Tutors your help will be appreciated SPli 3 Transfer pricing Due to the expansion of business in Cogoland in recent years, SR Products has set up a marketing division there responsible for selling a new product The head ofce and manufacnning plant remain in the United States The company has estimated that the total cost of manufacturing in the USA and the cost of transportation of the product is given by the function 3 Q2 20Q 4 10 151 where C total cost per week in $ and (,1 units sold Ibis cost appears in the accounts of the manufacturing division The total cost for the marketing division in Cogoland is given by c Q2 14Q 20 10 151 Ibis includes the $111 per unit which is the transfer price paid by the marketing division to the manufacturing division This total cost appears in the accounts of the marketing division The revenue mction for the marketing division is estimated as R 50011 sq2 (10 1 ) where R total revenue per week in $ EL Calculate the optimal policy for the company as a whole showing the price, output and overall prots of the rm b Calculate the optimal policies for the marketing division and the manufacturing divisions assuming a transfer price of 51m showing the overall prot of the rm in each case c Calculate the optimal transfer price in order to make the optimal policies for both divisions the same as that for the company as a whole d What does the above situation imply regarding managerial strategy As with all pricingproblems discussed so far the problemcan be analysed either graphically or algebraically In this case an algebraic approach will be used 1 Who developed the concept of IS LM model a Hicks and Hansen b J M Keynes c Adam Smith d None of the above 2 When rate of interest falls, level of investment will a increase b decrease c no effect on investment d both a b 3 The curve which shows different equilibrium levels of national income with various rates of interest is called a LM curve, b IS curve c Income curve d None of the above 4 IS curve slopes a upward b downward C horizontal d vertical 5 The steepness of IS curve depends on a the elasticity of investment demand curve b the size of the multiplier c demand for money 89 Page d both a b 6 The position of IS curve depends on a rate of interest, b rate of investment, c autonomous expenditure d none of the above 7 The curve which relates the level of income with the rate of interest which is determined by money market equilibrium corresponding to different levels of demand for money is known as a IS curve b LM curve c Income curve d None of the above 3 THE SUPPLY SIDE OF THE ECONOMY AGGREGATE PRODUCTION AND FACTOR MARKETS Problem 3 1 Use the neoclassical theory of distribution to predict the impact on the real wage and the real rental price of capital of each of the following events A A wave of immigration increases the labor force B An earthquake destroys some of the capital stock C A technological advance improves the production function Problem 3 2 If a 10 percent increase in both capital and labor causes output to increase by less than 10 percent, the production function is said to exhibit decreasing returns to scale If it causes output to increase by more than 10 percent, the production function is said to exhibit increasing returns to scale Why might a production function exhibit increasing or decreasing returns to scale Problem 3 3 Suppose that an economy's production function is Cobb Douglas with parameter alpha 0 3 One way to solve B D , assume numerical values, e g Assume A 1 K 1, LO 1 and L1 1 1 3 3A What fractions of income do capital and labor receive 3 3B Suppose that immigration raises the labor force by 10 percent What happens to total output (in percent) The rental price of capital The real wage One way to solve B , assume A 1, K 1, L0 1 and L1 1 1 3 3C Suppose that a gift of capital from abroad raises the capital stock by 10 percent What happens to total output (in percent) The rental price of capital The real wage 3 3D Suppose that a technological advance raises the value of the parameter A by 10 percent What happens to total output (in percent) The rental price of capital The real wage Problem 3 4 Empirically the trend in the real wage closely tracks the trend in labor productivity Explain why Problem 3 5 A Over the past century, the productivity of farmers has risen substantially because of technological progress According to the neoclassical theory, what should have happened to their real wage B In what units is the real wage in part (a) measured C Over the same period, the productivity of barbers has remained constant What should have happened to their real wage D In what units is the real wage in part (c) measured E Suppose workers can move freely between farmers and being barbers What does this mobility imply for the wages of farmers and barbers F What do your previous answers imply for the price of haircuts relative to the price of food G Who benefits from technological progress in farming farmers or barbers Problem 3 6 (Harder) Consider a Cobb Douglas production function with three inputs K is capital (the number of machines), L is labor (the number of workers), and H is human capital (the number of college degrees among the workers) The production function is Y KV3 L''3 H Problem 3 6A Derive an expression for the marginal product of labor How does an increase in the amount of human capital affect the marginal product of labor Problem 3 6B Derive an expression for the marginal product of human capital How does an increase in the amount of human capital affect the marginal product of human capital Problem 3 7C What is the income share paid to labor What is the income share paid to human capital In the national income accounts of this economy, what share of total incomeProblem 2 2 A farmer grows a bushel of wheat and sells it to a miller for 1 dollar The miller turns the wheat into flour and then sells the flour to a baker for 3 dollars The baker uses the Hour to make bread and sells the bread to an engineer for 6 dollars The engineer eats the bread What is the value added by each person Problem 2 3 Suppose a woman marries her butler After they are married, her husband continues to wait on her as before, and she continues to support him as before (but as a husband rather than as an employee) How does marriage affect GDP How should it affect GDP Problem 2 4 Place each of the following transactions in one of the four components of expenditures consumption, investment, government purchases, and net exports 4a Boeing sells an airplane to the Air Force 4b Boeing sells an airplane to American Airlines 4c Boeing sells an airplane to Air France 4d Boeing sells an airline to a private person 4e Boeing builds an airplane to be sold next year Problem 2 6 Consider an economy that produces and consumes bread and automobiles In the following table are data for two different years Year 2000 2010 Price of an automobile USD 50 000 USD 60,000 Price of a loaf of bread USD 10 USD 20 Number of automobiles produced 100 120 Number of loaves of bread produced 500,000 loaves 400,000 loaves Problem 2 7 Abby consumes only apples In year 1, red apples cost one dollar each, green apples cost two dollars each, and Abby buys 10 red apples In year 2, red apples cost two dollars, green apples cost one dollar, and Abby buys 10 green apples 2 7a Compute a consumer price index for apples for each year Assume that year I is the base year in which the consumer basket is fixed How does your index change from year I to year 2 2 7b Compute Abby's nominal spending on apples in each year How does it change from year 1 to year 2 2 7c Using year 1 as the base year, compute Abby's real spending on apples in each year How does it change from year I to year 27 2 7d Defining the implicit price deflator as nominal spending divided by real spending compute the deflator for each year How does the deflator change from year 1 to year 2 6 THE LABOR MARKET Problem 6 1 Suppose that students look for part time jobs On average it takes 2 weeks to find a part time job, and the part time job lasts on average 12 weeks A Calculate the rate of job finding per week and the rate of job separation per week B What is the natural rate of unemployment for this population of students Problem 6 3 The residents of a certain dormitory have collected the following data People who live in the dorm can be classified as either involved in a relationship or uninvolved Among the involved people, 10 percent experience a breakup of their relationship every month Among uninvolved people, 5 percent will enter into a relationship every month What is the steady state ( equilibrium ) fraction of residents who are uninvolved Problem 6 4 Suppose that Congress passes legislation making it more difficult for firms to fire workers If this legislation reduces the rate of job separation without affecting the rate of job finding how would the natural rate of unemployment change Do you think that it is plausible that the legislation would not affect the rate of job finding Why or why not Problem 6 5 Consider an economy with the following Cobb Douglas production function Y K 3 L' The economy has 1000 units of capital and a labor force of 1000 workers A Derive the equation describing the labor demand in this economy as a function of the real wage and the capital stock B If the real wage can adjust to equilibrate labor supply and labor demand, what is the real wage In this equilibrium, what is employment, output, and the total amount earned by workers C Assume that a minimum wage of 1 dollar is imposed by Congress What happens to employment output, and the total amount earned by workers D Did the minimum wage help the working class in this example Problem 6 6 Suppose that a country experiences a reduction in productivity (A) A What happens to the labor demand curve B What is the effect on employment, unemployment and the real wage if we assume perfect competition Assume that the labor supply curve is vertical C How would this change in productivity affect employment if unions prevent the real wage from falling

Question

Tutors your help will be appreciated  SPli  3 Transfer pricing Due to the expansion of business in Cogoland in recent years, SR Products has set up a marketing division there responsible for selling a new product  The head ofce and manufacnning plant remain in the United States  The company has estimated that the total cost of manufacturing in the USA and the cost of transportation of the product is given by the function   3  Q2 20Q 4  10 151 where C   total cost per week in $ and (,1  units sold   Ibis cost appears in the accounts of the manufacturing division  The total cost for the marketing division in Cogoland is given by  c  Q2  14Q 20  10 151   Ibis includes the $111  per unit which is the transfer price paid by the marketing division to the manufacturing division  This total cost appears in the accounts of the marketing division  The revenue mction for the marketing division is estimated as  R   50011 sq2 (10 1 ) where R   total revenue per week in $  EL Calculate the optimal policy for the company as a whole  showing the price, output and overall prots of the rm  b  Calculate the optimal policies for the marketing division and the manufacturing divisions  assuming a transfer price of 51m  showing the overall prot of the rm in each case  c  Calculate the optimal transfer price in order to make the optimal policies for both divisions the same as that for the company as a whole  d What does the above situation imply regarding managerial strategy  As with all pricingproblems discussed so far  the problemcan be analysed either graphically or algebraically  In this case an algebraic approach will be used  1  Who developed the concept of IS  LM model  a  Hicks and Hansen b  J  M  Keynes c  Adam Smith d  None of the above  2  When rate of interest falls, level of investment will  a  increase b  decrease c  no effect on investment d  both a   b 3  The curve which shows different equilibrium levels of national income with various rates of interest is called  a LM curve, b  IS curve c  Income curve d  None of the above 4  IS curve slopes a upward b  downward C  horizontal d  vertical 5  The steepness of IS curve depends on    a the elasticity of investment demand curve  b  the size of the multiplier  c  demand for money 89   Page d  both a   b 6  The position of IS curve depends on    a  rate of interest, b  rate of investment, c  autonomous expenditure d  none of the above 7  The curve which relates the level of income with the rate of interest which is determined by money  market equilibrium corresponding to different levels of demand for money is known as  a IS curve b  LM curve c  Income curve d  None of the above 3  THE SUPPLY SIDE OF THE ECONOMY  AGGREGATE PRODUCTION AND FACTOR MARKETS Problem 3 1  Use the neoclassical theory of distribution to predict the impact on the real wage and the real rental price of capital of each of the following events  A  A wave of immigration increases the labor force  B  An earthquake destroys some of the capital stock  C  A technological advance improves the production function  Problem 3 2  If a 10 percent increase in both capital and labor causes output to increase by less than 10 percent, the production function is said to exhibit decreasing returns to scale  If it causes output to increase by more than 10 percent, the production function is said to exhibit increasing returns to scale  Why might a production function exhibit increasing or decreasing returns to scale  Problem 3 3  Suppose that an economy's production function is Cobb Douglas with parameter alpha 0 3  One way to solve B  D , assume numerical values, e g   Assume A 1  K 1, LO 1 and L1 1  1  3 3A  What fractions of income do capital and labor receive  3 3B  Suppose that immigration raises the labor force by 10 percent  What happens to total output (in percent)  The rental price of capital  The real wage  One way to solve B , assume A 1, K 1, L0 1 and L1 1 1  3 3C  Suppose that a gift of capital from abroad raises the capital stock by 10 percent  What happens to total output (in percent)  The rental price of capital  The real wage  3 3D  Suppose that a technological advance raises the value of the parameter A by 10 percent  What happens to total output (in percent)  The rental price of capital  The real wage  Problem 3 4   Empirically the trend in the real wage closely tracks the trend in labor productivity  Explain why  Problem 3 5  A  Over the past century, the productivity of farmers has risen substantially because of technological progress  According to the neoclassical theory, what should have happened to their real wage  B  In what units is the real wage in part (a) measured  C  Over the same period, the productivity of barbers has remained constant  What should have happened to their real wage  D  In what units is the real wage in part (c) measured  E  Suppose workers can move freely between farmers and being barbers  What does this mobility imply for the wages of farmers and barbers  F  What do your previous answers imply for the price of haircuts relative to the price of food  G  Who benefits from technological progress in farming   farmers or barbers  Problem 3 6   (Harder) Consider a Cobb Douglas production function with three inputs  K is capital (the number of machines), L is labor (the number of workers), and H is human capital (the number of college degrees among the workers)  The production function is  Y   KV3   L''3   H  Problem 3 6A  Derive an expression for the marginal product of labor  How does an increase in the amount of human capital affect the marginal product of labor  Problem 3 6B  Derive an expression for the marginal product of human capital  How does an increase in the amount of human capital affect the marginal product of human capital  Problem 3 7C  What is the income share paid to labor  What is the income share paid to human capital  In the national income accounts of this economy, what share of total incomeProblem 2 2  A farmer grows a bushel of wheat and sells it to a miller for 1 dollar  The miller turns the wheat into flour and then sells the flour to a baker for 3 dollars  The baker uses the Hour to make bread and sells the bread to an engineer for 6 dollars  The engineer eats the bread  What is the value added by each person  Problem 2 3  Suppose a woman marries her butler  After they are married, her husband continues to wait on her as before, and she continues to support him as before (but as a husband rather than as an employee)  How does marriage affect GDP  How should it affect GDP  Problem 2 4  Place each of the following transactions in one of the four components of expenditures  consumption, investment, government purchases, and net exports  4a  Boeing sells an airplane to the Air Force  4b  Boeing sells an airplane to American Airlines  4c  Boeing sells an airplane to Air France  4d  Boeing sells an airline to a private person  4e  Boeing builds an airplane to be sold next year  Problem 2 6  Consider an economy that produces and consumes bread and automobiles  In the following table are data for two different years  Year 2000 2010 Price of an automobile USD 50 000 USD 60,000 Price of a loaf of bread USD 10 USD 20 Number of automobiles produced 100 120 Number of loaves of bread produced  500,000 loaves 400,000 loaves Problem 2 7  Abby consumes only apples  In year 1, red apples cost one dollar each, green apples cost two dollars each, and Abby buys 10 red apples  In year 2, red apples cost two dollars, green apples cost one dollar, and Abby buys 10 green apples  2 7a  Compute a consumer price index for apples for each year  Assume that year I is the base year in which the consumer basket is fixed  How does your index change from year I to year 2  2 7b  Compute Abby's nominal spending on apples in each year  How does it change from year 1 to year 2  2 7c  Using year 1 as the base year, compute Abby's real spending on apples in each year  How does it change from year I to year 27 2 7d  Defining the implicit price deflator as nominal spending divided by real spending  compute the deflator for each year  How does the deflator change from year 1 to year 2 6  THE LABOR MARKET Problem 6 1  Suppose that students look for part time jobs  On average it takes 2 weeks to find a part time job, and the part time job lasts on average 12 weeks  A  Calculate the rate of job finding per week and the rate of job separation per week B  What is the natural rate of unemployment for this population of students  Problem 6 3  The residents of a certain dormitory have collected the following data  People who live in the dorm can be classified as either involved in a relationship or uninvolved  Among the involved people, 10 percent experience a breakup of their relationship every month  Among uninvolved people, 5 percent will enter into a relationship every month  What is the steady state ( equilibrium ) fraction of residents who are uninvolved  Problem 6 4  Suppose that Congress passes legislation making it more difficult for firms to fire workers  If this legislation reduces the rate of job separation without affecting the rate of job finding  how would the natural rate of unemployment change  Do you think that it is plausible that the legislation would not affect the rate of job finding  Why or why not  Problem 6 5  Consider an economy with the following Cobb Douglas production function  Y   K 3   L'   The economy has 1000 units of capital and a labor force of 1000 workers  A  Derive the equation describing the labor demand in this economy as a function of the real wage and the capital stock  B  If the real wage can adjust to equilibrate labor supply and labor demand, what is the real wage  In this equilibrium, what is employment, output, and the total amount earned by workers  C  Assume that a minimum wage of 1 dollar is imposed by Congress  What happens to employment  output, and the total amount earned by workers  D  Did the minimum wage help the working class in this example  Problem 6 6  Suppose that a country experiences a reduction in productivity (A)  A What happens to the labor demand curve  B What is the effect on employment, unemployment and the real wage if we assume perfect competition  Assume that the labor supply curve is vertical  C How would this change in productivity affect employment if unions prevent the real wage from falling

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Tutors your help will be appreciated. SPli}.3 Transfer pricing Due to the expansion of business in Cogoland in recent years, SR Products has set up

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