i) Explain two assumptions underlying the Law of Diminishing Marginal Utility. A consumer in equilibrium buys 6 health bars at 60.80 each and 9 cartons of juice at 61.50 each. The marginal utility of the 6" health bar is 40 utils. (ii) Using the Equi-Marginal Principle of Consumer Behaviour calculate the marginal utility of the ninth carton of juice. (Show all your workings.) (25) [75 marks] 2. (a) Some Telecoms' analysts believe the main mobile operators in Ireland - Vodafone, 02, Meteor and 3 - control an oligopoly and have little reason to make the market really competitive. (The Irish Times, November, 2010) (i) Outline three key features of an oligopolistic market. Firms in an oligopolistic market may have objectives other than profit maximisation. (ii) Outline two objectives firms in oligopoly may have, other than achieving the maximum level of profits. (25) (b) Using one clearly labelled diagram: (ii) Explain the shape of the 'kinked' demand curve facing a firm in oligopoly. Explain the long run equilibrium position of this firm. (25) (c) It is suggested that consumers prefer price competition in the market place, yet there are benefits for consumers arising from non-price competition. Explain two reasons why consumers may prefer price competition. (ii) Describe two benefits to consumers of non-price competition. (25) [75 marks] Page 4 of 8 3. (a) (i) Define the term Marginal Revenue Productivity (MRP) of a factor of production. (ii) State and explain two factors that can influence MRP. (iii) Outline two difficulties that may arise in measuring MRP. (25) (b) Capital Investment has been an important driver of economic advancement in Ireland over the past ten years, providing the capacity and scope for growth'. (The National Recovery Plan 201 1 - 2014) (i) State and explain three reasons why investment is important for the Irish economy. (ii) Describe three factors that currently influence the level of investment in the Irish economy. (30) (c) Advise the Minister for Transport on two possible economic advantages and two possible economic disadvantages of investing in public transport, rather than investing in the construction of new roads. (20)The table below shows the short run production costs for a small firm producing and selling kitchen furniture. Number of units Fixed Costs Variable Costs Total Costs of output E E E 400 600 1,000 W N - 400 1,200 1,600 400 1,850 2,250 2.900 3,300 400 4,100 4,500 (a) (i) Using the information in the table above calculate the following: The marginal cost of producing the 4" unit. . The average cost of producing 5 units. The profit earned by the firm selling 5 units of output at E1,200 per unit. (Show your workings.) (ii) Using the information in the table above, draw the firm's short run average cost (AC) curve. Explain the reasons for its shape. (30) (b) "The cost of doing business in Ireland is falling. However, some costs continue to increase or remain relatively high'. (National Competitiveness Council Report, 2010) (i) Discuss the economic advantages of falling costs of production for the Irish economy. (ii) Outline possible restrictions on the growth of businesses in the Irish economy at present. (30) (c) The British Petroleum (BP) oil spill in the Gulf of Mexico in 2010 is estimated to have cost a total of $40 bn. Identify two costs for BP and two costs to society associated with this oil spill. (15) [75 marks] Page 5 of 8 5. (a) The Budget is a statement of the Government's fiscal policy. The Irish Government, in its National Recovery Plan 2011-2014 committed to reducing the General Government Deficit to under 3% of GDP by 2014. 1) Explain the underlined term. (ii) State and explain four possible economic effects on the Irish economy of the government's plan to significantly reduce the deficit over the next four years. (30) (b) It has been suggested that in order to reduce the National Debt the government should privatise state owned companies in the coming years. (1) Explain the term "privatisation'. (ii) Outline four economic arguments in favour of privatisation OR outline four economic arguments against privatisation. (25) (c) "The number of staff in the Irish public sector grew by 15.5% from 2001 to 2008, according to OECD statistics'. (Report on the Sources of Ireland's Banking Crisis, 2010) Discuss four measures the Minister for Finance could take to reduce the public sector wage bill. (20) [75 marks] 6. (a) Money is usually defined by reference to the functions it performs. (i) Outline four functions of money. (ii) Explain the term 'Monetary Policy'. (iii) Explain a central bank's function as 'lender of last resort'. (35)6. (a) Money is usually defined by reference to the functions it performs. (i) Outline four functions of money. (ii) Explain the term 'Monetary Policy'. (iii) Explain a central bank's function as "lender of last resort'. (35) (b) Many believe that a lack of supervision ('light-touch regulation') of financial institutions in Ireland contributed significantly to the banking crisis. Discuss the economic reasons why commercial banks in Ireland should be regulated. (20) (c) It is being suggested that the ECB will increase interest rates in the 2011/2012 period. Explain the economic effects of rising interest rates on the Irish economy. (20) [75 marks] Page 6 of 8 7. (a) (i) Define the following terms: . Gross Domestic Product at Current Market Prices; . Gross National Product at Factor Cost. (ii) Explain two reasons why GDP in Ireland at present is larger than GNP. (30) (b) (i) Explain what is meant by the term 'Multiplier'. (ii) It has been estimated that in the Irish economy: MPT = 0.22, MPM = 0.30, MPS 0.28. Calculate the value of the Multiplier in the Irish economy. (iii) Outline briefly how taxes affect the value of the Multiplier. (25) (c) "The Irish Government predicts that the rate of economic growth in 201 1 will be 1.75%'. (The National Recovery Plan 2011-2014) Discuss the economic effects of an increase in the rate of economic growth on the Irish economy. (20) [75 marks] 8. (a) Discuss the economic uses of the 2011 Census of Population data for Government and Business. (20) (b) 'Ireland is experiencing the highest level of net outward migration since 1989'. (The Central Statistics Office, 2010) Discuss the reasons why Ireland is now experiencing a high level of net outward migration. (25) (c) 'The unemployment rate in Ireland in December 2010 was 13.6%'. (The Central Statistics Office) (i) Discuss two economic measures which the Government could take in order to reduce the level of unemployment in Ireland. At the end of the year 2010, the EU and the IMF agreed 685bn of financial support for Ireland. (ii) Discuss the economic effects of this financial support on the Irish economy. (30)(I!) (t) (I!) (t) (I!) (9) Explain the following terms and show the relationship which exists between both: {1} Gross Domestic Product at Factor lCost {ii} Gross National Product at Market Prices. (29 marks) Outline the effects which each of the following could have on the level of GNP at Market Prices. {1}- a RISE in the general level of VAT; {11} a REDUCTION in subsidies to first-time house buyers. Explain your answer in each case. (20 marks) Discuss the positive and negative economic consequences which a fall in the level of economic growth (GNP) may have on the Irish economy. {35 marks) [75 marksl Page 6 of 1' Discuss the economic effects which the recent rise in Ireland's population may have on the Irish economy. (25 marks) Outline the effects which a rise in the level of unemployment in [reland may have on: {1} Government current nances. {ii} The Balance of Payments (Current Account}. {iii} Price ination. (29 marks) Immigration replaced high levels of emigration during the 'Celtic Tiger' period. {1} Discuss THREE reasons why the trend has changed from emigration to immigration in Ireland. {ii} Discuss the economic consequences [positive and negative} for a country experiencing increased immigration. (3!) marks) [T5 marks] Explain how specialisation and the division of labour promotes globalisationfinternational trade. (29 marks) The World Trade Organisation {WW} aims to reduce trade barriers between countries. {1} Outline THREE possible economic advantages of free trade. {ii} Explain THREE economic reasons why countries may impose barriers to restrict trade. {iii} State and explain TWO methods of restricting free trade. (35 marks) Adam Smith. author of 'The Wealth of Nations' (1716)} explained the reasons for and benefits of free trade. Outline FOUR other areas in which he made contributions to economic thought. 1. Explain the concept Opportunity Cost. Why is the concept central to the study of Economics? (16 marks) 2. Outline THREE reasons for the survival of small firms in the Irish economy, even though they do not have the benefits of economies of scale. (i) (ii) iii) (16 marks) 3. Explain what is meant by Consumer Surplus. (16 marks) 4. A consumer in equilibrium buys 10 cups of coffee at 62 each and 10 phone cards at 66 each. The marginal utility of the cups of coffee is 5 utils. What is the marginal utility of phone cards? Show your workings. Workings Answer: (16 marks) 5. Explain what is meant by the term Public Sector Borrowing Requirement. (16 marks) Page 2 of 7 6. For a composite (weighted) price index covering the three types of expenditure given in the following table, calculate the price index for the current year. The base value is 100. Show your workings. Category % Prices of Prices of Calculation of Weight Result income item(s) item(s) Simple Price Index spent base year current on year item (s) E Food 30% 10.00 11.50 Clothing & 20% 40.00 36.00 Footwear Other Items 50% 20.00 22.00 100% Price Index for the Current Year (17 marks) 7. "When a firm produces at a level of output at which marginal cost is greater than marginal revenue the1. (a) State and explain FIVE factors which affect a consumer's demand schedule. (25 marks) (b) (i) Show, by means of a labelled diagram, the market demand and supply for a product. Indicate the equilibrium price and quantity in this market. (ii) Explain, with the aid of a separate diagram in each case, the effects which each of the following may have on the above equilibrium position: A successful advertising campaign in favour of the product is introduced; A tariff on imports of the product is removed. (30 marks) (c) Assume that the average spending on energy by a low-income family is 640 weekly. The price of energy rises by 20% so that the same consumption by a low-income family would now cost (48 weekly. The government is considering introducing one of the following policy measures to assist low-income families: giving low- income families an increased allowance of 68 weekly (income supplement); subsidising the producers of energy so that energy can continue to be sold at the initial price (price subsidy). Which policy measure would you advise the government to take? Explain the economic reasons for your answer. (20 marks) [75marks] 2. (a) State and explain the assumptions underlying the theory of imperfect competition. (20 marks) (b) (i) Explain, with the aid of a clearly labelled diagram the long run equilibrium position of a firm in imperfect competition. (ii) State and explain ONE feature of this firm in long run equilibrium which would be common to a firm in long run equilibrium under perfect competition. (iii) State and explain ONE feature of this firm in long run equilibrium which would be common to a firm in long run equilibrium under monopoly. (40 marks) (c) Consider the retail market for petrol. Do you believe that this market operates under conditions of imperfect competition? State reasons for your answer. (15 marks) [75marks] Page 4 of 7 3. (a) Marginal Revenue Product (MRP) equals Marginal Physical Product (MPP) multiplied by Marginal Revenue (MR). (i) Explain the underlined terms. (ii) Outline the factors which influence MPP and MRP. (25 marks) (b) (i) Define LAND as a factor of production. (ii) Outline TWO economic characteristics of land. (iii) Explain the concept of Economic Rent and illustrate with a relevant example. (30 marks) (e) The price of residential property has increased in Ireland in recent years. Discuss FOUR reasons for this development. (20 marks) (75marks]SECTION A (100 marks) Answer six of the nine short response type questions in the spaces provided. 1 . Outline why 'choice' is fundamental to the study of economics. (16 marks) 2. (a) Explain the concept of the Equi-Marginal Principle of Consumer Behaviour. (b) In equilibrium, a consumer buys 5 bottles of water at (2.50 each and 8 bagels at 63 each. Workings: The marginal utility of the 5" bottle of water is 5 utils. Calculate the marginal utility of the 8" bagel. (Show your workings.) Answer: (16 marks) 3. (a) Outline the primary responsibility of the National Treasury Management Agency (NTMA). "The NTMA sells bonds worth 64bn at a low yield (0.867%) in 2015." (Report: Irish Times, January 2015) (b) Is selling bonds at a low yield good or bad for the Irish Government? Explain your answer. (16 marks) Page 2 of 9 SECTION A (continued) 4. A high concentration ratio is a key feature of an Oligopolistic Market. (a) Explain this statement and give one example. (b) Outline two ways oligopolists behave in the market