Solve the following questions please:

Multiple-Choice 1 . Picture a graph with chicken on the vertical axis and pork on the horizontal axis. Larry's indifference curves are vertical. This implies that he a. receives no satisfaction from pork. b. receives no satisfaction from chlcken. c. dislikes pork. d. dislikes chicken. 2. Wrestling tickets sell for $10 and stock car race tickets sell for $20. Suppose that Billy Bob, whose preferences satisfy all the usual assumptions, buys five wrestling tickets and two stock cat race tickets each month. With thls consumption bundle, his marginal rate of substitution of wrestling matches for stock car races is 3. Which of the following is correct? a. Billy Bob could increase his utility by buying more wrestiing tickets and fewer stock car race tickets. b. Billy Bob could increase his utility by buying more stock car race tickets and fewer wrestling tickets. c. Billy Bob is at an interior solution and is maximizing his utility. d. Billy Bob is at a corner solution and is maximizing his utility. 3. Ginny must spend her entire income on sunscreen and Silty Putty and chooses to spend it all on sunscreen. buying ten bottles. Which of the following statements mosrbe true? a. she considers Silly Putty to be a bad. b. the first unit of Silly Putty must have zero marginal utility. c. the first unit of Silly Putty must generate less utility than the tenth bottle of sunscreen. d. the first unit of Billy Putty must generate less utility per dollar than the tenth bottle of sunscreen. Fill-In 4. If Gaston's marginal rate of substitution for two goods Is the same, no matter how much of each good he buys, then the two goods must be 5. Indifference curves are convex to the origin because of marginal rates of substitution. Tme-FalseArnblguous arid Explain Why 6. People's Indifference curves for oatmeal and caviar are parallel to one another. 7. If you know the slope of the budget constraint for two goods, then you know the prices of the two goods. 3. Derek likes one scoop of chocolate ice cream better than one scoop of vanilla ice cream and one scoop of vanilla ice cream better than one scoop of strawberry ice cream. Therefore, he will like one scoop of chocolate ice cream betterthan one scoop of strawberry ice cream. 9. Both Turns and Rolaids will cure David's heartburn, and he regards them as perfect substitutes. Therefore. his indifference curves will be linear with a slope of 1. Shoo-Answer 10. Rose loves to eat eggs, but they make her break out in a rash. Luckily, two capsules of Rash- B-Gone per egg are a perfect antidote. Rose has budgeted $5 for eggs and RashaB-Gone this month. The cost of an egg is 10 cents and the cost per Ras hBBone tablet Is 20 cents. Rose will, therefore, buy how many eggs and how many capsutes of RashBGone? 11. Jonathan likes Playstatlon games {P} and Hot Pockets {H}. Playstation games cost $40. Hot Pockets cost $2. donathan's monthly budget for these items is 31 [it]. and his utility function is. UfP. H) = P'H'\". Find Jonathan's utility-maximizing bundle and his level of utility. 12. Caitlin likes to go to the mall to buy sandals {3} and handbags [H]. Her utility function is U[S. H} = smH'\". The price of sandals is $1 a. and the price of handbags is 54o. How much money should Caitlin bring with her if she wishes to receive a utility level of 16 from her trip to the mall? 4. (a) Explain, with the aid of an example, each of the following terms: Derived Demand Transfer Earnings . Supply Price Economic Rent. (20) (b) (i) Outline two economic characteristics of "land". (ii) Discuss three economic factors which influence a firm's decision on where to locate its operations within Ireland. (25) (c) (i) State and explain three factors that caused the price of residential property to fall considerably in Ireland in the years following 2007. (ii) Mortgage arrears (i.e. the inability to meet mortgage loan obligations) is the biggest single personal debt issue for many households. Discuss one possible economic impact of mortgage arrears on each of following: the household the banking sector the Irish Government. (30) [75 marks] Page 6 of 8 5. (a) The following table shows the level of National Income (Y), Consumption (C), Investment (1), Government Spending (G), Exports (X) and Imports (M) for 2013 and 2014. Y C G X M 2013 E80,000 E? E10,000 640,000 (100,000 (120,000 2014 E90,000 (56,000 E15,000 634,000 E1 10,000 E? Use this data to calculate the following: (Show all your workings.) The level of Consumption in 2013 (ii) The Marginal Propensity to Consume (MPC) (iii) The level of Imports in 2014 (iv) The Marginal Propensity to Import (MPM). (20) (b) "Ireland heads Forbes' list of the best countries for business." (Forbes Magazine Dec 4 2013) Discuss the economic benefits Multinational Companies (MNCs) can bring to a small economy such as Ireland. (20) (c) Economists use Gross Domestic Product (GDP) and Gross National Product (GNP) as measures of economic activity. (i) Define each of the underlined terms. (ii) Which of these terms do you consider to be a more useful measure of economic activity for Ireland? Explain your answer. (iii) Discuss three limitations of national income statistics. (35 [75 marks] 6. (a) (i) State and explain four current economic aims/objectives of the Irish Government. (ii) Outline two possible conflicts that could arise between some of these Government aims/objectives. (30) (b) Discuss arguments for and against the privatisation of state assets. (20)Exercise 6.12 Bond Portfolio Hedge using the Nelson-Siegel Extended Model We consider the Nelson-Siegel Extended zero-coupon rate function 1 - exp (- 7) 1 - exp (- ") RC (1, 0) = Bo + B + B2 exp ( - " ) 1 - exp (- 12) +B - exp 50 Problems and Solutions where R"(1, 0) is the continuously compounded zero-coupon rate at date : with maturity e. On 09/02/02, the model is calibrated, parameters being as follows: Bo BI B2 71 B3 T2 5.9% -1.6% -0.5% 5 1% 0.5 At the same date, a manager wants to hedge its bond portfolio P against interest- rate risk. The portfolio contains the following Treasury bonds (delivering annual coupons, with a $100 face value): Bond Maturity Coupon Quantity Bond 1 01/12/05 4 10,000 Bond 2 04/12/06 1.7: 10,000 Bond 3 07/12/07 4 10,000 Bond 4 10/12/08 7 10,000 Bond 5 03/12/09 5.7 10,000 Bond 6 10/12/10 5.5 10,000 Bond 7 01/12/12 4 10,000 Bond 8 03/12/15 4.75 10,000 Bond 9 07/12/20 4.5 10,000 Bond 10 |01/12/25 5 10.000 Bond 11 07/12/30 4.5 10,000 Bond 12 01/12/31 10,000 Bond 13 | 07/12/32 10,000 We consider Treasury bonds as hedging instruments with the following fea- tures: Hedging Asset Coupon Maturity Hedging Asset 1 4.5 04/15/06 Hedging Asset 2 5 12/28/12 Hedging Asset 3 6 10/05/15 Hedging Asset 4 6 10/10/20 Hedging Asset 5 6.5 10/10/31 Coupons are assumed to be paid annually, and the face value of each bond is $100. At date t, we force the hedging portfolio to have the opposite value of the portfolio to be hedged. 1. Compute the price and level, slope and curvature Sdurations of portfolio P. 2. Compute the price and level, slope and curvature Sdurations of the five hedging assets. 3. Which quantities $1, $2, $3, 4 and os of each hedging asset 1, 2, 3, 4 and 5 do we have to consider to hedge the portfolio P? 4. The parameters of the Nelson and Siegel Extended model change instanta- neously to become140 CHAPTER 8 normal. (Precise numerical answers are not nec- FIGURE 8. 1 1 essary here. In your graph, just show whether Short Answer Problem 8 (c) consumption increases or decreases but do not worry about specific numbers.) b. Draw a new graph showing the effect of an in- crease in Ms. Muffet's income if whey is an info- rior good. . Return to the initial circumstances in problem 5. Price of wine (dollars per bottle 2 Now, suppose that the price of curds doubles to $2 aunit while the price of whey remains at $1.50 per unit and income remains at $12. . Draw the budget line before and after the price change. b. Why is the initial best affordable point (label it point a) no longer the best affordable point? c. Use your graph and show the new best afford- able point and label it d. What has happened to Wine (bottles per month] the consumption of curds? d. Use your graph to illustrate the substitution and b. The price of a bottle of wine falls to $1. The income effects from the price change. Label the price of a loaf of bread remains at $1, and point created by the substitution effect b. Carolyn's income is constant at $6. Draw her new budget line in Figure 8.10. How many FIGURE 8. 10 bottles of wine does Carolyn now buy? Short Answer Problem 8 (a) and 8 (b) c. Assume that Carolyn's demand curve is linear. In Figure 8.11 draw Carolyn's demand curve for wine. FIGURE 8. 12 Wine (bottles per month) Short Answer Problem 9 Income (dollars per week) i... Income-time budget line 13 Bread (loaves per month] 12 8. Figure 8.10 illustrates Carolyn's indifference map between bread and wine. 168 a. The price of a bottle of wine is $2, and the price Leisure (hours per week) of a loaf of bread is $1. Carolyn has $6 to spend on bread and wine. In Figure 8.10 draw her budget line. How many bottles of wine does 9. In Figure 8.12 indicate the initial hours of leisure Carolyn buy? this person enjoys. Suppose that the wage rate rises so that the person moves to another of the indiffer-18. When the price of an orange falls, the income effect 22. The new consumer equilibrium is at point a. increases the consumption of oranges if oranges a. a. are a normal good. b. b. b. increases the consumption of oranges if oranges C. C. are an inferior good. d. a. c. always increases the consumption of oranges. d. always decreases the consumption of oranges. 23. When you examine the effect from a change in price while (hypothetically) changing income to keep the 19. When oranges fall in price, the substitution effect consumer on the same indifference curve, you are a. increases the consumption of oranges if oranges examining the are a normal good. a. price effect. b. increases the consumption of oranges if oranges b. income effect. are an inferior good. c. substitution effect. c. always increases the consumption of oranges. d. ceterus paribus effect. d. always decreases the consumption of oranges. 24. When the price of a normal good falls, the income Use Figure 8.7 for the next three questions. effect _ the quantity demanded and the substi FIGURE 8.7 tution effect _ the quantity demanded. Multiple Choice Questions 20, 21, 22 a. increases; increases b. increases; decreases c. decreases; increases d. decreases; decreases Tacos ( quantity per month) 25. An inferior good a. has a substitution effect opposite that of a normal good b. has an income effect opposite that of a normal good c. has a price effect opposite that of a normal good. 12 d. is one that breaks after its first use. Work-Leisure Choices 26. The substitution effect from a rise in the wage rate slices of pizza (quantity per month) a. motivates a decrease in leisure. b. motivates an increase in leisure. 20. The change in the budget line is the result of a(n) c. has the same effect on leisure as does the income a. fall in the price of a slice of pizza. effect. b. fall in the price of a taco. d. None of the above. C. increase in income. d. None of the above 27. Over the past 100 years, the quantity of labor sup- plied has decreased as wages have risen. This change 21. With the change in the budget line, the consumer's indicates that the income effect real income measured in units of tacos a. and the substitution effect have both discouraged a. definitely increased. leisure. b. definitely decreased. b. and the substitution effect have both encouraged c. did not change. leisure. d. might have changed, but it is impossible to tell c. encouraging leisure has dominated the substitut from the figure. tion effect discouraging leisure. d. has not affected the work-leisure choice