One.

Consider a two-period small open economy populated by a large number of

identical households with preferences described by the utility function

lnCT 1 + lnCN 1 + lnCT 2 + lnCN 2

where CT 1 and CT 2 denote consumption of tradables in periods 1 and 2, respectively, and CN 1 and CN 2 denote consumption of nontradables in periods

1 and 2. Households are born in period 1 with no debts or assets and are

endowed with L1 = 1 units of labor in period and L2 = 1 units of labor in

period 2. Households o?er their labor to ?rms, for which they get paid the

wage rate w1 in period 1 and w2 in period 2. The wage rate is expressed in

terms of tradable goods. Households can borrow or lend in the international ?nancial market at the world interest rate r?. Let pN 1 and pN 2 denote the

relative price of nontradable goods in terms of tradable goods in periods 1

and 2, respectively.

Firms in the traded sector produce output with the technology QT 1 = aTLT 1 in period 1 and QT 2 = aTLT 2 in period 2, where QT t denotes output in period t = 1,2 and LT t denotes employment in the traded sector in period t = 1,2.

Similarly, production in the nontraded sector in periods 1 and 2 is given by

QN 1 = aNLN 1 and QN 2 = aNLN 2 .

1. Write down the budget constraint of the household in periods 1 and 2.

2. Write down the intertemporal budget constraint of the household.

3. State the household's utility maximization problem.

International Macroeconomics, Chapter 9 299

4. Derive the optimality conditions associated with the household's max

imization problem.

5. Derive an expression for the optimal levels of consumption of trad

ables and nontradables in periods 1 and 2 (CT 1 , CN 1 , CT 2 , and CN 2 ) as functions of r?, w1, w2, pN 1 , and pN 2 .

6. Using the zero-pro?t conditions on ?rms, derive expressions for the real wage and the relative price of nontradables (wt and pN t , t = 1,2),

in terms of the parameters aT and aN.

7. Write down the market clearing condition for nontradables.

8. Write down the market clearing condition for labor.

9. Using the above results, derive the equilibrium levels of consumption ,

the trade balance, and sectoral employment (CT 1 , CT 2 , CN 1 , CN 2 , TB1, TB2, LT 1 , and LT 2 ) in terms of the structural parameters aT, aN, and r?.

10. Is there any sectoral labor reallocation over time? If so, explain the

intuition behind it.

Two.

Part 1. Beth Dean had been hired as a staff accountant within the last 6 months and was responsible for doing routine types of analytical work. Beth recently decided to undertake some break-even analysis and was eager to present her findings to her boss, Ben Jacobs. During the presentation, Beth explained the purpose of break-even analysis as follows: The company must be able to at least sell a sufficient volume of goods to cover all of the variable costs of producing and selling the goods as well as the fixed costs in order to make profits. The volume at which the firm covers both variable and fixed costs should be the lower limit for all planning since it is the point at which the firm breaks even. Beth used the following information for her charts. Exhibit 1 (Current data) Plant Capacity 2 million units per year Past year's level of operations 1.5 million units Average Unit selling price $7.20 Total Fixed Costs $2,970,000 Average unit variable cost $4.50 Required: (6 pts.) 1. Compute the break-even analysis that Ann Means provided to Ben Jacobs by computing the break-even in units and sales dollars. (You must have a formula (use excel to calculate) for your answer on the spreadsheet. In other words, you cannot just type the answer. Put the case data (for example, type in Exhibit 1 information) at the top of the worksheet and incorporate that data in your worksheet formulas. I should be able to change your "case data" and your worksheet would compute the new answer) 2. Prepare a contribution margin income statement (in good form - use lines, dollars signs, etc. - see your text for examples of what a statement should look like) at the current sales levels. (again, use formulas. Do not simply type the numbers)

Part d.

The market inverse demand curve is P{y] = ll] 2y, and a monopolist's cost curve is y? + 2. (a) "What output level y maximizes the monopolist's revenue? 'What output level y maximizes the monopolist's prot? Identify which of the two output levels is lower, and explain why using economic intuition. (b) Suppose a second rm with cost curve 3;? + 2 is considering entering the market. If after entry, the rms would compete a la Cournot, what would be the Cournot- Nash equilibrium output levels yl and y2 of rms 1 and 2? What would be the equilibrium prots for each rm? Will rm 2 choose to enter the market? (c) Suppose that if rm 2 enters, both rms collude, choosing output levels that maxi- mize total prots and then split the prots equall}r between them. 1What would be the prots to each rm? Will rm 2 choose to enter the market in this case? In reporting on real GDP growth in the second quarter of 2016, an article on Reuters news noted that: "U.S. economic growth unexpectedly remained tepid in the second quarter as inventories fell" and also that the "inventory drawdown was almost across the board." Source: Lucia Matikani, "Inventory Reduction Curbs U.S. Economic Growth; Rebound Expected," reuters.com, July 20, 2016. If companies are drawing down inventories is aggregate expenditure likely to have been larger or smaller than GDP? O A. Smaller than GDP, because more is being bought than produced. O B. Larger than GDP, because less is being bought than produced. O C. Larger than GDP, because more is being bought than produced. O D. Smaller than GDP, because less is being bought than produced. The chief economist at UniCredit Research is quoted in the article as stating that: "The U.S. economy just went through a meaningful inventory correction cycle." What would an "inventory correction cycle" be? O A. A situation where companies deplete low levels of inventory to earn economic profits. O B. The process of companies increasing production levels to create more inventory. O C. A situation where inventory levels are held constant for stability. O D. The process of companies decreasing or increasing actual inventories to match planned inventories. The article states that: "Though the inventory drawdown weighed on GDP growth, that is likely to provide a boost to output in the coming quarters." Why would an inventory drawdown boost output in the coming quarters? O A. Once the firms are able to sell off their excess inventories, consumption will be lower. O B. Once inventories reach desired levels, firms will increase production to match expected planned aggregate expenditures. O C. This would indicate that the quantity of output demanded is greater than the quantity of output supplied, and production levels will rise. O D. An inventory drawdown would reduce storage costs, thus giving firms an incentive to produce more output.xam MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Holding money to meet unplanned expenditures and emergencies is known as A) transactions demand. 1) B) aggregate demand. C) precautionary demand. D') asset demand. 2) Precautionary demand for money will fall when 21 A) government spending falls. Bj the interest rate rises. () the money supply increases. Dj the Interest rate falls. 3) When households choose to hold money as a store of value, rather than holding assets such as certificates of deposit, stocks, and bonds, demand for money results. A) precautionary B) liquidity 9 asset D) transactions 4) When the Fed conducts open market operations, it A) is engaging in fiscal policy. B) shifts the demand for money curve. C) also raises taxes at the same time. D) purchases or sells government bonds issued by the U.S. Treasury. 5) When interest rates in the bond market go up A) there is no impact on the price of existing bonds. BJ the price of existing bonds goes up. () the price of existing bands goes down. Dj the price of stocks goes up. 6)_ 6) In the real world, contractionary monetary policy would be used to B) increase long-run aggregate supply. A) combat a recession. Dj reduce the rate of inflation. CJ increase nominal GDP. 7) 7) An appreciation of the U.S. dollar is most likely a result that A) the Fed has pursued an expansionary monetary policy. B) more dollars are required to obtain foreign currencies, C) U.S. bond prices have increased. D) U.S. interest rates have increased. .' A-1