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Compare flexible and fixed exchange rate regimes, which of the following statement is correct? Under a flexible exchange rate the central bank cannot use monetary policy to pursue macroeconomic stabilization goals. Under a fixed exchange rate the central bank can achieve both free cross-border capital flows and independent monetary policy. Under both regimes the central bank cannot use monetary policy to pursue macroeconomic stabilization goals. Under a fixed exchange rate the central bank cannot use monetary policy to pursue macroeconomic stabilization goals.Exercise 2. Mr. Jones has an income stream (Yo, Yi) = (100, 50) and can borrow and lend at the interest rate i = 0.11. His preferences are represented by the additively separable utility function: U(Co. CI) = 1 - 1 + 0.9 1 - 1 where the risk-aversion is given by the parameter n = 2. (a) Define the marginal utility of consumption at t = 0 and t = 1, respectively. (b) Write down the consumer's intertemporal budget constraint and the first order condition that must be satisfied by the optimal consumption stream. (c) Use the first order condition and the consumer's inter-temporal budget constraint to find the con- sumption stream (C;. Of) that maximizes utility. (d) How much will the consumer save at { = 0? How much will his savings be worth at t = 1? (e) Check that he can afford the optimal consumption Of int = 1.Multiple-Choice 1 . Picture a graph with chicken on the vertical axis and pork on the horizontal axis. Larry's indifference curves are vertical. This implies that he a. receives no satisfaction from pork. b. receives no satisfaction from chlcken. c. dislikes pork. d. dislikes chicken. 2. Wrestling tickets sell for $10 and stock car race tickets sell for $20. Suppose that Billy Bob, whose preferences satisfy all the usual assumptions, buys five wrestling tickets and two stock cat race tickets each month. With thls consumption bundle, his marginal rate of substitution of wrestling matches for stock car races is 3. Which of the following is correct? a. Billy Bob could increase his utility by buying more wrestiing tickets and fewer stock car race tickets. b. Billy Bob could increase his utility by buying more stock car race tickets and fewer wrestling tickets. c. Billy Bob is at an interior solution and is maximizing his utility. d. Billy Bob is at a corner solution and is maximizing his utility. 3. Ginny must spend her entire income on sunscreen and Silty Putty and chooses to spend it all on sunscreen. buying ten bottles. Which of the following statements mosrbe true? a. she considers Silly Putty to be a bad. b. the first unit of Silly Putty must have zero marginal utility. c. the first unit of Silly Putty must generate less utility than the tenth bottle of sunscreen. d. the first unit of Billy Putty must generate less utility per dollar than the tenth bottle of sunscreen. Fill-In 4. If Gaston's marginal rate of substitution for two goods Is the same, no matter how much of each good he buys, then the two goods must be 5. Indifference curves are convex to the origin because of marginal rates of substitution. Tme-FalseArnblguous arid Explain Why 6. People's Indifference curves for oatmeal and caviar are parallel to one another. 7. If you know the slope of the budget constraint for two goods, then you know the prices of the two goods. 3. Derek likes one scoop of chocolate ice cream better than one scoop of vanilla ice cream and one scoop of vanilla ice cream better than one scoop of strawberry ice cream. Therefore, he will like one scoop of chocolate ice cream betterthan one scoop of strawberry ice cream. 9. Both Turns and Rolaids will cure David's heartburn, and he regards them as perfect substitutes. Therefore. his indifference curves will be linear with a slope of 1. Shoo-Answer 10. Rose loves to eat eggs, but they make her break out in a rash. Luckily, two capsules of Rash- B-Gone per egg are a perfect antidote. Rose has budgeted $5 for eggs and RashaB-Gone this month. The cost of an egg is 10 cents and the cost per Ras hBBone tablet Is 20 cents. Rose will, therefore, buy how many eggs and how many capsutes of RashBGone? 11. Jonathan likes Playstatlon games {P} and Hot Pockets {H}. Playstation games cost $40. Hot Pockets cost $2. donathan's monthly budget for these items is 31 [it]. and his utility function is. UfP. H) = P'H'\". Find Jonathan's utility-maximizing bundle and his level of utility. 12. Caitlin likes to go to the mall to buy sandals {3} and handbags [H]. Her utility function is U[S. H} = smH'\". The price of sandals is $1 a. and the price of handbags is 54o. How much money should Caitlin bring with her if she wishes to receive a utility level of 16 from her trip to the mall? (b) {c} {I} (b) {c} {I} {b} {c} ----II Total Utility in [faint-Unis 21] 45 Till 75 Marginal Utility in Unirst'Udtr 20 25 it) 5 {i} State and explain the law illustrated in the above table. {ii} Outline two assumptions underlying this law. [25] {i} State the 'Law of Supply'. and illustrate with a labelled diagram. {ii} Explain how technical progress affects the supply curve. {iii} Outline, with the aid of labelled diagrams, two other factors that would cause a shift in the supply curve. [30] Macklemore announces a concert in Ireland at a venue with a maximum capacity of 30,000 people. The tickets are priced at E65 and the concert sells out in hours. {i} Draw one labelled diagram, showing a market demand curve and a market supply curve that would be consistent with the above information. Explain your answer. {ii} Explain, using the concept of Consumer Surplus, why it might make sense for the concert promoters to have di'erent ticket prices (cg. VIP section, seating section and standing section] for this concert. (2'1) [1'5 marksI {i} State and explain three assumptions underlying the theory of imperfect competition. {ii} Explain why a rm's demand curve under imperfect competition differs from a rm's demand curve under perfect competition. (25} {i} Explain, with the aid ofa diagram, the long run equilibrium of'a rm in imperfect competition. {ii} With reference toyour diagram in {b} (i) explain why the font is not making socially efcient use of scarce resources. (30') \"A few large retailers {c.g. Tesco, SuperValu. Dunnes Stores, Aldi, Lidl} dominate the Irish grocery market at present" Suggest a market structure which most closely reects this situation. Explain your answer. (20} [1'5 marksl PageSof'E {i} Dene the categories of Price Elasticity of Demand [FED]: elastic, inelastic and unit elastic. {ii} State three factors that affect FBI] and explain how each factor affects it. [3"] A consumerfmotorist buys 20 litres ofpetrol when the price is 1.60 per litre. When the price increases to 130, as a result ofan increase in carbon tax. the consumer buys 19 litres. Calculate the consumer's Price Elasticity of Demand {FED}. {Show all your workings.) Is this demand for petrol price elastic or price inelastic? Outline the implication of your answer for government revenue. [20] A rm is considering a change to its products price. It conducts market research which reveals that the Price Elasticity of Demand (FED) for the product is 4.5. Use this information to answer the following question: {i} If the fun wishes to maximise total sales revenue, should it lower or raise the price of the product\"? Explain your answer. The market research also reveals Income Elasticity of Demand (YED) for the product is +4.5. Use this information to answer the following question: {it} In the case of an economy which is expected to remain in recession for the next ve years. what, if any, will be the likely impact on the demand for the product\"? Explain your answer. (25} SECTION A (100 marks) Answer six of the nine short response type questions in the spaces provided. 1. Define the term 'opportunity cost'. State one example of an opportunity cost facing the Irish Government. Definition: Example: (16 marks) 2. If the marginal cost (MC) is less than average cost (AC), then AC must be falling when output increases. (i) Is this statement true? Circle the correct answer. YES / NO (ii) Explain the reason for your answer: (16 marks) 3. Define the term 'structural unemployment' and outline one policy response that the Irish Government could take to reduce it. Definition: Government Policy: (16 marks) Page 2 of 8 SECTION A (continued) 4. Explain the meaning of the term 'complementary goods' (i.e. joint demand). State one example
