QUESTIONS....

1. Pure Exchange Economy In this problem we will go through the model scen in class using an example with specic assumptions about tastes and endowments. Hume and Foreign are endowed with different amounts of two goods, Apples and Bananas. The two countries are characterized by the following preferences. Home country's aggregate utility function is: J. J. U=rjr while Foreign cuuntIy's aggregate utility mctiun is: .1. ,1 Lu" =xfx3' The two countries' endowments are the following: Home has lllf'.I Apples and 't' Bananas while Foreign has 5ft Apples and El] Bananas. Let's start by looking at what happens if the two countries are in autarky and then we will analyze what happens if the two countries are allowed to trade. As for all general equilibrium problems you have to think in terms of relative prices, therefore 'ocm now on we are interested only in the relative price of Apples relative to Bananas p = g which is equivalent to assuming that we are taking Bananas as our numeraire.p3 = l. 1. For the Home country draw a graph with the quantity of the two goods on the two axes and explain why at the consumption point the MRS must be equal to the autarky relative price. 1tIti'hat is the meaning of autarky relative price since there is no exchange allowed with other countries? The autarky prices are in fact determined by two factors: what are those factors? Find the autarky price p in the Home country. 2. For the Foreign country do the same analysis and draw a graph showing what determines relative prices in autarky. Find the autarky price p' in the Foreign country. 3. Now compare autarky prices in the two countries. In which country is the price of Apples higher relative to the price of Bananas? What factors determine the different autarky prices? In particular in this example why is p E p'? 4. Now imagine the two countries are allowed to trade. Similarly to what we saw in class, draw an Edgeworth box. where the indifference curves for the two countries are drawn in the same graph. Show where the endowment point is located. Show also the "lens" area that cointains points which are preferred to the original endowment by both countries. 5. Derive the demand for both goods for both countries and nd the equilibrium relative price at which the two countries exchange Apples for Bananas. pr. What are MR3 and MM' equal to in equilibrium? Problem 27-8 Lockboxes and Collections It takes Cookie Cutter Modular Homes, Inc., about six days to receive and deposit checks from customers. The company's management is considering a lockbox system to reduce the firm's collection times. It is expected that the lockbox system will reduce receipt and deposit times to three days total. Average daily collections are $134,000 and the required rate of return is an EAR of 6 percent. Assume 365 days per year. a. What is the reduction in the outstanding cash balance as a result of implementing the lockbox system? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) b. What is the daily dollar return that could be earned on these savings? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c-1. What is the maximum monthly charge the company should pay for this lockbox system if the payment is due at the end of the month? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c-2. What is the maximum monthly charge the company should pay for this lockbox system if the payment is due at the beginning of the month? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Cash balance reduction b. Dollar return 2-1. Maximum monthly charge C-2. Maximum monthly chargeProblem 27-8 Lockboxes and Collections It takes Cookie Cutter Modular Homes, Inc., about six days to receive and deposit checks from customers. The company's management is considering a lockbox system to reduce the firm's collection times. It is expected that the lockbox system will reduce receipt and deposit times to three days total. Average daily collections are $134,000 and the required rate of return is an EAR of 6 percent. Assume 365 days per year. a. What is the reduction in the outstanding cash balance as a result of implementing the lockbox system? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) b. What is the daily dollar return that could be earned on these savings? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c-1. What is the maximum monthly charge the company should pay for this lockbox system if the payment is due at the end of the month? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c-2. What is the maximum monthly charge the company should pay for this lockbox system if the payment is due at the beginning of the month? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Cash balance reduction b. Dollar return 2-1. Maximum monthly charge C-2. Maximum monthly charge3. Define both terms and explain the difference between microeconomics and macroeconomics. Is gross domestic product a microeconomic or macroeconomic question? Is the price change of pizza a microeconomic or macroeconomic question? 4. Scans of internal organs using magnetic resonance imaging (MRI). These devices are often covered by subsidized health insurance programs such as Medicare. Consider the following table illustrating hypothetical quantities of individual MRI testing procedures demanded and supplied at various prices. Answer the following questions (4 points) Price Quantity Quantity Demanded Supplied $100 100,000 40,000 $300 90,000 60,000 $500 80,000 80,000 $700 70,000 100,000 $900 60,000 120,000 a. What is the equilibrium price and equilibrium quantity of MRI tests? b. Suppose that the government establishes a health plan guaranteeing that all qualified participants can purchase MRI tests at an effective price to the individual of $100 per test. How many MRI tests are now demanded? Is the result in the market a surplus or shortage? How large is the surplus or shortage? 5. Paint and paintbrushes are complement goods. Describe what occurs in both markets when there is an increase in the price of paint. In your explanation, be sure and describe which one is a change in quantity demanded with movement along the demand curve and which one is a change in demand with a shift in the entire demand curve: a. Explain what happens to the demand curve for paint when the price of paint increases. b. Explain what happens to the demand curve for paintbrushes when the price of paint increases. 6. Briefly explain the three tax systems - proportional, progressive and regressive. As you explain each one, also compare the relationship between marginal tax rate and average tax rate as income rises for each one.3. Define both terms and explain the difference between microeconomics and macroeconomics. Is gross domestic product a microeconomic or macroeconomic question? Is the price change of pizza a microeconomic or macroeconomic question? 4. Scans of internal organs using magnetic resonance imaging (MRI). These devices are often covered by subsidized health insurance programs such as Medicare. Consider the following table illustrating hypothetical quantities of individual MRI testing procedures demanded and supplied at various prices. Answer the following questions (4 points) Price Quantity Quantity Demanded Supplied $100 100,000 40,000 $300 90,000 60,000 $500 80,000 80,000 $700 70,000 100,000 $900 60,000 120,000 a. What is the equilibrium price and equilibrium quantity of MRI tests? b. Suppose that the government establishes a health plan guaranteeing that all qualified participants can purchase MRI tests at an effective price to the individual of $100 per test. How many MRI tests are now demanded? Is the result in the market a surplus or shortage? How large is the surplus or shortage? 5. Paint and paintbrushes are complement goods. Describe what occurs in both markets when there is an increase in the price of paint. In your explanation, be sure and describe which one is a change in quantity demanded with movement along the demand curve and which one is a change in demand with a shift in the entire demand curve: a. Explain what happens to the demand curve for paint when the price of paint increases. b. Explain what happens to the demand curve for paintbrushes when the price of paint increases. 6. Briefly explain the three tax systems - proportional, progressive and regressive. As you explain each one, also compare the relationship between marginal tax rate and average tax rate as income rises for each one