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Instructions (1 pt.) Please acknowledge that you read the instructions fully, and you understand that you cannot consult another person to help you with any part of this exam. Perfect competition II (13 pts.) Suppose that the market for mangos is perfectly competitive. The production of a single mango farm is given by the following table: Units of labor hired Mangos produced 0 0 1 48 2 94 3 138 4 180 5 220 6 250 7 270 8 288 9 300 10 304 The wage rate is w = 60 per unit of labor and the (short-run) equilibrium price of mangos is 2.5 per unit. The mango farm's yearly fixed costs associated with producing mangos are $265. In addition, assume that all other mango farms are identical to this one. 1. (5 pts.) What is the long run price of mangos. Will firms enter, exit, or or neither, as we move from the short-run to the long-run? Now suppose that the government states that any mango farm with five or more employees must oer all employees additional health care benefits. These added benefits eectively increase the wage rate to w = 90 for all workers, whenever the farm has five or more employees.1 If the farm has four or fewer employees, then the wage rate is unchanged and remains w = 60 for all workers. In addition, suppose that mango demand is perfectly inelastic. 2. (8 pts.) Did the number of people employed by all mango farms in total increase or decrease in the long run? By what percent did the total amount of workers working in mango production change? For both parts, compare the total level employment in the mango industry from before the regulation was implemented with the total level of employment in the long run equilibrium after the regulation is implemented. The market for loanable funds in a closed economy (22 pts.) Let's consider a closed economy (no trade) with perfectly flexible prices, perfectly competitive input and output markets, a consumption function that is a function of the interest rate, and with a fixed technology, whose loanable funds market is in equilibrium. 1 Assume that workers must be hired in whole number amounts. You cannot hire 4.9 employees, for example. 2 1. (4 pts.) Draw of figure of such an equilibrium, labeling your axis, any functions and indicate the equilibrium. Ok, from that initial equilibrium, suppose that because of COVID-19, transaction costs and production costs rise which lowers potential output, all else equal. 2. (5 pts.) Show how this initial equilibrium is aected by the fall in potential output by drawing a new figure, and in it, show the fall/rise of consumption and/or investment demand, along with the new equilibrium. Now, suppose that uncertainty and expectations of falling prices lowers consumption at every level of disposable income AND consumption becomes less sensitive to the interest, other things equal. 3. (5 pts.) From your equilibrium you found in 2 of this question, show the changes that ensue from the change in consumption and the new equilibrium. Compare this equilibrium to the last and the levels of potential output, investment demand and consumption. Finally, businesses get very nervous and the same sort of change happens to investment demand. The interest rate sensitivity of investment demand falls AND investment falls for all levels of the real interest rate. 4. (8 pts.) From the last equilibrium, draw a new figure and show what happens to loanable funds with these changes in investment demand. Indicate the new equilibrium, and any changes in consumption and investment demanded. Make a table that shows the overall changes of this equilibrium from the one you found after part b above to 1) potential output, 2) real interest rate, 3) investment demanded, and 4) consumption. Trade restrictions in our open economy model (20 pts.) Consider the following graphs describing the (open economy) market for loanable funds. 1. (5 pts.) Using the domestic (no-trade) loanable funds figure on the left and the Net Capital outflows figure on the right, derive the loanable funds figure with trade and indicate the equilibrium real interest rate now that you have incorporated trade. Make sure to use the same scale for the r-axis - for the respective X-axes, three squares on the N CO graph equal one on the I d , S figure. 3 2. (4 pts.) Ok, now with your new equilibrium including NCO, derive the equilibrium level of the real exchange rate (indicate level with ) by using the Net Export function below: The x-axis scale is exactly the same as that of the NCO. 3. (5 pts.) Good, now let's suppose the foreign interest rates have risen - that means for any level of the domestic interest rate, the foreign rate has risen. Use your equilibrium from part a to show what happens to the domestic real interest rate, investment demanded, consumption, net exports and the real exchange rate. 4. (6 pts.) Suppose that the administration sets out a \"Make Exports Great Again!\" (MEGA!) campaign which puts tight, restrictive quotas on imported goods. Other things equal, show exactly what happens to the domestic real interest rate, investment demanded, consumption, net exports and the real exchange rate from this change. Economic Growth (17 pts.) In a paper by Acemoglu, Robinson and Johnson, they look at populations of cities in the ancient word as a proxy for levels of technological progress - those cities with the largest populations having the most productive technologies. 1. (5 pts.) Using the Malthusian model, demonstrate why these authors make that assumption. 2. (6 pts.) One of the robust findings of economists who examine institutions and public policy is that governments that extort very high taxes from their populations without providing services have lower per capita median incomes and less stabile regimes. Using the Malthusian model, evaluate the dierences between highly extractive (basically a government that just takes goods/income away from the population and eats it) governments and more prudent, public good providing ones. Is the modern understanding of income and political stability likely to follow from the model? [Absolute maximum of .5 pages written or .25 typed.] 4 3. (6 pts.) Using the Malthusian model, explain why a country with a very high concentration of income among the top percentiles of income might be less successful (smaller population) in the long run than a country with more equally distributed income. [Absolute maximum of one paragraph of written explanation.] 5