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EXERCISES FOR CHAPTER 1 Exercise 1.1 An economy has 100 identical workers. Each one can produce four cakes or three shirts, regardless of the number of other individuals producing each good. (a) How many cakes can be produced in this economy when all the workers are cooking? (b) How many shirts can be produced in this economy when all the workers are sewing? (c) On a diagram with cakes on the vertical axis, and shirts on the horizontal axis, join these points with a straight line to form the PPF. (d) Label the inefficient and unattainable regions on the diagram. Exercise 1.2 In the table below are listed a series of points that define an economy's production possibility frontier for goods Y and X. Y 1000 900 800 700 600 500 400 300 200 100 0 X 0 1600 2500 3300 4000 4600 5100 5500 5750 5900 6000 (a) Plot these pairs of points to scale, on graph paper, or with the help of a spreadsheet. (b) Given the shape of this PPF is the economy made up of individuals who are similar or different in their production capabilities? (c) What is the opportunity cost of producing 100 more Y at the combination (X = 5500, Y = 300). (d) Suppose next there is technological change so that at every output level of good Y' the econ- omy can produce 20 percent more X. Enter a new row in the table containing the new values, and plot the new PPF. Exercise 1.3 Using the PPF that you have graphed using the data in Exercise 1.2, determine if the following combinations are attainable or not: (X = 3000, Y = 720), (X = 4800, Y = 480). Exercise 1.4 You and your partner are highly efficient people. You can earn $20 per hour in the workplace; your partner can earn $30 per hour. (a) What is the opportunity cost of one hour of leisure for you? (b) What is the opportunity cost of one hour of leisure for your partner? (c) Now consider what a PPF would look like: You can produce/consume two things, leisure and income. Since income buys things you can think of the PPF as having these two 'prod- ucts' - leisure and consumption goods/services. So, with leisure on the horizontal axis and income in dollars is on the vertical axis, plot your PPF. You can assume that you have 12 Exercises for Chapter 1 = 27 hours per day to allocate to either leisure or income. [Hint: the leisure axis will have an intercept of 12 hours. The income intercept will have a dollar value corresponding to where all hours are devoted to work.] (d) Draw the PPF for your partner. Exercise 1.5 Louis and Carrie Anne are students who have set up a summer business in their neighbourhood. They cut lawns and clean cars. Louis is particularly efficient at cutting the grass - he requires one hour to cut a typical lawn, while Carrie Anne needs one and one half hours. In contrast, Carrie Anne can wash a car in a half hour, while Louis requires three quarters of an hour. (a) If they decide to specialize in the tasks, who should cut the grass and who should wash cars? (b) If they each work a twelve hour day, how many lawns can they cut and how many cars can they wash if they each specialize in performing the task where they are most efficient? (c) Illustrate the PF for each individual where lawns are on the horizontal axis and car washes on the vertical axis, if each individual has twelve hours in a day. Exercise 1.6 Continuing with the same data set, suppose Carrie Anne's productivity improves so that she can now cut grass as efficiently as Louis; that is, she can cut grass in one hour, and can still wash a car in one half of an hour.Exercise 2.1 An examination of a country's recent international trade flows yields the data in the table below. Year National Income Imports ($b) ($h) 201 1 1,500 550 2012 1,575 573 2013 1,701 610 2014 1,531 560 2015 1,638 591 (a) Based on an examination of these data do you think the national income and imports are not related, positively related, or negatively related? (b) Plot each pair of observations in a two-dimensional line diagram to illustrate your view of the import/income relationship. Measure income on the horizontal axis and imports on the vertical axis. This can be done using graph paper or a spreadsheet-cum-graphics software. Exercise 2.2 The average price of a medium coffee at Wakeup Coffee Shop in each of the past ten years is given in the table below. 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 $1.05 $1.10 $1.14 $1.20 $1.25 $1.25 $1.33 $1.35 $1.45 $1.49 (a) Construct an annual *coffee price index' for this time period using 2005 as the base year. [Hint: follow the procedure detailed in the chapter - divide each yearly price by the base year price.] (b) Based on your price index, what was the percentage change in the price of a medium coffee from 2005 to 2012? (c) Based on your index, what was the average annual percentage change in the price of coffee from 2005 to 2010? (d) Assuming the inflation rate in this economy was 2% every year, what was the real change in the price of coffee between 2007 and 2008; and between 2009 and 2010? Exercise 2.3 The following table shows hypothetical consumption spending by households and income of households in billions of dollars. 44 Theories, data and beliefs Year Income Consumption 2006 476 434 2007 482 447 2008 495 454 2009 505 471 2010 525 489 2011 539 509 2012 550 530 2013 567 548 (a) Plot the scatter diagram with consumption on the vertical axis and income on the horizontal axis. (b) Fit a line through these points. (c) Does the line indicate that these two variables are related to each other? (d) How would you describe the causal relationship between income and consumption? Exercise 2.4 Using the data from Exercise 2.3, compute the percentage change in consumption and the percentage change in income for each pair of adjoining years between 2006 and 2013.70 . The classical marketplace - demand and supply EXERCISES FOR CHAPTER 3 Exercise 3.1 The supply and demand for concert tickets are given in the table below. Price ($) 0 4 8 12 16 20 24 28 32 36 40 Quantity demanded 15 14 13 12 10 8 7 6 5 Quantity supplied 0 0 0 0 0 1 3 5 7 9 11 (a) Plot the supply and demand curves to scale and establish the equilibrium price and quantity. (b) What is the excess supply or demand when price is $24? When price is $36? (c) Describe the market adjustments in price induced by these two prices. (d) Optional: The functions underlying the example in the table are linear and can be presented as P = 18 + 20 (supply) and P = 60-40 (demand). Solve the two equations for the equi- librium price and quantity values. Exercise 3.2 Illustrate in a supply/demand diagram, by shifting the demand curve appropriately, the effect on the demand for flights between Calgary and Winnipeg as a result of: (a) Increasing the annual government subsidy to Via Rail. (b) Improving the Trans-Canada highway between the two cities. (c) The arrival of a new budget airline on the scene. Exercise 3.3 A new trend in US high schools is the widespread use of chewing tobacco. A recent survey indicates that 15 percent of males in upper grades now use it - a figure not far below the use rate for cigarettes. This development came about in response to the widespread implementation by schools of regulations that forbade cigarette smoking on and around school property. Draw a supply-demand equilibrium for each of the cigarette and chewing tobacco markets before and after the introduction of the regulations. Exercise 3.4 The following table describes the demand and supply conditions for labour. Price ($) = 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 wage rate Quantity 1020 960 900 840 780 720 660 600 540 480 420 360 300 240 180 120 60 0 demanded Quantity 0 0 0 0 0 30 60 90 120 150 180 210 240 270 300 330 360 supplied (a) Graph the functions and find the equilibrium price and quantity by equating demand and supply. Exercises for Chapter 3 . 71 (b) Suppose a price ceiling is established by the government at a price of $120. This price is below the equilibrium price that you have obtained in part (a). Calculate the amount that would be demanded and supplied and then calculate the excess demand. Exercise 3.5 In Exercise 3.4, suppose that the supply and demand describe an agricultural market rather than a labour market, and the government implements a price floor of $140. This is greater than the equilibrium price. (a) Estimate the quantity supplied and the quantity demanded at this price, and calculate the excess supply. (b) Suppose the government instead chose to maintain a price of $140 by implementing a system of quotas. What quantity of quotas should the government make available to the suppliers?Exercise 3.6 In Exercise 3.5, suppose that, at the minimum price, the government buys up all of the supply that is not demanded, and exports it at a price of $80 per unit. Compute the cost to the government of this operation. Exercise 3.7 Let us sum two demand curves to obtain a 'market' demand curve. We will suppose there are just two buyers in the market. Each of the individual demand curves has a price intercept of $42. One has a quantity intercept of 126, the other 84. (a) Draw the demands either to scale or in an Excel spreadsheet, and label the intercepts on both the price and quantity axes. (b) Determine how much would be purchased in the market at prices $10, $20, and $30. (c) Optional: Since you know the intercepts of the market (total) demand curve, can you write an equation for it? Exercise 3.8 In Exercise 3.7 the demand curves had the same price intercept. Suppose instead that the first demand curve has a price intercept of $36 and a quantity intercept of 126; the other individual has a demand curve defined by a price intercept of $42 and a quantity intercept of 84. Graph these curves and illustrate the market demand curve. Exercise 3.9 Here is an example of a demand curve that is not linear: Price ($) 4 3 2 0 Quantity demanded 25 100 225 400 625 (a) Plot this demand curve to scale or in Excel. (b) If the supply function in this market is P = 2, plot this function in the same diagram. 72 - The classical marketplace - demand and supply (c) Determine the equilibrium quantity traded in this market. Exercise 3.10 The football stadium of the University of the North West Territories has 30 seats. The demand curve for tickets has a price intercept of $36 and a quantity intercept of 72. (a) Draw the supply and demand curves to scale in a graph or in Excel. (This demand curve has the form P = 36- 0.5 x Q.) (b) Determine the equilibrium admission price, and the amount of revenue generated from ticket sales for each game. (c) A local alumnus and benefactor offers to install 6 more seats at no cost to the University. Compute the price that would be charged with this new supply and compute the revenue that would accrue at this new equilibrium price. Should the University accept the offer to install the seats? (d) Redo the previous part of this question, assuming that the initial number of seats is 40, and the University has the option to increase capacity to 46 at no cost to itself. Should the University accept the offer in this case? Exercise 3.11 Suppose farm workers in Mexico are successful in obtaining a substantial wage increase. Illustrate the effect of this on the price of lettuce in the Canadian winter, using a supply and demand diagram, on the assumption that all lettuce in Canada is imported during its winter.Exercise 4.1 You have the following annual data for an economy: Year Real GDP Consumer price Labour force Employment (2007 $) index (2007=100) (000) (000) 2012 1,282 109.1 17.593 16.537 2013 1,307 111.9 17.857 16.696 2014 1,288 138.9 18.125 16.856 (a) What was the rate of growth of real GDP from 2012 to 2013, and 2013 to 2014? (b) What was the rate of inflation in 2013 and in 2014? (c) What were the rates of growth of the labour force and employment from 2012 to 2013, and 2013 to 2014? (d) What happened to the unemployment rate between 2012 and 2013, and between 2013 and 2014? Exercise 4.2 Suppose the economy represented by the table in Exercise 4.1 above had a population of 27.885 thousand in 2014. (a) What were the participation and employment rates in the economy in that year? (b) Suppose a mild recession in that year discouraged some unemployed workers and they stop looking for work. As a result the participation rate fell to 64.5 per cent. How would the unemployment rate and the employment rate be affected? Why? Exercise 4.3 If brewers buy barley and hops from agricultural producers, natural gas to fire their brew kettles from gas companies and bottles from glass manufacturers as in the following table, what is the value added of the brewing industry? If brewers also wholesale some of their output to pubs, is that output counted in GDP? Explain your answer. Costs (millions of current $) of: Brewery retail sales Barley and hops Natural gas Bottles 1000 350 125 150 Exercise 4.4 The economy has two main industries. One produces services and the other produces goods. The services industries produce services for households and businesses with a total market 100 Economic activity & performance value of $10,000. The goods industries produce goods for the use of both households and busi- nesses with a total market value of $5,000. The service industries spend $1,000 on computers and paper and envelopes supplied by the goods industries. The goods industries spend $1,000 to buy financial, insurance, advertising and custodial services supplied by the service industries. Explain how you measure nominal GDP in this economy and the value of output you find? Exercise 4.5 Suppose you are given the following data on incomes and expenditures for the econ- omy of Westland, in current prices for factors of production and outputs. Consumption expenditures 2,500 Employment compensation 2,800 Government expenditure 800 Net indirect taxes 150 Exports 1,200 Gross corporate surplus and mixed income 1,050 Investment expenditure 600 Imports 1,100 (a) What is the value of nominal GDP measured by expenditures? (b) What is net domestic income? (c) What is the value of nominal GDP measured by the income approach