Name : Jasmin Hanim Student 10: 57664106 ECON 208: Problem Set & ( a) T ( Q ) = PCQ ) x Q - T( CQ) = (300- () x Q- 40Q. where TL ( Q ) denotes the level of profits as a function of G. 6 ) MR= MC. 300 - 2Q = 40 - 2Q = 10 -300 - 2Q =- 260 Q : - 260 - 2 = 130 P= 300 - 130 = 170 TC ( 130 ) = ( 300 - 130 ) x 130 - 40 x 130 : 22 100 22 100 - 5200 16 90 0 ( ) P = MC MC = 40 P = 40 Q : 300 - P : 300 - 10 = 260 1 (260) : (300- 260) x 260 - 40 x 260= 10 HOD 10 400 - 104003 a) Price of airfare = $800 Price of hotel : $ 800 Earns profits of NZ$ 500 ( = NZ$ 800 - NZ$ 300) from each for a total profit of NZ$10CO. The firm could attract two customers for each service at a price of NZ$500 , but it would earn profit of NZ$ 200 (: NZ$ 500- NZ$ 300 ) on each customer for a total of NZ $ 80O profit. less profit than the NZ$SOU price . () with bundling , the best the firm can do is charge a price of $900 for the airfare and hotel. At this price the firm will attract all three customers and earn $ 300 (= $3900 - $300- $300 ) profit on each for a total profit of $qoo. The firm could raise its price to $1000 , but then it would only attract one customer and total profit would be $400 (= $ 1010 - $300- $300 ). Notice that with bundling the firm cannot do as well as it could with mixed bundling . ( ) Because customer I has a willingness - to-pay for the airfare below marginal cost and customer 3 has a willingness . to-pay for the hotel below marginal cost , the firm can potentially earn greater profits through mixed bundling . In -this problem if the firm charges $800 for the airfare only, $ 800 for the hotel only , and $10oo for the bundle , then customer I will purchase the hotel only . customer 2 will purchase the bundle , and customer 3 will purchase the airfare only . This will earn the firm profits of TL (860 - 300) + (1000 - 300- 300) + (810 - 300) = $ 14too , implying that mixed bundling is the best option in this problem .\fECON 206: Problem Set 8 1) The two questions in Tutorial Problems ? looked at how changes in dierent macroe- conomic variables affected the interest rate and and aggregate income. This week we'll extend the changes to how they affect the aggregate demand curve. For b) - c) remember that this means that 1" does not aect C and I and so the IS curve exists but is not downward sloping. So now you need to know what this means for the slope of the AD curve. \"rhen 1' does affect C and I we get a downward sloping IS curve and a downward sloping AD curve. When 'r' does not affect C and I we do not get a downward sloping IS curve. This means we also do not get a downward sloping AD curve. Once you have worked out what the AD curve looks like and why it looks like this, then you can answer b]-c]. Remember to ask for help if you get stuck. a) Show on a diagram how the scal stimulus in Q1] of tutorial problems 7 effects the aggregate demand curve. b) What would the aggregate demand curve look like when people and businesses are completely unresponsive to changes in the real interest rate over say 3-5 years? [Note: this is from Q2) of tutorial problems 7.} c) What happens to the aggregate demand curve if the government spends more on goods and services when people and businesses are completely unresponsive to changes in the real interest rate over say 3-5 years? [Note: this is from Q2) of tutorial problems 7.1 d) What happens to the aggregate demand curve if the central bank increases the money supply when people and businesses are completely unresponsive to changes in the real interest rate over say 3-5 years? [Note: this is from Q2] of tutorial problems 7.] ECON 206: Problem Set 7 1) Say you are working for the government and they desperately want to boost incomes because the country is in a recession and the government has an election coming up. You are charged with working out the likely effects of a boost in government spending of $2.9 billion. This figure is what the ruling party thinks they can afford without upsetting the financial ratings companies and incurring a debt rating downgrade.' Just under forty-five percent of this amount is to be used for transfer payments (unemployment benefit, domestic purposes benefit etc). You also know from your statistician that aggregate consumption was $54,521 billion in a past year and is currently $75,840 billion, and aggregate income was $92,679 billion in the same past year and is currently $123,985 billion (all figures in constant dollars). a) You have to use the given information to calculate the increase in aggregate income in the goods market implied by the increase in government spending. You have to explain that the makeup of the increase in government spending won't have as big an impact as they think in the goods market. b) The government thinks that the fiscal stimulus in the goods market is also the change in aggregate income. You need to explain to them that this isn't correct because they haven't included the money market in their thinking. You can't work out the numbers but you can work out how big the change in aggregate income is relative to just looking at the goods market. Since the politicians aren't trained in economics you have to explain it to them using a diagram with a simple concise explanation. 2) Reserve Banks in some countries are currently finding that no matter how much they decrease interest rates they do not seem to increase economic activity. So what we will do is investigate changes in government spending and the money supply and see when this situation is likely to occur and also compare how effective monetary and fiscal policies are at causing changes in output and income. For this question assume that changes in r do not affect C and I. This change means that you need to work out what the IS curve looks like before answering any of the other questions. The IS curve still exists but it is not downward sloping as shown in class because I and C are not affected by r for this question. The IS curve is only downward sloping if I and C are affected by r. The size of any shifts of the IS curve These are costly because they then result in lenders wanting higher interest payments because of a perceived increase in the riskiness of the country's government. It also tells you that the government is funding the increase in spending by borrowing and not by raising taxes. Tutorials: Week 9 Due: Friday, 2 October will also be different when r does not affect C and I. The LM curve does not change what it looks like or how much it shifts because it does not depend on C and I. a) If you work for the central bank and are trying to figure out the impacts of monetary policy on aggregate economic behaviour how would you model the goods market, money market, and aggregate income diagramatically? What explanation would you give for how you model the aggregate economy? b) Central banks worry about the inflationary effects of increases in government spending on goods and services. Given a situation where consumption and investment are unresponsive to the real interest rate, how would an increase in spending on goods and services proposed by the government affect the interest rate and aggregate income? How would you show this diagrammatically and what explanation would you give your manager? c) Central banks are in control of monetary policy. They also need to know how monetary policy affects aggregate economic behaviour to work out what monetary policy they should take to reach a certain price level. Given a situation where consumption and investment is unresponsive to the real interest rate how would an increase in the money supply by the central bank affect the interest rate and aggregate income? How would you show this diagrammatically and what explanation would you give your manager?