Part A.

Production

Problem 1. Consider the Cobb-Douglas production function f(x,y) = 12x0.4y0.8.

(A) Find the intensities (? and 1 ? ?) of the two factors of production. Does this firm have decreasing, increasing, or constant returns to scale? What percentage of the firm's total production costs will be spent on good x?

(B) Suppose the firm decides to increase its input bundle (x, y) by 10%. That is, it inputs 10% more units of good x and 10% more units of good y. What is the percent increase in output?

(C) Suppose the firm has a production quota of q = 1000 units, and the firm inputs x = 100 units of the first good. How many units of the second good does it need to use to meet the quota?

(D) Assume the firm has a production quota of q = 2000 units, and the input prices are (px,py) = (7,19). Find the minimized cost C(2000) and the conditional factor demands (x?,y?).

Problem 2. Consider the linear (perfect substitutes) production function f (x, y) = 12.7x + 19.4y.

(A) How many units of good y would be a perfect substitute for 1 unit of good x? What is the slope of

the firm's isoquants?

(B) Suppose the input prices are (px,py) = (5,8). What is the slope of the isocost lines? How much output does the firm get when it inputs $1 worth of good x? How much output does the firm get when it inputs $1 worth of good y?

(C) Suppose this firm has a production quota of q = 500 units. Find the minimized cost C(500) and the corresponding conditional factor demands.

(D) Draw the firm's level-500 isoquant, as well as the isocost lines. Indicate the cost minimizer on your diagram.

Problem 3. Consider the Leontiev (perfect complements) production function f (x, y) = M in x , y . 9.6 5.2

(A) How many units of good y would be a perfect complement for 1 unit of good x? What is the equation of the firm's kink line?

(B) Assume the firm has a production quota of q = 400 units. Graph the firm's level-400 isoquant. What are the coordinates of the kink?

(C) Suppose the input prices are (px,py) = (16,9). Find the minimized cost C(400). What is the cost minimizing input bundle (x?, y?)?

(D) Give a complete geometric illustration of this firm's cost minimization. On a single diagram, draw the firm's level-400 isoquant, the isocost lines, and the cost minimizing input bundle.

Problem 4. Suppose that a firm's production plan is (x, y, z) = (102, 19, 957), and the market prices are (px , py , pz ) = (10, 5, 1.25). How much profit would the firm make if it carried out this plan?

Problem 5. Suppose that a firm's production function is f(x,y) = 20x0.7y0.3. Starting from the input bundle (x, y) = (40, 60), how much extra output will the firm get if it increases x from 40 to 41? How many units of output will the firm lose if x decreases from 40 to 39?

Problem 6. Suppose that the production of airframes (for aircraft) uses two inputs: capital (good x) and labor (good y). The production function is f(x,y) = xy. Assume that the price of capital is $1 per unit, and the price of labor is $10 per unit. The manufacturer wants to make 121,000 airframes. Find the cost-minimizing combination of capital and labor inputs.

Part B.

1. (4 pts.) Briefly define each of the components of Y = C + I + G + NX and give an example for each category of expenditure:

(3 pts.) Do economists prefer Nominal GDP or Real GDP as the best measure economic activity? Why?

(3 pts.) Your bank pays you 5% on your savings and the inflation rate is 2%. What is your real interest rate? Does this represent an increase or decrease in the purchasing power of your savings?

(4 pts.) Why is productivity important for determining a country's average income per person?

(3 pts.) What is the primary function the financial system serves in our economy?

(4 pts.) Identify each of the following acts as either saving (S) or investment (I):

a. b.

c. d.

7. (4 pts.)

_____ John uses some of his income to buy government bonds.

_____ google.com uses the funds it generated by selling new shares of stock to build a research and development center.

_____ Jane uses some of her income to buy stock in a major corporation.

_____ Walmart uses the funds it raised by issuing bonds to build a new regional warehouse.

The equation below represents National Saving in a closed economy: S = (Y-C-T) + (T-G)

Define each of the variables; also, give the names of the terms for the two expressions in brackets.

8. (5 pts.) The GDP for a country was $18 trillion in 2020; National Saving was $2.2 trillion; government tax revenue was $3.2 trillion; and Public Saving was $ 0.5 trillion. What was the amount of Private Saving in 2020? What was the amount of government expenditures (G)?

9. (5 pts.) Show on the axes below how the presence of trade unions can impact the structural rate of unemployment in a country:

Wage

(3 pts.) Considering the process of fractional reserve banking, which reserve ratio would allow the smallest ultimate impact on the money supply, 17% or 6%? Why?

(4 pts.) An initial $3 billion increase in the money supply by the Federal Reserve resulted in an overall increase of $18 billion in the money supply.

What is the size of money multiplier?

What is the reserve ratio %?

Quantity of Labor

12.

(3 pts.) What is the method the Fed uses most frequently to change the money supply?

(4 pts.) Describe how this process alters the money supply:

13.

a. (3 pts.) Define each of the variables in the following equation: M V = P Y

b. (4 pts.) Applying the Quantity Equation and assuming that velocity is constant, what will be the rate of inflation if real GDP grows 4.5% in a given year and the money supply only increases 2.2%?

14. The figure below shows the market for loanable funds (in an open economy), net capital outflow and the market for foreign currency exchange.

(5 pts) Show how the graphs would be affected if a new tax increase on dividend income from stocks incentivizes people to save less.

(3 pts) How would this affect the real interest rate?

(3 pts) How would it affect the real exchange rate?

Real Interest Rate

Real Interest Rate

Quantity of Loanable Funds

Quantity

Real Exchange Rate

Quantity of Dollars

15. The figure below shows the market for loanable funds (in an open economy), net capital outflow and the market for foreign currency exchange.

(5 pts) Show how the graphs would be affected if China experienced an unexpectedly large crop of soybean one year and so decided to import less soybean from the United States (ie. US exports of soybean decreased significantly).

(3 pts) How would this affect the real interest rate?

(3 pts) How would it affect the real exchange rate?

Real Interest Rate

Real Interest Rate

Quantity of Loanable Funds

Quantity

Real Exchange Rate

Quantity of Dollars

16.

a. (3 pts.) Draw the Model of Aggregate Demand and Aggregate Supply you would use for

analyzing short and long-run fluctuations in the U.S. economy.

Price

(3 pts.) Use the graph to show the impact of the following event:

A large drop in the stock market causes businesses to become more pessimistic and reduce their level of investment.

(4 pts.) What happens to the price level in the short-run and long-run? (describe what happens in both cases)

(4 pts.) What happens to output in the short-run and long-run? (describe what happens in both cases)

Income, Output (Y)

e. (4 pts.) If the government wished to avoid the negative effects of a recession following the fall in investment, what could it do? How would this impact the AD-AS model? (just describe in words, there is no need to illustrate on the graph)

17. (4 pts.) If the initial impact on Aggregate Demand of a new airport security program amounts to $42 billion and the Marginal Propensity to Consume is 0.75, what would be the total impact on Aggregate Demand if a crowding out effect of $14 billion also occurs?

18.

a. (4 pts.) How does the Theory of Liquidity Preference explain the downward slope of the

AD curve?

b. (4 pts.) How does the Theory of Liquidity Preference explain why the AD curve shifts inward when the Fed decreases the money supply (M)?

19.

a. (3 pts.) Draw a graph showing the long-run and short-run Phillips curves (draw both

curves on the same axes below).

Inflation Rate

(3 pts.) Show a point on the short-run Phillips curve and indicate what would happen to that point in the short run if the Federal Government significantly increased its expenditures in an effort to stimulate the economy.

(4 pts.) If a newly invented mathematical algorithm was widely rolled out which can match unemployed people to their ideal job much more quickly, would this shift the long or short run Phillips curve? In which direction would the curve shift? (just describe, there is no need to show on the graph)

(3 pts.) How would the situation described in question 19c above affect the long-run aggregate supply curve?

Unemployment Rate

(4 pts.) If oil prices fell causing a positive supply shock, would this shift the long or short run Phillips curve? In which direction would the curve shift? (just describe, there is no need to show on the graph)

(4 pts.) In the AS-AD Model, would the situation described in question 19e above shift the SRAS, the LRAS or the AD curve? In which direct would the curve shift?

(3 pts.) Would the situation described in question 19e above cause 'stagflation'?

20. (5 pts.) Provide two examples of events that could shift the LRAS curve. Say in which direction the curve would shift, and also how the event would affect the long-run Phillips curve.

21. (5 pts.) What are three key lessons you will remember from taking ECON 204 Principles of Macroeconomics?

Part c.

Solve the below questions well

A) Short Answer Part 1) Assume you are head of an agency that has the duty to keep markets competitive in your country. And your agency is using HHI as the variable to measure market concentration. Write a strategy your agency can use to keep market concentration in the economy low. Explain your answer. 2) Assume in agricultural sector of Zambia, the average fixed costs are higher for each production level, compared with aggricultural sector of Paraguay, while in Paraguay the average variable costs for each production level higher, compared with Paraguay. Compare the price level of the shutdown point in these two countries. 3) Write a condition of the perfectly competitive market. Do you think the condition you choose in general is met in an average sector in the economy of TRNC, Turkey or the country you come from. Explain your answer. 4) Assume Figure 9.5 presentes the cost structure of a company. Show the profit/loss leves for prices PH, PM and PL on the graph. You can use recreate the graph if necessary. (which you can do by copying and pasting, in case you are using software) Make sure you specify where the area you show represents loss or profit. Price $ ATO AVC PM PL A Shutdown point Outpul Figure 9.5 5) Within the perfect competition model the short run supply curve for a company is Marginal Cost Curve above the AVC. How can it be proven that this is the case? (Don't forget to prove also "above the AVC part.") 5) Coronavirus has significantly affected the demand faced in different sectors. During the crises, some companies remained open 0even though they were making loss while others are shut down. Assuming the cost structure of the companies remain the same. Show on a graph how cost and revenue structure of a company that is making profit before the Corona Crises, will look like. Your graph should have MC, MR, AVC, SRATC Curves. Draw the same graph for a company that would choose to remain open according to perfect competition model, and than another version of the graph for a company, that according to perfect competition model will choose to shut down. 7) How does a market with perfect competition, where intitially companies are making profits, when all costs are taken into account, will return to equilibrium point in the long run?The market inverse demand curve is P(y) = 10 - 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 profit? Identify which of the two output levels is lower, and explain why using economic intuition. (b) Suppose a second firm with cost curve y' + 2 is considering entering the market. If after entry, the firms would compete a la Cournot, what would be the Cournot- Nash equilibrium output levels y and y2 of firms 1 and 2? What would be the equilibrium profits for each firm? Will firm 2 choose to enter the market? (c) Suppose that if firm 2 enters, both firms collude, choosing output levels that maxi- mize total profits and then split the profits equally between them. What would be the profits to each firm? Will firm 2 choose to enter the market in this case