Please use the attachment for guidance.

Complete each of the following economic problems.

Problem A

Use the national income data in the table below to compute the following:

1. GDP.
2. NDP.
3. NI.

Compensation of employees	$288.2
US exports of goods and services	63.4
Consumption of fixed capital	23.6
Government purchases	188.8
Taxes on production and imports	28.8
Net private domestic investment	104.2
Transfer payments	27.8
US imports of goods and services	33.0
Personal taxes	81
Net foreign factor income	4.4
Personal consumption expenditures	438.2
Statistical discrepancy	0

Problem B

Compare a $40,000 income in 1980 to 2010 and analyze the following questions:

• What are the differences in the available products?
• What are the differences in the quality of products?
• If you made $40,000 in 1980 and in 2010, what would your income status or wealth be in each time period?
• In which period would you choose to live, and why?

Problem C

• In the aggregate demand model in equilibrium, GDP (Y) = C + I + X (open economy).
• Where C = consumption schedule = 100 + .75Y (consumption is a function of income).
• Where I = planned investment = 20 and X = net exports = 40. Both are independent of GDP (Y).

Use the information provided above to complete the following:

1. Calculate the equilibrium level of income or real GDP for this economy.
2. What happens to equilibrium Y if Ig changes to 15? What does this outcome reveal about the size of the multiplier?

Problem D

1. Suppose the consumer spending initially rises by $5 billion for every 1 percent rise in household wealth and that investment spending initially rises by $20 billion for every 1 percentage point fall in the real interest rate. Also assume that the economy's multiplier is 4. If household wealth falls by 5 percent because of declining house values, and the real interest rate falls by 2 percentage points, in what direction and by how much will the aggregate demand curve initially shift at each price level? In what direction and by how much will it eventually shift?
2. Use the hypothetical economy in the table below to calculate the aggregate demand and supply, as well as its price level.
3. Given the above information, in this hypothetical economy what is the equilibrium price level and the equilibrium level of real output? Using Excel, graph both the aggregate demand and aggregate supply curves.
   1. Can there be equilibrium level of output at below full employment?
   2. At what price level will aggregate supply equal aggregate demand? At what price level will demand fall below aggregate supply? Given a price level of 250 will aggregate demand exceed supply?
   3. If the aggregate demand schedule shifted by $20 billion to the right at every level, what would be the new equilibrium level of income?

Amount of Real GDP Demand (in billions)

Price Level (Price Index) Amount of Real GDP Supplied (in billions) $180 300 $500 260 250 400 300 200 300 420 150 200 560 100

100

MBA-FP6008 Helpful Hints MBA-FP6008 Helpful Hints Assessment 1, Problem A Alternative s Machines Food Sacrifice A 0 14 B 1 13 -1 -2 C 2 11 D 3 9 E 4 7 F 5 4 G Hints: 6 0 -2 -2 3 -4 1. 2. 3. 4. 5. 6. 7. Type your data into an Excel spreadsheet. With your mouse, highlight the data only. Go to Insert Click on Scatter. Click on the smooth lines option. Select the line chart. Plot data drawing line. 16 14 12 10 8 6 4 2 0 0 1 2 3 4 5 6 7 1 MBA-FP6008 Helpful Hints Note: The production possibilities curve reflects the Law of Increasing Costs. To obtain more of one good, society must sacrifice an increasing amount of another good. Society cannot have all it wants of both goods. Assessment 1, Problem B Supply and Demand Concepts 1. The Law of Demand: Quantity demanded of a good varies inversely with price. People will buy more at lower prices and at higher prices. Assuming all else is held constant. 2. Law of Supply: Quantity supplied will vary directly with price. Suppliers will supply more at higher prices Assuming all else is held constant. 3. Change in demand or supply: Changes in the demand and supply curves are represented by shifts of the respective curves as a result of changes in the factors assumed to remain constant, that is, tastes and preferences, prices of substitutes, incomes, and number of buyers in the market. 4. When the supply and demand curves are graphed, the intersection of the two lines determines the equilibrium price. 5. Supply and demand are in equilibrium when the quantity supplied is equal to the quantity demanded. 6. If the demand curve remains fixed, a movement along the demand curve represents a change in quantity demanded. If the supply curve remains fixed, a movement along the supply curve represents change in quantity supplied. 7. Price floors: Prices cannot fall below a specific price; for example, minimum wage. May result in surpluses. a. Price floors, such as minimum wage, create surpluses as the quantity supplied will be greater than quantity demanded. 8. Price ceilings: Prices cannot rise above a specific price; for example, rent controls. May result in shortages. a. Price ceilings, such as rent control, create shortages as the quantity supplied will be less than the quantity demanded. 9. Elasticity: The percentage change in quantity demanded or supplied as a result of a 1 percent change in price. 10. Elasticity represents the ratio of the percentage change in quantity demanded supplied to the percentage change in price. 11. Elasticity of Demand Formula: a. e= [Q2-Q1/(Q2+Q1/2)]/[P2-P1/(P2+P1/2)] b. The same process applies to elasticity of supply. c. Es= %change in quantity supplied/%change in price Assessment 1, Problem C Supply and demand are in equilibrium when the quantity supplied is equal to the quantity demanded. Price floors, such as minimum wage, create surpluses as the quantity supplied will be greater than quantity demanded. Price ceilings, such as rent control, create shortages as the quantity supplied will be less than the quantity demanded. 2 MBA-FP6008 Helpful Hints Assessment 3, Problem A Elasticity of Demand Formula: a. e= [Q2-Q1/(Q2+Q1/2)]/[P2-P1/(P2+P1/2)] b. The same process applies to elasticity of supply. c. Es= %change in quantity supplied/%change in price Quantity Demanded 0 Change in Quantity Price Change in Price Q2+Q1/2 P1+P2/2 2 5 5 2 15 3 2 25 1 6 10 10 4 10 20 2 10 40 0 If price falls from 4 to 2, quantity demand increases from 10 to 20. e= [Q2-Q1/(Q2+Q1/2)]/[P2-P1/(P2+P1/2)]=(10/15)/(2/3) = 1 Demand is unit elastic. Assessment 3, Problem B You may find Chapter 20 of the following text useful as you complete this assessment: Ahleresten, Krister. (2008). Essentials of Microeconomics. Retrieved from http://bookboon.com/en/textbooks/economics/microeconomics-uk Assessment 3, Problem C You may find Chapter 3 of the following text useful as you complete this assessment: Ahleresten, Krister. (2008). Essentials of Microeconomics. Retrieved from http://bookboon.com/en/textbooks/economics/microeconomics-uk Let MUA = z = 30 - x and MUB = z = 63 - 2y. Where z is marginal utility per dollar measured in utils. x is the amount spent on product A. y is the amount spent on product B. Assume that the consumer has $30 to spend on A and B; that is, x + y = 30. How is the $10 best allocated between A and B? How much utility will the marginal dollar yield? To solve this system of equations, set the MUA=MUB. This is required if we are maximizing utility. This leaves only x and y to solve for using the individual's budget constraint. Consider the following equations: Let MUA = z = 30 - x and MUB = z = 63 - 2y, where z is marginal utility per dollar measured in utils, x is the amount spent on product A, and y is the amount spent on product B. Also, assume that the consumer has $30 to spend on A and B; that is, x + y = 30. 3 MBA-FP6008 Helpful Hints We know from our optimization rule that MUA=MUB, which implies 30 - x = 63 - 2y. Or, after some rearranging, 2y - x = 33. Combining this equation with our budget constraint, x + y = 30, we have two equations and two unknowns (x and y). Use the budget constraint to solve x, or x = 30 - y. Substitute x from this equation into our optimality rule (2y - x = 33), which gives us 2y - (30 - y) = 33. Again after some rearranging, we have 2y - 30 + y = 33, or 3y = 21. Thus, we spend $21 on product B. Using our budget constraint (9x + y = 30), this implies we spend $3 on product A. Assessment 4, Problem A American Widget Factory (AWF) is a widget manufacturer. It has monthly fixed costs of $2,000,000. Its marginal costs are $.50 per widget. What happens if sales fall by 20% from 1,000,000 to 800,000 widgets per month? What happens to average fixed costs (AFC) per widget and the marginal costs per widget? If sales fall by 20 percent from 1 million widget per month to 800,000 widgets per month, what happens to the AFC per paper, the MC per paper, and to the minimum amount that you must charge to break even on these costs? Answer: AFC per paper rises from $2.00 per widget to $2.50 per widget; marginal cost (MC) does not change; and the minimum amount that AWF must charge to break even rises from $2.50 per widget (= $2 million in fixed costs divided by 1 million papers plus $.50 per widget in marginal costs) to $3.00 per widget (= $2 million in fixed costs divided by 800,000 papers plus $.50 per widget in marginal costs). Here MC is constant, which implies that average variable cost (AVC) is constant and equals MC. This does not imply average total cost (ATC) is constant or has to equal MC. Total cost (TC) = fixed cost (FC) + variable cost (VC). Divide through by the quantity Q, which implies TC/Q = FC/Q + VC/Q. This gives us ATC = AFC + AVC. Assessment 4, Problem B ATC = AFC + AVC Profit Maximization = Marginal Revenue = Marginal Cost Profit = Average Revenue (Price) minus Average Total Cost Quantity 0 1 2 3 4 5 6 7 8 AFC AVC ATC 25 12.5 8.33 6.25 5 4.17 3.57 3.13 10 8 6.67 5.5 4.8 4.5 4.57 5 35 20.5 13 11.75 9.8 8.67 8.14 8.13 Mc 10 6 4 2 2 3 5 8 14 Price Profit 4 MBA-FP6008 Helpful Hints 9 10 2.78 $2.50 6 7.5 8.76 10 21 Assessment 4, Problem C Tom's newspaper stand sells 1000 newspapers per day at a total cost of $450. If Sam sells 800 units per day, his total cost would be $300, and Sam if sold 500 units per day, his total cost would be $275. What are the Sam's ATC per unit at each sale level? If every firm in this industry has the same cost structure, is the industry in longrun competitive equilibrium? From what you know about these firms' cost structures, what is the highest possible price per unit that could exist as the market price in longrun equilibrium? If that price ends up being the market price and if the normal rate of profit is 20 percent, how big will each firm's accounting profit per unit be? The firms' ATC per unit at 1000 units per day is $0.45 (= $450/1000); at 800 units per day it is $0.38 (= $300/800); and at 500 units per day it is $0.55 = ($275/500). At .55 the normal profit would be (.2)(.55) - .11. In the long run, what would the normal profit be? Assessment 7, Problem A You may find the following Internet resource useful as you complete this assessment: U.S. Government Printing Office. (n.d.). Economic report to the president. Retrieved from http://www.gpo.gov/fdsys/browse/collection.action?collectionCode=ERP The expenditures approach: GDP = (Personal consumption expenditures) + (Net private domestic investment) + (Consumption of fixed capital, depreciation) (the sum of these two components measures gross investment = Gross Investment + (Government purchases) + (net exports) Net Domestic Product equals GDP minus Consumption of fixed capital (depreciation). NDP = You can determine NI in two ways: first, you can make the required additions or subtractions from NDP; second, you can add up the types of income and taxes that make up NI. Net Domestic Product Approach: National Income = (Net Domestic Product) (Statistical discrepancy) + (Net foreign factor income) =. Income and Taxes Approach: National Income = (Compensation of employees) + (Rents) + (Interest) + (Proprietor's income) + (Corporate profits) + (Taxes on production and imports) = . Assessment 7, Problem B You may find Chapter 1 of the following text useful as you complete this assessment: 5 MBA-FP6008 Helpful Hints Jochumzen, P. (2010). Essentials of macroeconomics. Retrieved from http://bookboon.com/en/textbooks/economics/macroeconimics-uk You many also find the following Internet resources useful as you complete this assessment: Russell Sage Foundation. (n.d.). Chartbook of social inequality. Retrieved from http://www.russellsage.org/sites/all/files/chartbook/Income%20and%20Earnings.pdf U.S. Census Bureau. (2012). Income data. Retrieved from http://www.census.gov/hhes/www/income/ Assessment 7, Problem C a. Solve for Y b. The Marginal Propensity to Consume = Change in Consumption/Change in Income. c. The Multiplier = 1/MPC. You may find Chapter 11 of the following text useful as you complete this assessment: Jochumzen, P. (2010). Essentials of macroeconomics. Retrieved from http://bookboon.com/en/textbooks/economics/macroeconimics-uk 6 National Income Compute each of the following; GDP,NDP,NI GDP GDP=C+ G+ I +(x-m) Where C is the household consumption, G is Government spending, I is the gross private investment and (x-m), net income from exports. Gross private investment is (Net Private Investment + Consumption of fixed capital)j In our case, The government spending, G, is $188.8 Household consumption, C , is $ 438.2 Net private investment, I, is $104.2j Consumption of fixed capital is $23.6j Exports, X for the year is $63.4 Imports, M, for the year is $33 =438.2+188.8+127.8j+ (63.4-33)=$785.2 Net Domestic Product (NDP) is Gross National Product- Consumption on fixed capital Gross Domestic Product $785.2 Consumption on fixed capital ($23.6) Net Domestic Product $761.6 The net domestic product is thus $761.6 The National Income NI= Net Domestic Product-Statistical discrepancy+ Net foreign factor income The net domestic product 761.6 Statistical discrepancy 0 Net foreign factor income $4.4 The National Income therefore, $766 The National Income for the country is therefore $766 National Income Problem b Compare a $40,000 income in 1980 to 2010 and analyze the following questions: What are the differences in the available products? Due to changes in preferences over time, the products have evolved and developed. It is unlikely that the same products that were in 1980 are available in 2010 but improved versions are however. What are the differences in the quality of products? The quality of products is definitely not the same. For some products the quality has improved while for others it has deteriorated. The general trend though is improvement in quality due to technological advances. If you made $40,000 in 1980 and in 2010, what would your income status or wealth be in each time period? If you made $40000 in 1980, you would be a very wealthy person as compared to if you made the same amount in 2010. Due to inflation, the buying power of money has generally decreased over the years. The buying power of $40000 in 1980 is so much higher compared to the buying power of the same amount in 2010. In which period would you choose to live, and why? I would choose to live in 1980, because the buying power of money at the period is high. That amount of money would buy so much and make living comfortable. Problem c In the aggregate demand model in equilibrium, GDP (Y) = C + I + X (open economy). Where C = consumption schedule = 100 + .75Y (consumption is a function of income). Where I = planned investment = 20 and X = net exports = 40. Both are independent of GDP (Y). Use the information provided above to complete the following: 1. Calculate the equilibrium level of income or real GDP for this economy. The real GDP of the economy; National Income GDP(Y)=C+I+X Y=100+0.75Y +20+40 Y-0.75Y=100+20+40 0.25Y=160 Y=640 2.What happens to equilibrium Y if Ig changes to 15? What does this outcome reveal about the size of the multiplier? Y= if I changes to 15 Y=100 +0.75Y + 15 +40 Y-0.75Y=100+15+40 0.25Y=155 Y=620 The multiplier is 4 as it multiplies the real GDP by 4. Problem D