Get college assignment help at uniessay writers Suppose Yvette gives haircuts on Saturdays to make extra money. She is the only person in town cutting hair on Saturdays, so she has some market power. Assume that she does not incur fixed costs and that the only significant variable cost to Yvette in giving haircuts is her time. As she gives more haircuts, Yvette must increasingly forgo other valuable Saturday activities. For example, if she gives one haircut, she forgoes reading the paper after breakfast. If she gives two haircuts, she gives up reading the paper, sleeping an extra half-hour, and so on. Yvette’s clients are a varied group willing to pay between $20.00 and $28.00 for a haircut. Assume that Yvette cannot price discriminate-that is charge different clients different prices. If Yvette charges $28.00 per haircut, she will have one client per week; if she charges $26.00, she will have two; if she charges $24.00, three, and so forth. The following table contains data on the revenues and costs of Yvette’s haircut business as a function of her price-quantity choice. (The costs are based on the value of Yvette’s alternative activities, in dollar terms. For example, the total cost of the first reading the newspaper after breakfast.) Also, marginal profit is the additional profit Yvette earns from haircut is $4-the value Yvette places on producing more unit of output. Marginal profit is positive when a rise in output increases total profit and negative when a rise in output causes one total profit to fall Fill in the missing cells of the table and then use them to answer the questions that follow. Total Marginal Revenue Marginal Profit Price Total Cost Marginal Cost Profit Output Revenue (Dollars per haircut) (Dollars per week) (Dollars per haircut) (Dollars per haircut) (Dollars per week) (Dollars per haircut) (Haircuts per week) (Dollars per week) C 0 0 C 28.00 4.00 24.00 28.00 28.00 1 4.00 24.00 24.00 4.00 20.00 26.00 2 52.00 8.00 44.00 20.00 8.00 12.00 24.00 3 72.00 16.00 56.00 28.00 4 22.00 12.00 24.00 -12.00 5 20.00 100.00 52.00 48.00 On the following graph, use the blue points (circle symbol) to plot Yvette’s total revenue curve, use the orange points (square symbol) to plot her total cost curve, and use the purple points (diamond symbol) to plot her total profit curve. st Note: Be sure to graph from left to right, starting with zero haircuts and ending with five. Line segments will automatically connect the points. 100 Total Revenue 80 Total Cost 60 Profit 40 20 2 3 4 QUANTITY OF OUTPUT (Haircuts per week) On the following graph, use the blue points (circle symbol) to plot Yvette’s marginal revenue (MR) curve, and then use the orange points (square symbol) to plot her marginal cost (MC) curve for the first five haircuts. TOTAL REVENUE, TOTAL COST, AND PROFIT (Dollars per week) C Note: Marginal values are sometimes plotted between integers (to indicate that they represent changes incurred in moving from one integer to the next), and sometimes they are plotted directly on the integers with which they are associated. On the following graph, be sure to plot marginal valu directly on the integers with which they are associated. For example, if Yvette’s marginal cost of increasing her production from one haircut to two haircuts is x, then you would plot a point at (2, x). Line segments will automatically connect the points. 30 25 Marginal Revenue 20 Marginal Cost 15 10 0 0 2 3 4 5 6 QUANTITY OF OUTPUT (Haircuts per week) per haircut Yvette maximizes her profit by serving per week and charging If Yvette gave more haircuts than her optimal quantity of haircuts, which of the following statements would be true? Check all that apply. revenue minus total cost) would decline Yvette’s total profit (total Yvette’s marginal profit would be negative. Yvette’s marqinal revenue would be less than her marginal cost PRICE AND COST Dollars per haircut)
Chec On the basis of the three individual demand schedules below, and assuming these three people are the only ones in the society determine (a) the market demand schedule on the assumption that the good is a private good and (b) the collective demand schedule on the assumption that the good is a public good Instructions: Enter your answers as whole numbers (in the gray-shaded cells). (b) Public Demand Individual #1 Individual #2 Individual #3 (a) Private Demand ok Price Qd Price Qd Qd Price Qd Price Qd Price nt 0 $8 1 $8 1 $8 $8 nces 2 7 7 7 7 6 1 3 6 6 . 0 6 5 2 4 5 5 4 3 4 5 4 2 4 3 6 3 3 3 7 2 2 2 7 4 2 6 8
Instructions: Enter your answers as whole numbers. Demand Public Good Individual #3 Individual #2 Individual #1 Price Qd Qd Qd Price Price Price Qd 1 1 $8 $8 S8 2 7 7 7 3 1 6 4 2 1 5 4 k 5 3 4 2 4 4 4 3 3 6 3 7 4 2 7 2 2 8 8 1 1 1 nces b. Using the following supply schedule. determine the optimal quantity of this public good Quantity Supplied Price 10 $19 16 13 10 4 2 4 Optmal quansty
Instructlons: Enter your answers as whole numbers. Demand Public Good Individual #3 Individual #2 Individual #1 Price Qd Price Qd Qd Price Qd Price 1 $16 1 $16 $16 2 14 2 1 14 2 14 3 12 2 12 12 4 4 10 4 10 10 3 5 8 4 6 7 7 4 7 4 4 8 7 2 2 2 b. Use the public demand schedule above and the following supply schedule to ascertain the opt Quantity Supplied Price $20 10 18 16 14 12 2 10 Optimal auanity
Juanita owns a plot of land in the desert that isn’t worth much. One day, a giant meteorite falls on her property, making a large crater. The event attracts scientists and tourists, and Juanita decides to sell nontransferable admission tickets to the meteor crater to both types of visitors: scientists (Market A) and tourists (Market B). The following graphs show daily demand (D) curves and marginal revenue (MR) curves for the two markets. Juanita’s marginal cost of providing admission tickets is zero. ? ? Market A Market 20 20 18 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 MR D MR 0 0 3 12 15 18 21 24 27 30 0 3 12 15 18 21 24 27 30 QUANTITY (Admission tickets) QUANTITY (Admission tickets) Suppose that at first, Juanita charges the same price of $8 per admission in both markets so that the total number of admissions demanded is tickets Suppose now that Juanita decides to charge a different price in each market. To maximize revenue (and therefore, profits), Juanita should charge admission tickets per admission in Market A and per admission in Market B. At these prices, she will sell a total quantity of per day Complete the following table by calculating Juanita’s total revenue from selling in both markets under the nondiscriminatory as well as the discriminatory price policy. TotalDoro. PRICE (Dollars per ticket) co PRICE (Dollars per ticket) co. co Complete the following table by calculating Juanita’s total revenue from selling in both markets under the nondiscriminatory as well as the discriminatory price policy. Total Revenue Pricing Policy (Dollars) Nondiscriminatory Discriminatory Juanita charges price elasticity of demand. higher price in the market with a relatively a
MONETARY-FISCAL POLICY AND ECoNoMic GROWT IN AN OPEN EOONOMY MONETARY-FISCAL POLICY AND ECONOMIC GROWTH 615 government expenditures. Although it may be important to supple ment these measures by changes in specific types of taxes, govern- ment expenditures or credit conditions, the general direction of By DAVID C. SMITIn Introduction, 614.-I Equilibrium growth in an open economy, 615; change of monetary-fiscal poliey instruments has not been disputed. aggregate relationships, 615;-equilibrium growth conditions, 619.-II. Inter national economie dependence, 621;-relation of domestic to foreign growt rate, 621-role of net balance of international indebtedness, 625.-III. Mone tary-fiscal poiey and growth, 627:-role of monetary-fiscal instruments, (27;-in which international trade and capital flows are important is the alternative combinations and limits, 629.-IV. Conclusions, 632. These poliey preseriptions have been deduced, however, from elosed economy growth models. Their relevance for an economy subjeet of this paper. Canada provides an interesting example of the type of economy envisaged in the following analysis since tools Although recent aggregate growth models have not led to ver of growth theory developed for advanced economies can be used meaningful numerical estimates of the structure of eeonomie inter and the economy’s rate of economic growth is at present highly relationships, new insights into the poliey problem of maintainin dependent on growth in foreign economies, particularly in the United a high rate of reasonably stable growth have been deduced on th States. For such an economy a crucial policy question is: can reliance assumption that the models are not entirely inconsistent with eco nomie experience. Further, while the models have been differen- tiated by the emphasis placed on the role of various determinant rate of growth if the foreign long-run growth rate has fallen? Thus, of economie change, the implications for monetary-fiscal poliev whic if it is true that the recent rather low rate of growth in the United have been derived from them have not been a source of serious dis States will continue in the early 1960’s and that the Canadian rate agreement among economists. The appropriate combination of growth will tend to refleet this, what influence could the appro monetary-fiscal poliey instruments can produce, according to P. A priate use of monetary-fiscal policy instruments have in Canada on Samuelson,’ W. L. Smith,’ and A. Smithies, both employment an designed, however, to suggest only a very simple general framework income stability and a wide range of rates of growth of output for the analysis of such a question, and no attempt is made to derive Preseriptions for maintaining a higher rate of stable growth than the empirical conclusions on the basis of statistical data for a particular economy would otherwise generate have been to lower the cost and increase the availability of eredit and to increase taxes relative t on monetary-fiscal poliey tools permit a country to maintain a high preserving the recent high rate of Canadian growth? The paper is economy I am grateful to A. 8mithies for his stimulating supervision of my doetora disertation in the subjeet area of this paper and to J. M. Letiche, P. W. Bell and D. W. Jorgenson who also have offered belpful commente. Responsibility of course, reats entirely with the author. 1. A. Smithies, “Economie Fluctuations and Growth,” Econometrica Vol. 25 (Jan. 1957), p. 24n 2. P. A. Samuelson, The New Look in Tax and Fiscal Potiey,” in Federa Taz Policy for Economic Grouth and Stability, Papers Submitted by Panelist Appearing before the Subeommittee on Tax Policy, Joint Committee on th Eoonomie Report (Washington: U.S. Government Printing Office, 1955), pp. 229 34; “Full Employment versus Progress and Other Economie Goals,” in M. F Millikan (ed.), income Stabilizatien for a Dereloping Democracy (New Haven Yale University Pres, 1953), pp. 568-00 3. W. L Smith, “Monetary-Fiseal Policy and Economic Growth,” thi Journal, L.XXI (Feb. 1957), 36-55 4. A. 8mithies, The Control of Inflation,” Neriee of Economica and Stati tice, XXXIX (Aug. 1957), 272-83 I. EQUILIBRIUM GROWTH IN AN OPEN ECONOMY A. Aggregate Relationships The models which have been most amenable to analysis of the impaet of monetary-fiscal policy instruments on economic growth have been those which have added to multiplier theory essentially 5. Apart from R. F. Harrod’s brief eommente in Towards a Dynamice Eco nomice (London: Maemillan, 1954), the monetary-fiscal poliey implications of adding a foreign seetor to an aggregative growth model have not been explored, although Johnaon, Brema and Blaek have examined some of the stability and growth propertice of a system with a foreign sector. H. G. Johnaon, “Equi- ibrium Growth in an International Economy,” Canadian Journal of Economice and Political Seience, XIX (Nov. 1953), 478-500, and “Economie Expansion and International Trade,” Manchenter School of Economie and Social Studies, XXIII (1955), 95-112; H. Brems, “The Foreign Trade Accelerator and the International Tranamission of Growth,” Econometrica, XXIV (July 1956), 223-38; J, Black, “Eeonomie Expanaion and International Trade.” Reviee of Beonomic 8tudies XIII (1955-56), 204-12. See aleo, J. M. Letiche, Balance of Payments and 614 QUARTERLY JOURNAL OF ECONOMICS 616 MONETARY-PISCAL POLICY AND ECONOMIC GROWTH 617 two relationships: a relationship between investment and the output Domestie output is equal to total output for all markets minus capacity of the economy and a relationship for investment as a imports. funetion of actual output and capacity output. As a result a simple system is derived which can be analyzed for growth and stability properties, given initial conditions, the behavior of exogenous vari where X represents exports and M imports ables and various estimates of the parameters, and which ean be modified by the introduetion of discretionary poliey variables. While on whether international transfers are a credit or a debit item in the the meaningfulness of the policy implications will in turn depend balance of payments.. In the following it is assumed that these on the accuraey with which the model refleete both the interaction transfers consist only of interest and dividends (D) and are some among economie aggregates and the impact of changes in poliey proportion (d) of the net balance of international indebtedness (Z) variables, the following simple system may be viewed as charao- which may be positive or negative. teristic of recent models in which fluetuations, and therefore ratchets and the effeet of excess or under capacity, can be ruled out. Equa where N represents income and tions (1) to (6) therefore represent only a simplified version of the models used by Smithies and W. L. Smith in their analyses of growth policies. Y, C, G, X – M (7) Income is defined as being greater or less than output depending N 1,CG x, D, – M D dz Since disposable income is inereased or decreased depending upon whether D, is positive or negative, the relation between con (1) sumption and output must be amended. -e[-a)Y, D (9) C-( a)Y T-aY GY (2′) (2) (3) Over the long run there are no a priori grounds for assuming that (4) imports must be an increasing or decreasing funetion of output. The (5) actual trend will depend on both domestic and foreign demand and ()supply conditions. Apart from any change in commercial policy, it may be argued that as capacity output expands over the long run Output (Y) is equal to the summation of investment, consump- an economy will become less dependent on imports due to such tion and government expenditures while changes in full-capacity factors as economies of scale in production, greater diversification of output (Y) depend on the addition to capacity output asociated output, and a rise in the ratio of services to goods. There is, however, with the previous period’s net investment (kl,-1). Government no basis for arguing that this must always be the case. The role of expenditures as a proportion of output are () and taxes are levied many factors, including relative wage rates, technological changes, at the rate (a) on all output. Thus, investment out of profits will be available supplies of raw materials, and the relation of capacity affeeted both by credit conditions () and the tax rate, while con- output to actual output both at home and abroad, means no elear Y CG Y,Y-k sumption is a linear function of after-tax output. If international trade and capital flows are introduced, income,, 8. It will be aasumed that imports consist of unfinished goods. As Tin- bergen hae pointed out, this assumption is in a sense always correct since “practi output and expenditure cannot, however, be treated as identical. cally no article at the moment of importation is finisbed in the economie sense of the word.” J. Tinbergen, International Eeonomic Integration (Amaterdam: Elsevier, 1954), p. 83. 6. Smithies, The Control of Inflation,” op. cit.; W. L. Smith, op. cit 7. Full eapacity output as used here is Smithie’ concept: “The output that the existing stoek of equipment is intended to produce under normal working conditions with reepeet to hours of work, number of shifts and so forth.” Smithies, “Economie Fluetuations and Growtb,” op. cit., p. 8. The capacity output that would fully employ the labor force is not explieitly introduced here 9. It is assumed that the international tranafers are distributed to house- holds only. Earnings on direct investments will, of course, affeet investment, but under this aseumption will have a direct influence on investment in the country in which the direct investment was made. If ineome rather than output a taxed (2) would become C, – e-a) (Y, D). 618 QUARTERLY JOURNAL OF ECONOMICS 619 MONETARY-FISCAL POLICY AND ECONOMIC GROWT. generalization can be made. The influences on the trend are many. In the following, imports are represented by the expression M,mY but (m) may inerense or decrease over time. In the model it is elassical transfer mechanism will conceal more than it will reveal in assumed for purposes of simplification, however, that (m) is inde-economie growth. In the context of economie growth the flow of pendent of the composition of output, that is, that the import con- capital funds and of goods and services will to a large extent be in tents of output for the various demand sectors are the same. Further, the trend of imports of the foreign economy will be response not to each other but to common growth factors. Expres- subjeet to a similar variety of long-run influences, and z, the ratio sions for the two flows must thus include their dependence on common of domestic exports to foreign output, will also not necessarily be factors, on factors unique to each, and on a balancing mechanism. constant. All aggregates are expressed in domestic eurreney and No attempt is made here, however, to provide the formal nicety of units of foreign eurreney have been chosen initially so that the price an expression for capital flows and the cause and effect relationship of a unit of foreign eurrency converted into domestic eurrency by with the current account. Rather, in the analysis, capital flows are the exchange rate is equal to the price of one unit of domestie eur- introduced as a possible constraint on long-run changes in the eur- reney. Thus, abstracting from changes in relative prices, x,-zY where Y is foreign output, and X,-Y where z zY/Y, Although z may inerease or decrease and may change in the opposite direction to changes in , in the special type aetual output will tend to be in any given year can be derived. of economy assumed in this paper there is an asymmetry in the relation of the domestic and foreign economy. Changes in foreign output will affeet exports, output and imports of the domestic economy, but changes in imports of the domestic economy will not have a suffi where = Z/Y, the net balance of international indebtedness eiently significant impaet on foreign output to affect domestic exports proportion of output although the impaet on exchange rate changes and international lending must be considered. With respect to long-term capital flows, (K), it is necessary over and that balance-of-payments equilibrium is preserved without the long run that K,- M X D Under conditions of a perfeet world capital market it is possible to suggest a simple mechanism, as J. Robinson does, in which long-term capital flows will automatically adjust to changes in the eurrent (10 account balance. Yet, to do this or to suggest in its place a simple our understanding of the role of real transfers of resourees during rent account, and later the impact of monetary-fiscal policy on rela- (11) tive rates of return and costs of capital at home and abroad is con- sidered as a means of influencing the balance of payments. (12) B. Equilibrium Grouth Conditionas From (1), (2), (3), (4), (7), (9), (10), (12) an expression for what () (1- a) e(1-a de)- m (14) as a This expression assumes that domestic savings plus the net inflow of foreign savings adjusts to investment plans during a single year changes in relative prices or the exchange rate. The proportionate (13) rate of growth (R) is ) (1- a) 1 el ade)-9 m- When Y Y the expression for full-capacity output, R, (15) 1. Viner has denied the existence of any inexorable tendeney for a trend decline in the ratio of importa to output. J. Viner, The Prospects for Foreign Trade in the Post-War World,” Readings in the Theory of International Trade derived from (1), (2′), (3), (4), (6), (9), (10), (12), will be (Philadelphia: Blakiston, 1949), pp. 514-29. For an analysis of how the tendency for the United States economy to generate capaeity faster than final output has been responsible for some long-ran imbalance in world trade, see Letiehe, ep. ing international capital Bows during eeonomie growth are given by Letiche in 3. Empirical demonstrations of the need for a broader framework in analyz pp. 267-319 2. J. Robinson, The Aceumulation of Capital (Homewood, Illinois: R. D, examining British experience in the nineteenth century and by Meier in examin- ing Canadian experience during the period 1895-1913. Letiche, op. cil., pp. 234- 36, 256-58; G. M. Meier, “Economie Development and the Transfer Mechaniam: Canada, 1805-1913,” Canadian Journal ef Economics and Political Science, XIXx Irwin, 1956), pp. 380-82 MONETARY-FISCAL Policy anD BCONOMIC GROWTH 621 QUARTERLY JOURNAL OF EC ONOMICS 620 (-a d) -g m– ds]P,- Y,-[1 term capital inflow is required to maintain even the same rate of (16) growth as in the foreign economy. Yet the simple system only assists in specifying what are the conditions for steady equilibrium growth in an open economy; it (17) does not specify what the actual time path of growth and adjustments and the proportionate rate of growth (R) is R k [1 e(1 -a da) – g m – 2 – de) If initially Y. Y., capital flows are compensatory to changes in the balance of payments will be if Y diverges from Y. Thus, for in the current account, and the growth rates, (15) and (17), are equal, steady equilibrium growth the rate of growth in the domestic economy then, in the absence of shocks to the system, steady equilibrium must bear a specifie relationship to the foreign rate of growth and this growth will occur. The stability and value of some of the parameters relationship will depend upon the behavior of z and m. Sinee the net will depend, however, on initial conditions and the rate of growth balance of trade must remain a constant proportion of domestic of the foreign economy and on initial conditions and the rate of output under conditions of steady equilibrium growth this means growth of the net balance of international indebtedness. For instance, let us assume arbitrarily that foreign output (y#) elasticity of demand for imports in the domestie and foreign econ- is growing at the rate h 1 and that Y UN where U represents omies must be equal. If m and z are treated as constants, the initial conditions. The solutions of the difference equations (14) output elasticities of demand for imports are each equal to unity in and (16), where B and B, are determined by initial conditions, equal, but this is a special case. In addition, for steady equilibrium dc(l – a ds), and e = () (1-a), are respectively that the products of the rate of growth of output and the output the two economies and the two rates of growth of output must be growth in an open economy, the ratio of income to output must be у.- в. (; — hz h (1- m)- (18) constant which means that, if net international interest and dividend transfers are not initially equal to zero, net long-term capital flows cannot initially be equal to zero and the current account balance as a proportion of output must be constant. It is necessary to analyze d- m) Y,- E, 1k(1d m-d)) kr 9) more elosely therefore what happens when the rigorous conditions h-(1 k) (1- m – de) If exports are a constant proportion of foreign output and imports are not all met. are a rather high and constant proportion of domestic output there will be a strong tendeney for the rate of growth of actual output to converge to that of foreign output as t increases, since, for high values A. Relation of Domestic to Foreign Grouth Rate of m, I e-m will usually be greater than in (18) and since with a positive or zero proportionate rate of growth in the foreign relationships among parameters must be eonsidered in examining economy h (1 d -m)-will be positive. Further, certain the dependence of the domestic growth rate on the foreign growth struetural relations necessary for equilibrium growth in the domestic rate. If we abstract at this point from the role of fiscal and monetary economy can be deduced from (19). First, on economic grounds it is authorities and relate exports explicitly to foreign output (y), the reasonable to assume that 1 k (1 – e- m- da) will usually be condition for steady equilibrium growth, the equality of (15) and greater than 1 but if Y is not ultimately to decline 1 -k(1-e-m-de) (17), can be summarized as must be greater than h Secondly, if k (1 – e) is smaller (larger) for the domestic economy than for the foreign economy, the required net eapital inflow (outflow) can be specified. This provides a familiar 1- e-cdz m conclusion. If the produet of the marginal capital-output ratio and the savings ratio is low relative to the foreign eeonomy, a net long- initially steady equilibrium growth which, of course, is not necessarily 4. If in (19), A 1 k a-e m-de), another particular solution for the difference equation must be tried. In this case a complete solution is: II. INTERNATIONAL EconoMic DEPENDENCE Not only the implications of the model itself but also the inter- (20) If it is assumed that the domestic economy is experiencing 8. Johneon, “Equilibrium Growth in an International Economy,” ep. cit, p. 493 m-d-Uw- .-E 622 QUARTERLY JOURNAL OF ECONOMICS MONETARY-FISCAL POLICY AND ECONOMIC GROWTH 623 at a rate equal to that of the foreign economy, depending on the out- would not be any different in an open economy than in a elosed put elasticities of demand for imports, a crucial question is the effect economy. While the absence of prices in the model severely limits on the domestic growth rate of a change in the foreign growth rate. its usefulness for a discussion of this question, I suggest that the If a fall in the foreign long-run rate of stable growth oceurs, the eonditions which are necessary for an economy to insulate its growth domestic economy is likely to be faced with a fall in the rate of growth rate solely by exchange rate depreciation are unlikely to be met and of exports, a fall in the rate of growth of output relative to full that there will be limits on the speed and size of exchange rate capacity output, and an import balance that causes balance-of depreciation. Neither of these propositions deny, however, that payments difficulties. Yet, there may be a number of adjustments occasional adjustments of the exchange rate can be useful in con- which will maintain internal and external balance and which will junetion with other domestic growth instruments for maintaining reduce the fall in the rate at whiech actual output in the domestic a country’s growth rate. economy tends to grow and therefore will reduce the extent to which the rate of growth of full-capacity output must fall. If decisions to invest are not greatly influenced by the state of there will be a fall in the rate of growth of total demand for output export markets or if a fall in investment reduces business saving and of the domestic economy. Under conditions of stability in the foreign the value of the multiplier, the deeline in the rate of growth of Y will not be so great. This requires the further assumption that the exchange market exchange depreciation will, on the one hand, tend fall in the foreign growth rate leads to a sharper deeline in the to offet, at least partially, the effect of a slower rate of growth in the marginal efficieney of investment in the foreign economy than in the foreign economy on the rate of growth of total demand for output domestic economy and that an inerease in the net eapital inflow or in the domestie economy. Deprecintion in the long run will lead decrease in the net capital outflow occurs. If this aseumption does to a rise in the price of imports in terms of domestic eurrency and not hold true, the decline in the domestic rate of growth still need to a faster rate of growth of demand for the output of import-com not be so great as that of the foreign economy. As exporte fall excess Peting industries. At the same time, the rate of growth of total eapacity will emerge, and, on the one hand, if excess capacity leads demand will be partly sustained by the effect of depreciation on to the production of goods formerly imported, the output elasticity increasing the ratio of the volume of exports demanded to foreign of demand for imports will fall while, on the other hand, if excess output. While depreciation will therefore tend to sustain the rate Capacity leads to more intensive efforts of domestic producers in the of growth of demand for output, it will on the other hand, tend to export markets the foreign output elasticity of demand for imports reduce the proportion of resources available in the domestie economy may rise. Such an occurrence may not be unlikely. Further, trends for sustaining the rate of growth of full-capacity output. This in produetivity and wages in export- and import-competing industries follows from the assumption that savings will be related to real or changes in the relative importance of various demand seetors for income and that the ratio of real income to output will fall as more which the output has different import contente, may lead to a similar units of output must be exchanged on the foreign market for a unit of result If there is a fall in the foreign rate of growth may it not be domestie economy’s growth rate must adjust downwards. possible, however, to maintain the domestic rate of growth and to avoid any long-run tendency for trade imbalance by continual shift in favor of the depreciating country, if changes in the distribu- depreciation of the exchange rate over the long run? If it is true tion of income lead to a shift in the consumption funetion or if net that a country can insulate itself from the effects of a fall in the foreign savings are attracted. The posibility of a favorable rather foreign long-run rate of growth of output by means of exchange than adverse shift in the terms of trade appears to be remote, how depreciation, then the problem of appropriate monetary-fiscal poliey ever, for the type of eeonomy envisaged in this paper for which . The effecet of excess capacity on importa and exports will be differeat, neither the import nor export long-run supply curves are regarded of course, if excess capacity is emerging in the foreign economy. Let us assume that there are no net international flows of capital and that as a result of a fall in the foreign rate of growth of imports imports. A fall in the ratio of savings to output will mean the Exceptions to this conclusion may occur if the terms of trade 7. Johnson, “Equilibrium Growth in an International Eeonomy,” op. cit, pp. 403-800 624 QUARTERLY JOURNAL OF ECONOMICS MONETARY-FISCAL POLICY AND BCONOMIC GROWTH 625 as being very price inelastic. With respect to shifts in the consump These adjustments will at the same time permit an upward adjust- tion function, profits in import-competing and export industries ment in the rate of growth of full-capacity output, although the may lead to some shift in income from wages and salaries to profits change in the rate of stable growth is not so great as in that of the and cause, as a result, a rise in the ratio of savings to real income, but foreign economy. in the absence of poliey intervention, it is doubtful that this effect can be expected to be very important in sustaining the ratio of sav growth to inerease by more than the foreign rate. If domestie invest- ings to output. A more interesting possibility is that with deprecia ment is closely linked to the state of export markets, there may be a tion tending to sustain the rate of growth of demand for total output tendeney for actual output to expand more rapidly than in the foreign the marginal efficieney of investment in the domestic economy rela economy despite a falnl in the value of the multiplier. At the same tive to the foreign economy will rise and net foreign savings will be time that exports, investment and output are rising, interrelated attracted to the domestic economy, thereby compensating for a forces may lead to a rise in imports relative to exports as a result of decline in the ratio of domestic savings to output. For this to occu higher import contents in the more rapidly expanding production the capital inflow in search of higher profits from investment must sectors or ehanges in relative prices, to a rise in foreign capital inflows exceed the speculative outflow of eapital in response to expectations as a result of higher marginal rates of return on capital in the domestic of further depreciation of the exchange rate. Speculative capital economy relative to the foreign economy, and to a general rise in the flows will mean there is a limit on the speed and extent to which a private saving ratio. Thus, in response to an improved growth rate country can permit its exchange rate to depreciate over the long run abrond, the rate of growth of capacity output and actual output may and controls over capital flows will not solve this problem sine rise by more than the rise in the foreign growth rate. speculation can occur in the goods market. Another limiting factor may be the effect of exehange depreciation on income distribution foreign rate of growth need not lead to a proportionate change in the For example, in an economy in which businesses and government ate of domestic growth, and the actual time path of growth in the must make large interest payments, fixed in terms of foreign eur domestic economy will depend on a series of adjustments not explicitly reney, on foreign indebtedness, the real burden of foreign debt and included in the model. The central argument, however, remains the its effect on insolveney will tend to limit the extent of exehange depre same. For the type of economy envisaged in this paper, a change in ciation. Finally, with respect to the inflow of foreign eapital in searet the foreign growth rate will have the effet of ehanging the domestio of higher profits from investment, exchange depreciation alone may growth rate in the same direction. not, from the standpoint of the individual foreign investor, increas B. Role of Net Balance of International Indebtedness the marginal efficieney of investment in the domestie economy relative to the foreign economy unless there are expeetations that other policy measures will be taken to maintain the growth rate ir be influenced by factors which do not enter into the balance of pay the domestic economy. The appropriate use of other policy instru mente such as the flow of labor, ideas and technology. Thus, ments therefore must usually be considered Only a fall in the foreign long-run growth rate has been con in the foreign economy. In particular, continuous net capital inflows, sidered. If, on the other hand, there is a rise in the foreign rate o especially of the direct investment type, will usually have some effect stable growth, output will rise relative to full-capacity output and in making parameters, such as v, partly dependent on parameters exports will rise relative to imports. The long-run tendeney fo in the foreign economy. The existence of a continuous capital inflow inflation may be correeted at the expense of the rate of growth o to maintain steady equilibrium growth would therefore serve to make output not increasing so rapidly as in the foreign economy. Fo the domestie growth rate even more dependent on the foreign growth instance, the value of the multiplier may fall as the rate of busines rate 8aving rises due to higher profits and pressures on capacity may als Canadian eonomie experienee during 1900-1913 and in recent post-World serve to encournge imports and restrict the expansion of exporte War 11 yoare It is, of course, also possible for the domestic rate of stable As in the case of a fall in the foreign rate of growth, a rise in the The relation between the domestic and foreign growth rates will Some of the parameters of the model may be directly related to parameters 8. This type of response is a erude but not entirely unrealistie mummary of 626 QUARTERLY JOURNAL OF ECONOMICS MONETARY-FISCAL POLICY AND ECONOMIC GROWTH 627 It has long been a tenet of economic growth theory, however, change in the balance of trade of a debtor or of a creditor nation, that a continuous net capital inflow will not occur. An economy’s but it does not show how an economy moves from a debtor to a economic relations with the foreign economy have been viewed tradi- creditor position tionally as moving through systematic stages which alter its trade balance, eurrent account balance, debtor ereditor status and there- to a creditor position-a theory which may have an important fore the relation of income to output. The bases for this view, how- bearing on the type of domestic policy pursued-must be based on ever, appear to arise sometimes from an analysis of the relation of arguments which require that the structure of the model changes in the rate of growth of interest and dividend payments on foreign debt a predictable manner. Thus, Marshall argued that as a country relative to the rate of growth of international capital flows (inelusive develops “she may beeome rich enough to provide the capital needed of amortization payments) and sometimes from an analysis of changes for most of her own enterprises: and then the payment of interest in the economie strueture during growth In the case of the former, if the new capital inflow is a constant exports relatively to her imports.”” This suggests two possibilities percentage of domestic output and amortization payments are a As real income per capita increases, the rate of savings per capita constant percentage of the new capital inflow, the capital inflow increases. As the capital “overhead” of a country increases, less (net of amortization payments) will be a constant percentage of ndditional capital is required per unit inerease of output capacity. output and will be increasing at a rate of growth equal to output. Thus, as (s) and (k) increase, the capital inflow may decline and On the other hand, if the rate of net interest and dividend payments on the net balance of international indebtedness is greater than the be maintained. The theory, however, that these adjustments must rate of growth of the net capital inflow, then, given initial conditions oeeur and that a country’s state of development can be determined of a net capital inflow and a deficit on balance of trade, a surplus on the facts, and the net balance of international indebtedness may be balance of trade must emerge over time. With a rise in exports an important factor in the selection of the appropriate combination relative to imports the depressing effect on the rate of growth of of instruments in growth poliey output relative to the rate of growth of capacity of the more rapid rate of growth of interest and dividend payments will be at least partially offset. Reasoning on the basis of the compound interest A. Role of Monelary-Fiscal Instruments formula can reveal what empirical conditions are necessary for a The stage theory that a country inevitably moves from a debtor on the capital, borrowed in her early phase, will tend to inerease her become a capital outflow while fairly stable equilibrium growth could on the basis of the extent of these adjustments does not always fit II. MONETARY-FISCAL POLICY AND GROWTH While the model indicates that changes in the foreign growth 9. C. P. Kindleberger, International Economics (Homewood, Ilinois: R. D. Irwin, 1955), pp. 367-71. 8. Enke and V. Salern, Inlernational oonomice (New rate will lead to changes in the same direetion of the domestic growth York: Prentice-Hall, 1951), pp. 501-6. 1. See, especially, E D. Domar, The Effect of Foreign Investment on the instruments widen the limits within which the domestie rate of Balanee of Paymente,” American Economic Reviee, XL (Dee. 1950), 805-26; equilibrium growth can differ from the foreign? R. Hinsbaw, Foreign Investment and American Employment,” American Economic Revien, Papers and Proceedings, XXXVI (1946), 661-71; and W. S. Salant, The Domeetic Effeets of Capital Export under the Point Four Program,” Amerioan Economie Rerieu, Papers and Proceedings, XL (1950), 495-510. 2. From the model if z is the net balance of international indebtedneas, In this schema Canada would be clasified as having reverted to the earliest Dis the net payment of interest and dividends, d is the rate at which interest and stage of economie development due to ita defieits on balsnee of trade and large dividends are paid, K is the net capital inflow (including amortization) and w is net eapital inflows since 1950, even though ita income per eapita is second only the rate at whieh Z is growing due to reinveetment of profita in direet investments, to that of the United States and its rate of private saving slightly higher. A then D,- dz,- and K,-2,- 2,–w2, . With initial conditions of a poliey of lowering the growth rate or of affeeting the rate of saving would alter deficit on balance of trade and a net eapital infow, a surplus on balance of trade ta elaseification. Not only may atage of development become a rather meaning must emerge if rate, to what extent can the appropriate use of monetary-fiscal poliey 3. Marhall, Money, Credil and Commerce (London: Macmillan, 1929), p. 112. 4. Kindleberger provides a schema, based on the balanoe of payments, for elassifying countries according to stage of development. Kindleberger, loc. eit. s term in such a schema, but also it is clearly poseible for a country to move from a mature debtor, as Canada was in the 1930’s and 1940’s, to an immature debtor -> 1 where re – 2-2,-1. 2-1 d MONETARY-FISCAL POLICY AND ECONOMIC GROWTH 629 628 QUARTERLY JOURNAL OF ECONOMICS If the policy instruments available are confined to the tax rate (a), of stable growth in an open economy will be less serious than if the rate of government expenditures (g), and the cost and availability long-term capital flows are insensitive to these instruments, but the of capital (), the impact of changes of these instruments on domestic appropriate combination of instruments may then be quite different investment, the value of the multiplier, the resources available for than in a elosed economy expansion of capacity and the balance of payments must be con- sidered. In terms of a elosed economy, inereasing the rate of growth output is K/Y-ai- Ba and the current account adjusts to the of full-capacity output requires an inerease in domestic investment long-term capital account, (15) and (17) may be rewritten, where through lowering the tax rate or the interest rate. At the same time, , e, a, B and k are assumed to be constant for the sake of simplicity to maintain equilibrium between output and capacity an increase in resources available for investment must occur through raising the tax rate or lowering government expenditures, actions which in turn would reduce the value of the multiplier. The work, in particular of Smithics and w. L. Smith, has led to certain rules with respect to the impact of monetary-fiscal poliey instruments on the rate of B. Alternative Combinations and Limits stable growth. With a given allocation of resources between the If an expression for long-term capital inflows as a proportion of P(i) (1 = a) 1-(1-a de)-9 ai – Ba de k -e( -a dz’) -g ai – Bal (21) Several general conclusions follow from (21). As in the case of a private and publice sectors, that is, with a given rate of government elosed economy, monetary poliey cannot be used alone to maintain expenditures, an inerease in the rate of equilibrium growth requires a higher rate of growth in the domestic economy than in the foreign an increase in the tax rate and a decrease in the interest rate; with economy. Also, changes in the size of a balanced budget will affect a given tax rate a lower rate of government expenditures and a lower the rate of growth of full-capacity output in an open economy. For interest rate are required; with a given interest rate a lower tax rate a elosed economy, abstracting from the direct effeet of some govern- and a still lower government expenditure rate are required. To avoid awkward boundary conditions, either economic, legislative or adminisment expenditures on the expansion of capacity, W. L. Smith’ has trative, there is thus a tendency to favor using all three instruments shown that a rise in the size of a balanced budget will mean less so that a lower interest rate and an inerease in the tax rate relative abeorbed by higher government expenditures. In an open economy resources are freed from consumption by higher taxes than are to the rate of government expenditures will occur. These conclusions do not necessarily hold for an open economy. this effect is likely to be inereased due to the impact of higher taxes Also, the range within which monetary-fiscal policy instruments can on the net inflow of foreign resources. The problem of reconciling be used alone to achieve a target growth rate different from that of 8ociety’s preferences for the appropriate allocation of resources be- the foreign economy may be severely restrieted. A serious constraint tween the publie and private seetors and maintenance of a high rate is imposed by the problem of maintaining balance-of-payments equi- of growth with a balaneed budget may therefore be more serious in librium which will depend partly on the relative rates of growth at an open economy. Finally, from (21) it ean be shown that various home and abroad. At the same time, if long-term international combinations of monetary-fiscal policy instruments to affect the rate capital flows are a function of the tax rate and credit conditions in the of equilibrium growth are possible and may be different for an open domestic economy relative to the foreign economy, this constraint economy than fora closed economy. on the use of monetary-fiscal poliey instruments for affeeting the rate There is no a priori basis for suggesting in which direction one 5. W. L 8mith, ep, eit.; A. Smithies, “The Control of Indation” op, ci., policy instrument should be moved to affect the growth rate if the pp. 272-83. In this paper the problem of how poliey instrumente must be adjusted direction of change of the other poliey instruments has not been if full employment of the labor force does not occur is not explicitly considered. 6. Inereasing the arsenal of poliey inetrumente such as by adding seleetive pecified. Thus, if, as a result of a fall in the foreign growth rate, eredit eontrola and ehanges in the structure of taxes and government expenditures the domestic growth rate has fallen, several alternative combinations pp. 277-82 growth rate. If the rate of government expenditures remains con- 7.Op. cil, pp. 50-51. 630 QUARTERLY JOURNAL OF ECONOMICS MONETARY-FISCAL PoLICy AnD ECONOMIC GROWTH 631 stant, the interest rate may be raised and the tax rate lowered. The tions may be set to influence the appropriate long-term capital flow reduetion in the tax rate can be used to offset the deterrent to invest- for balance-of-payments equilibrium, and a lowering of the tax rate ment from tighter credit conditions while action to raise interest and an even greater fall in the rate of government expenditures used rates and lower tax rates ean be used to attract foreign resourees for to maintain a higher growth rate. investment and thereby offset a decline in available resourees due to changes in the rate of consumption. Asymmetry in the impact of growth cannot be specified until the nature of fiscal policy has also changes in different poliey instruments on the various sectors may been specified, the limits within which any combination of monetary- call for unrealistically large changes in a policy instrument, but the fiscal poliey instruments can affect the growth rate will be determined extent to which a poliey instrument must be changed can be decreased in an open economy by the extent to which these instruments can if more poliey instruments are introduced, suech as variation in the control the balance of payments. The problem is an empirical one. tax strueture and use of specific credit controls. Alternatively, how- For a country sueh as Canada where international capital inflows ever, the interest rate may be lowered and the tax rate increased to have been sensitive to domestic eredit and tax conditions, control maintain a higher rate of growth if e > B. In this case, easing of of the balance of payments by monetary-fiscal policy during economie credit conditions is used to affect investment incentives and a higher growth may be easier than for many other countries. In general, tax rate to free resources from consumption expenditures. In this however, postwar experience has shown that the use of monetary second case, consumption standards have to be eurtailed, but, in poliey has not in most cases helped very greatly in solving balance-of- comparison with the first case, interest and dividend payments abroad payments problems during economie growth. Whether this is the will not inerense so much and the ratio of income to output will be result of not using the tools of monetary policy sufficiently effectively greater. The possibility of alternative courses of action means that or whether more direct measures to control the balanee of payments if monetary authorities are attempting alone to affeet the growth that in most cases, however, even the most vigorous use of monetary rate they will be faced with a serious dilemma. In both of the above cases changes in the rate of government fiscal policy will not provide very much leeway for pursuing an inde- expenditures may also be used to offset more efficiently the effect pendent growth rate in an open economy of a decline in the growth rate. Thus, in order to free more resources for expansion of capacity it may be important in both cases to eurb of tariffs, import eontrols or periodie exehange rate devaluations may While an appropriate monetary poliey for promoting economie are necessary is a question in which more research is needed. I feel In the face of a fall in the foreign long-run growth rate, the use the rate of government expenditures, or rather those government therefore provide the only means by which a country can control its expenditures which do not inerease capacity output. If the tax rate balance of payments while attempting to maintain its former growth is fixed or if the eurrent account balance does not adjust readily to rate. The impact of these instruments on the structure of the econ- changes in long-term capital flows, changes in the rate of government oy requires, however, further investigation and a more elaborate expenditures must be used. For instance, if the eurrent account model than is offered here. For instance, Harrod is ineorrect in balance is independent of the long-term capital account eredit condi- arguing that in contrast with eyclical problems it is always the bal- ance, not the volume, of trade that is important in growth poliey.
compare and contrast the new and old field of comparative economics. Why does the field of comparative economics have shifted? 3-4 paragraph
Individual Taxpayers If Taxable Income Is Between: The Tax Due Is: 0 $9,525 10% of taxable income $9,526-$38,700 $952.50 12% of the amount over $9,525 $4,453.50 22% of the amount $38,701- $82,500 over $38,700 $82,501- $157,500 $14,089.50 24% of the amount over $82,500 $32,089.5032% of the amount over $157,500 $157,501 – $200,000 $200,001 $500,000 over $200,000 $45,689.5035% of the amount $150,689.5037% of the amount over $500,000 $500,00
Consider the daily market for hot dogs in a small city. Suppose that this market is in long-run competitive equilibrium, with many hot dog stands in no market power. the city, each selling the same kind of hot dogs. Therefore, each vendor is a price taker and possesses one The following graph shows the demand (D) and supply (S MC) curves in the market for hot dogs = Place the black point (plus symbol) on the graph to indicate the market price and quantity that will result from perfect competition. Note: Dashed drop lines will automatically extend to both axes Perfect Competition 5.0 4.5 PC Outcome 4.0 3.5 3.0 2.5 2,0 S MC 1.5 1.0 0.5 0 0 0 0 0 1 50 18 240 270 300 QUANTITY (Hot dogs) Now suppose that one of the hot dog vendors successfully lobbies the city council to obtain the exclusive right to sell hot dogs within the city limits This firm buys up all the rest of the hot dog vendors in the city and operates as a monopoly. Assume that this change doesn’t affect demand and that the new monopoly’s marginal cost curve corresponds exactly to the supply curve on the previous graph. Under this assumption, the following graph shows the demand (D), marginal revenue (MR), and marginal cost (MC) curves for the monopoly firm. Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price and quantity of a monopolist. PRICE (Dollars per hot dog) Monopoly 5.0 4.5 Monopoly Outcome 4.0 3.5 3.0 2.5 2.0 MC 1.5 1.0 0.5 D MR 0 0 30 60 90 120 150 180 210 240 270 300 QUANTITY (Hot dogs) In the following table, enter the price and quantity that would arise in a perfectly competitive market; then enter the profit-maximizing price and quantity that would be chosen if a monopolist controlled this market. Price Quantity (Dollars) (Hot dogs) Market Structure Perfect Competition Monopoly Given the summary table of the two different market structures, you can infer that, in general, the price is lower under a and the quantity is lower under a This analysis assumes that the demand for hot dogs remains unchanged under both market structures. This need not be true because the monopoly may seek to: Influence the demand curve through advertising Shift the demand curve inward PRICE (Dollars per hot dog)
Web Slinger is an Internet service provider. In the long run, Web Slinger can provide Internet service for 20,000 homes each month at a total cost of $800,000, Internet service for 30,000 homes at a total cost of $900,000, or Internet service for 40,000 homes at a total cost of $1,000,000 Use the purple points (diamond symbol) on this graph to plot points of the long-run average cost curve at outputs of 20,000, 30,000, and 40,000 homes. Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically ? 50 Average Cost 40 30 20 10 40 50 10 20 30 HOMES SERVED (Thousands) Suppose that Web Slinger provides Internet service for all 40,000 homes that purchase Internet service in the metropolitan area. This situation can best be characterized as: A natural monopoly Decreasing returns to scale AVERAGE COST (Dollars per home per month) S
Get college assignment help at uniessay writers Please list a good or service (not mentioned in the textbook) that resembles a perfectly competitive market. How do they fit, or depart from, the models? Please remember to respond to your classmates’ posts.
Consider the following scenario to understand the relationship between marginal and average values. Suppose Andrew is a professional basketball player, and his game log for free throws can be summarized in the following table. Fill in the columns with Andrew’s free-throw percentage for each game and his overall free-throw average after each game. Game Free-Throw Percentage Game Result Total Average Free-Throw Percentage Game 6/8 6/8 1 75 75 2/8 8/16 2 2/4 10/20 3 8/10 18/30 4 8/10 26/40 5 On the following graph, use the orange points (square symbol) to plot Andrew’s free-throw percentage for each game individually, and use the green points (triangle symbol) to plot his overall average free-throw percentage after each game. Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically (? 100 90 Game Free-Throw Percentage 80 70 Average Free-Throw Percentage 60 50 40 30 20 10 0 2 3 4 F GAME FREE-THROW PERCENTAGE C You can think of the result in any one game as being Andrew’s marginal free-throw percentage. Based on your previous answer,, you can deduce that when Andrew’s marginal free-throw percentage is below the average, the average must be You can now apply this analysis to production costs. For a U-shaped average total cost curve, when the marginal cost curve is below the average total cost curve, the average total cost must be Also, when the marginal cost curve is above the average total cost curve, the average total cost must be Therefore, the marginal cost curve intersects the average total cost curve
Suppose that a worker’s tastes for consumption c and leisure l can be represented by the utility function u(c, ) c” l1- , where 0
Musashi owns and operates a hot dog stand in downtown Chicago. In order to operate his hot dog stand, regardless of the number of hot dogs sold Musashi must purchase a permit from the local government in Chicago. Musashi’s initial profit hill is plotted in green (triangle symbols) on the following graph Suppose the price Musashi must pay for a permit increases by $80 per day. On the following graph, use the purple diamond symbols to plot Musashi’s new profit hill, for 0, 10, 20, 30, 40, 50, 60, and 70 hot dogs, after the increase in the price of a permit (with all other factors remaining constant) Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically 400 350 New Profit Hill 300 250 200 150 100 50 Initial Profit Hill -50 -100 -150 -200 10 20 30 40 50 60 70 80 QUANTITY (Hot dogs per day) Based on the graph, you can tell that Musashi initially faces a fixed cost of $ per day Initially, Musashi’s profit-maximizing level of output is hot dogs per day hot dogs per day. After the price of a permit rises, Musashi’s profit-maximizing level of output is TOTAL PROFIT (Dollars per day)
A firm’s Cobb-Douglas production function for output x is f(l,k)= 25/5k5, where / (labour) and k (capital) 9. are variable inputs costing w (wage rate) and r (rental cost of capital) each per unit (a) Follow the two-step (indirect) method’ and begin by setting up the firm’s cost- minimisation problem and deriving the three first-order conditions (FOC8) (4 marks) 2(wr)2 x2 (where, to be clear, (c) The cost function derived from the FOC8 above is c(w,r,x) 3125 1 5 the fractions are and exponents). From this function, derive the firm’s MC and AC functions (4 marks) (3 marks) equation for the firm’s output supply function (f) Derive an (g) Does the output supply function you derived above have the usual properties for a supply curve (i.e. in terms of movements along the supply e.g. as discussed in first-year Economics)? Explain your answer curve versus movements of the curve – (3 marks)
Question 5. Use (uncovered) interest rate parity to explain why it might not be the deal of a lifetime to lend to the Reserve Bank of Zimbabwe, where deposits earn several thousand percent (nominal) interest.
O. Let X1 and X2 be two random variables, and let Y = (X1 X2)2. Suppose that E[Y]= 25 and that the variance of X1 and X2 are 9 and 16, respectively. (63) Suppose that both X1 and X2 have mean X2 is equal to (a) -1 zero. Then the correlation between X1 and r (b) -0.5 (e) 0 (d) 0.5 (64) Suppose that both X1 and X2 have mean one. Then the covariance between X1 and X2 is equal to (a)-2 (c) 0 (d) 1 (b) -1 (65) Suppose that both X1 and X2 have mean one. Then the correlation between X1 and X2 is equal to (a)-1/6 (d) 1/2 (b) 0 (e) 1/6
9. Suppose my tastes for pies (x1) and other goods (x2) can be represented by the utility function U(x, х) = 50х)5 х2. (a) Letting the price of pies be denoted by p, the price of other goods by 1, and my weekly income by I, determine my weekly optimal consumption of pies and the amount of money I spend on other goods as a function of p and I. (5 marks) 2 25 (b) Show that my compensated weekly demand for pies is xf and my compensated 1250 weekly demand for other goods is x (5 marks) p (c) Suppose that a pie government decides to impose a tax of 100% on pies (because eating pies is deemed unhealthy) and the price of a pie increases to $10. Determine my initial consumption of pies and the amount of money I initially spend on other goods. Then determine how my weekly consumption of these two goods changes after the tax is imposed. costs $5 initially and my weekly income is $500. However, the (2 marks) (d) How much of the change in my weekly consumption of pies is due to the substitution effect? How much of it is due to the income effect? What about the change in my weekly expenditure on other goods? How much of the change is due to the substitution effect, and how much of it is due to the income effect? (5 marks) (e) How much tax does the government collect from me in a week? (1 mark) (f) How many dollars a week am I worse off as a result of this tax? (4 marks) (g) How large is the weekly deadweight loss of this tax? (3 marks)
Paolo provides cleaning services in his apartment complex. He cleans one apartment per hour, so, working a full day, Paolo can clean a total of 8 apartments. The next best use of Paolo’s time involves online freelance work, which he can pick up at any time for $8 per hour. The following table contains information on Paolo’s total and marginal costs of cleaning apartments as well as information on his total and marginal benefits from cleaning apartments To clean the first apartment, Paolo incurs an opportunity cost of $8 (for the hour of earnings forgone) and explicit costs of $2 for replacing cleaning supplies and upkeep of his equipment for a total cost of $10. Since Paolo’s total cost is zero when he doesn’t clean, the marginal cost of cleaning the first apartment is $10. The marginal cost of cleaning the second apartment is $12-he incurs an additional opportunity cost of $8 and an additional $4 in costs for supplies and equipment upkeep. The total cost of cleaning two apartments is therefore $10 for the first apartment plus an additional $12 for the second, or $22. Since the opportunity cost of tenants’ time varies, so too does their willingness to pay for cleaning. Paolo’s marginal benefit from cleaning an apartment depends on the tenants’ willingness to pay. Assume that the occupant of the first apartment will pay Paolo $36 to clean the apartment. Paolo’s marginal benefit of cleaning the first apartment is therefore $36. Consider that the occupant of the second apartment also has a relatively high opportunity cost of cleaning compared to most other occupants and will pay Paolo $34 to clean the apartment. Paolo’s marginal benefit of cleaning the second apartment is therefore $34. His total benefit from cleaning two apartments is equal to the marginal benefit from the second apartment ($34) plus the marginal benefit of the first ($36), or $70. Complete the following table by entering the missing values. Paolo’s Total Paolo’s Marginal Benefit Paolo’s Marginal Cost of Apartments Cleaned Paolo’s Total Benefit of Apartments Cleaned Cost Quantity of Apartments Cleaned (Dollars) (Dollars) (Dollars) (Dollars) 0 0 C 10 36 1 10 36 34 12 2 22 70 32 3 36 102 30 16 4 52 28 70 160 24 20 24 114 204 28 18 8 142 222 Using the preceding table, plot Paolo’s marginal cost and marginal benefit curves for cleaning apartments. Be sure to plot on the integers. For example, the marginal cost of the first apartment is $10, so the first point on your marginal cost curve should be (1, 10). LO. LO N CO Using the preceding table, plot Paolo’s marginal cost and marginal benefit curves for cleaning apartments. Be sure to plot on the integers. For example, the marginal cost of the first apartment is $10, so the first point on your marginal cost curve should be (1, 10) Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically. ? 40 35 Marginal Cost 30 25 Marginal Benefit 20 15 10 0 0 1 2 3 4 5 8 7 8 QUANTITY OF APARTMENTS CLEANED and his total net benefit from cleaning five apartments is Paolo’s net benefit from cleaning the fifth apartment is Paolo’s net benefit from cleaning the eighth apartment is and his total net benefit from cleaning eight apartments is For Paolo, the optimal quantity of apartments to clean each day is BENEFIT, COST (Dollars per Apartment Cleaned)
A hair salon that provides haircuts has determined that it faces the daily revenue and cost data shown in the following table. Complete the following table by determining the marginal revenue (MR) and marginal cost (MC) associated with changes in output from 0 to 15, 15 to 30, and 30 to 45 haircuts per day, and enter your answers in the appropriate column. Hint: Remember that marginal revenue (MR) is defined as the change in total revenue divided by the change in output Total Cost Total Revenue Marginal Revenue Marginal Cost Output (Haircuts per day) (Dollars per day) (Dollars per haircut) (Dollars per day) (Dollars per haircut) 0 0 75 15 600 225 30 1,050 525 45 1,350 975 Suppose the hair salon is currently doing 15 haircuts per day. As an economist, what advice would you give Antonio, the owner of the hair salon? “You should perform the number of haircuts that yields the highest total revenue. You should perform 45 haircuts per day, because at that quantity, total revenue minus total cost is positive.” “You should perform more haircuts per day, because the marginal revenue from performing an additional haircut is larger than the marginal cost.” “You should perform fewer haircuts per day, because the marginal revenue from performing an additional haircut is smaller than the marginal cost.’ AAA AMA
Figure 1 shows the dependency ratio for Japan, South Africa and Zambia between 1960 and 2015. Briefly discuss the causes for the decrease in South Africa’s dependency ratio. (3.3 Why do you think South Africa is experiencing a different trend than Japan and Zambia./  Figure 1: Dependency ratio / Figuur 1: Afhanklikheidslas 1,1 1 0,9 0,8 0,7 0,6 0,5 0,4 1970 1975 1985 1990 1960 1965 1980 1995 2000 2005 2010 2015 – Japan South Africa Zambia – –
The post Question: Suppose Yvette Gives Haircuts On Saturdays To Make Extra Money. She Is The Only Person In Town Cutting Hair On Saturdays, So She Has Some Market Power. Assume That She Does Not Incur Fixed Costs And That The Only Significant Variable Cost To Yvette In Giving Haircuts Is Her Time. As She Gives More Haircuts, Yvette Must Increasingly Forgo Other Valuable … appeared first on uniessay writers.