2008 B Macro FRQ #3

2008 B Macro FRQ #3

Watch me answer it here

https://youtu.be/rbnxY6mXN0o

(A) Calculate this year's nominal gross domestic product (GDP).

The GDP Cheat Sheet here.

Nominal GDP is simply this years GDP,    

Price of the goods this year multiplied by the quantity produced

(B) Assume that in Gala Land the GDP deflator (GDP price index) is 100 in the base year and 150 this year. Calculate the following.

(i) The inflation rate, expressed as a percentage, between base year and this year.

It should be clear that inflation increased by 50%. I don't know how to say this differently or better or clearer. Someone should help me.

(ii) This years real GDP.

So, if they had gave us base year prices and another years quantity, we would have used this formula.

but they didn't so,

We have to understand that Real GDP means taking into account the level of inflation. Prices have risen by 50% this year.

It is easy to think that since prices rose by 50% that we should just half the 6000 and say that the real GDP is 3000 (and that would be incorrect)

BUT, recognise that $4000 x 50% rise in prices would be, $4000 x .5 = $2000 and $2000 + $4000 = $6000.

(C) Since the base year, workers have received a 20% increase in their nominal wages. If workers face the same inflation rate as was calculated in (b) (ii) (50%), what has happened to real wages? Explain.

If workers get a 20% raise but prices of all the things they buy rise to 50%, then their real wages have dropped by 30%. Remember that real wages take into account inflation.

from the cheat sheet.

Real Wages (Purchasing Power) post

(D) If the GDP deflator in Gala Land increases unexpectedly, would a borrower with a fixed interest rate loan be better or worse off? Explain.

If the GDP deflator increases then inflation has increased. A borrower would be paying back money that is able to purchase less goods, therefore the borrower would  be better off. You bought a good that would now, cost you, significantly more money. 

2008 Micro FRQ #3

2008 Micro FRQ #3

(A) For a competitive market for which there is a binding (effective) price ceiling , draw a CLG and label the price ceiling Pc & the quantity sold, Qa, and the socially efficient output Qb.

(B) (i) Using the labelling in the graph, identify the profit-maximising output and the socially efficient output. (Output means Quantity)

(B) (ii) At the socially efficient output is the monopoly making a profit or incurring a loss. Identify the area of profit or loss.

2008 B Macro FRQ #2

2008 B Macro FRQ #1

(A) Will each of the following groups benefit from the decrease in the tariff rate?

(i) Mexican consumers

If the Mexican government reduces the tariffs (tax) on cars being imported from other countries then importers will be able to sell those cars for less. This means Mexicans will be able to buy cars at a cheaper price and be able to spend the surplus savings on other goods like, education, healthcare, entertainment, food, clothing. Yes, I would say that this is a benefit.

(ii) Mexican automobile manufacturers. Explain.

No Mexican automobile manufacturers would like tariffs to be higher not lower. If tariffs were higher then the Mexican manufacturers would be able to raise the prices of their domestically produced cars. Mexican automobile manufacturers would not benefit. 

If tariffs are reduced then importers can charge less for each car. Consumers will be able to buy cheaper cars. Domestic producers of cars will have to lower their prices to compete with the imports.

(B) How would the decrease in the tariffs rate affect each of the following in Mexico?

(i) Current Account Balance. Explain.

We must first know what the Current account is.

If the current account balance is (imports & exports) goods and services.

If Mexico lowers its tariffs on automobiles imported then the price of imported automobiles will fall and more automobiles will be imported. Therefore their will be a current account deficit as imports will be increasing relative to exports..

(ii) Capital (financial) account balance.

If the current account is in a deficit, and therefore the capital account must be in a surplus. 

Think of it like this - If you buy food from the grocery store you have imported goods into your household and therefore your current account is in a deficit. When you paid for the food you bought at the store that money is counted in the financial (capital account). The grocery store will take this cash and spend it at your advertising firm by buying your services.

When Americans buy cars from Germany our current account goes into a deficit but we paid for the cars with cash, and this cash will be used to buy property and goods from America. 

(C) Given the change in Mexico's current account in part (B)(i), what will happen to the aggregate demand in Mexico.

If Imports increase then net exports must decrease and therefore AD will decrease as Net exports is a component of AD.

2008 B Micro FRQ #3

2008 B Micro FRQ #3

watch me answer it here

https://youtu.be/g0Adx3-66Ts

(A) After which worker do diminishing marginal returns begin?

Make a chart.

What is Diminishing Marginal Returns?

From the Resource Costs (Labor) Cheat Sheet here.

The MRP, marginal revenue product increases to $20 with the hiring of the 1st worker. The second worker brings in $32. The third worker brings in $20 and every worker hired after the second brings in less revenue. The returns fall after hiring the second worker.

(B) Calculate the Marginal Physical Product of the 5th worker.

What is the marginal physical product?

For the AP exam, where the input of labor (number of workers hired) increases by one at a time you should use MP marginal product and Marginal Physical Product interchangeably. MP & MPP are different when hiring more than one labourer at a time.

The marginal product (product produced by the 5th worker) is 5 units of the good.

Understand that the change in production from the 4th worker to the hiring of the 5th worker created an additional 5 hats.

Again, the question is simply asking how many hats are produced by the 5th worker.

(C) Calculate the marginal revenue product of the 3rd worker.

Chart - 

3rd worker - MP(10) X P(2) = $20

The 3rd worker brings in $20 and costs us $15

(D) How many workers will be hired to maximise profit?

Profit Max for hiring is where MRP  = MRC

Or as close as possible without losing money.

**hiring the 4th worker makes us $1 of profit.

but

**hiring the 5th worker would cost us $5, a loss

(E) If GW has fixed costs equal to $20, what will be the company's show-run profit from hiring 

two workers?

Remember don't you, that MC (wage) is a variable cost and VC+FC = TC

So, if the wage of each worker is $15 then the wage for the two workers is $30. This is the VC. The fixed cost is $20. ((This is not $20 per worker so don't double it.)) 

VC ($30) + FC ($20) = TC ($50)

Remember that Profit = TR - TC

The MRP or Total Revenue earned from hiring two workers is ($20 + $32) = $52

So, TR($52) - TC($50) = Profit of $2

(F) If the price of hats increases, what will happen to the number of workers hired in the short-run? Explain.

MRP (additional revenue per additional worker hired) The formula for MRP is MP x P = MRP.

So if either the MP (productivity) or the P (price of the good) increases then the MRP will increase.

If the MRP increases then more workers will be hired as now it will be more profitable to hire an additional worker.

I had answered this problem in an earlier post, here.

2008 B Micro FRQ #2

2008 B Micro FRQ #2

Market Failure Cheat Sheet Here.

(A) Draw a CLG of supply and demand, and

(i) Label the market price "Pm", and label the market output "Qm".

(ii) Label the socially efficient level of output "Qs".

(iii) Shade the area of DWL.

(B) Is marginal social cost greater than, less than, or equal to marginal social benefit at the market price?

The market price production is at Qm. Society (government) feels it would be a healthier society with more people vaccinated. Society wants more consumption of vaccines. In essence the price of vaccines is to high and the government can entice people to buy more vaccines if the price is lower. 

Society is not spending enough on vaccines or the social cost is to low. Society should spend more on vaccines raising the cost of spending to equal the benefit.

Government would entice people to buy with a subsidy that would lower the price. Remember that government cost increasing also increases the social cost as government is part of society.

Remember that the demand = benefit and the supply (MC) curve = costs

We firm wants to produce where MB = MC, and society where MSB = MSC

If MC < P we need to produce more, social costs are lower than social benefit - produce more.

to produce more we must hire more people to produce more

this extra production is spurred by giving subsidies to producers to get them to lower the price

Lower price more consumption

If MSC < MSB (demand) then costs must be lowered to get more consumption/production.

I know this section is weird, as during the beginning of the course we say that the most optimal amount of quantity to be produced is where S = D, market equilibrium. We promote the MB = MC understanding and then with market failure we say that for different reasons the people can't make the right decisions so government must step in with taxes or subsidies and fix the problem.

Economics is fun. Grind your teeth and understand what you need to to answer the questions for the exam...

(C) How will a tax on the producers of vaccines affect the DWL? Explain.

A tax on producers will raise their costs and on the margin some producers will go out of business reducing the supply of vaccines. This would move us further away from the Socially Optimal Quantity increasing the DWL.