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b) Suppose that in the recent news you have heard that an economy is at 'full employment'. Explain if this economy has got an unemployment rate at zero percent? (2 Marks) 3. Consider the following consumption function: C = 700 + 0.2Y where C is aggregate Consumption and Y is the aggregate income. a) Explain how you would interpret the coefficients '700' and '0.2'. (2 Marks) b) State any three assumptions of a Keynesian model. (3 Marks) 4. "The term deficit financing has been described as the financing of a deliberately created gap between public revenue and public expenditure, the method of finance being borrowing of a type that results in a net addition to national outlay or aggregate expenditure". a) State the two main ways in which a government can obtain the needed funds in periods of mismatch between public expenditure and revenue. (2 Marks) b) Explain the effect of an increase in income taxes on the level of disposable income, aggregate demand (AD) and government's tax revenue, (3 Marks) 5. "Banks always keep a certain proportion of their total assets in the form of cash, partly to meet the statutory reserve requirement and partly to meet their own day-to-day needs for making cash payments", a) Differentiate between the monetary base and the reserve ratio. (2 Marks) by Explain the term *bank panic'. (2 Marks) c) Explain one reason why do banks have reserve requirement. (1 Mark) 6. "A macroeconomic model is a very useful in the study of macroeconomics and the general behavior of the economy". a) Explain what you understand by the term "macroeconomic model". (1 Mark) b) State two ways in which a macroeconomic model could be described. (2 Marks) c) *A business cycle is an economic model". Explain the relationship that this model depicts, (2 Mark) ECN501Sem Semester 2. 2019 Page 5 of 8Consider a homogeneous good industry (such as an agricultural product) with just two firms and a total market demand Q = 400-P, so the inverse demand is P = 400 - Q. Suppose both firms have a constant marginal cost equal to $100 per unit of output and a fixed cost equal to $10,000. One simple way to depict rivalry in a duopoly (2 firms) is the Cournot model. This model is reasonable in agricultural markets where firms choose production (plantings) in advance and the market price is determined later after the crop is harvested. In the Cournot model, we imagine that the two firms simultaneously choose their production or quantity and that demand (market clearing) determines the price given each firms' quantity. (a) Suppose (hypothetically) that the second firm produces 0 units, and the first firm anticipates this, so the first firm is the only seller. How much will the first firm produce (in this case the first firm acts as a monopolist and sets output where MR = MC)? Hint: The first firm's inverse demand is P = 400-(Q1 +Q2), but since Q2 = 0 we can write this as P = 400-Q1 and so MR = 400 - 2Q1. Mathematically this problem is the same as a monopoly problem. What quantity will firm 1 choose? What price will it charge? What are the producer surplus and profit? (b) Now suppose instead that the second firm produces exactly 100 units, and that the first firm anticipates this. The total output is the first firm's output, Q1, plus 100, so substituting Q1 + 100 for QT in the inverse demand implies that P = 300 - Q1. That is if firm 1 produces Q1 it expects the price to be 300-Q1. This implies that MR = 300-Q2. How much will firm 1 produce (set MR = MC)? What price will clear the market given the total output Q1 + Q2? What are the producer surplus and profit? (c) Explain intuitively why neither firm wants to change their production if each is producing 100 (Q1 = Q2 = 100)? Note that your are explaining why Q1 = Q2 = 100 is a Cournot-Nash equilibrium). (d) Calculate the total producer surplus (both firms) and consumer surplus in parts (a) and (b). Why is consumer surplus higher with 2 firms than with one firm? (e) Intuitively, why is the deadweight loss smaller with two firms than with only one firm?l4. I-IrConsider a perfectly competitive market. Suppose that all rms are identical and have the same cost function G (q) = 4g. 32 (a) What is the equilibrium price, 310, facing a rm? Compute the market equilibrium quantity demanded if the market demand is g = 10 p. [In what follows, consider the monopolist's problem facing the demand q = 10 p. Cost is the same as above] (b) Compute the monopolist's optimal output, q\
