Econowaugh AP

Wednesday, October 26, 2016

2007 Macroeconomic Exam FRQ #1

2007 Macroeconomic Exam FRQ #1

WHAT GOES UP.

Ok, so investors are running to their computers trying to sell their stocks. On the other side investors are rushing to the bank to try and take the money out of their banks to buy the stocks. This implies that the supply of loanable funds is decreasing and/or the demand for loanable funds is increasing,, Yes, they both are happening at the same time because they are the same thing. Check out the graph below. Either one I believe would have been acceptable on the exam.

Supply of loanable funds is decreasing as people take the money out.

Demand for loanable funds is increasing as more and more people rush to take the money out.

Notice, that both cause the RIR to increase. If the RIR is increasing then the NIR (Nominal Interest Rate) is also increasing. Check out this post, Here.

If an economies stock market is decreasing very fast then investors will be trying to get their money out of stocks and into cash. Why? Cash values don't fall as quickly, whereas stock values can plummet over night. So cash is safer.

This implies that the Demand for Money will be increasing.

(B) Due to the decline in wealth caused by the change in the stock prices, the general price level in the US falls relative to the general price level in Japan, a trading partner. Use a CLG (correctly labeled graph) of the FOREX (foreign exchange market) for the US dollar to show the impact of the change in relative price levels on each of the following.

(i) Demand for the dollar.

(ii) Price of the dollar (Yen/dollar)

When you see the phrase "fall in the price level", you should think of inflation. Inflation and the price level are most often the same thing. So, if the price level (inflation level) is falling it means that US goods are getting relatively cheaper than Japanese goods.

This means that Japanese citizens will be buying more US made goods. Japanese will be importing US goods. To buy the US goods Japanese housewives will be dumping money into the FOREX market to purchase US dollars. (Demand for the US $ is increasing therefore the Value of the US$ is increasing, or said another way, the price of the dollar is increasing relative to the Yen) Why? because they will be demanding US dollars $ to buy the US goods as US suppliers don't accept Yen ¥.

* To buy US goods Yen must be exchanged for US dollars. Yen is sold in the FOREX and US dollars are bought.

Check out the FOREX cheat Sheet, Here.

(C) How will the change in the price of the dollar you indicated in part (b)(ii) affect net exports of the US? Explain.

As the value of the US dollar increases our US goods will become more expensive relative to Japanese goods and those same Japanese housewives will buy less US goods and more Japanese goods. The US exports will decrease.

(D) Using an AD/AS curve show how changes in net exports in part (C) will affect each of the following in the short-run.

(i) Aggregate Demand

(ii) Output & Price Level

If Net Exports are declining then AD is falling as Net Exports (Xn) is a determinant of AD/GDP.

Check out AD/AS Cheat Sheet, Here.

(E) Given your answer in part (D), what will happen to unemployment in the short-run. Explain.

As output decreases then less workers are needed so some are let-go and unemployment will increase.

Read careful here as the College Board likes to use employment/unemployment and if read incorrectly easy to give the wrong answer.

Tuesday, October 25, 2016

2007 Microeconomics Exam FRQ Question # 3

Watch me answer it here

https://youtu.be/f-9gy11cTDk

(A) In which market structure do these firms operate? Explain.

You should know by now that the market structure is an oligopoly. There are only two firms (Rankin & Roadway) and they are mutually interdependent.

**** That phrase should be memorized ((mutually interdependent)) as this means that they depend on the actions of the other to choose a course of action.****

(B) If Roadway chooses an early departure, which departure time is better for Rankin wheels.

So before you start to answer this question you should make a chart.

Here is the word chart for this problem, if you do it the same way every time you will get it correct.

Answer – If Roadway chooses an early departure then Rankin should go early.

(C) Identify the dominant strategy for Roadway.

Notice the shaded area for Roadway. No matter what Rankin does Roadway will/should go Early. This means that Roadway has a dominant strategy.

(D) Is choosing an early departure a dominant strategy for Rankin wheels? Explain.

NO, an early strategy is not a dominant strategy for Rankin because if Roadway goes late then Rankin should go late because $800 > $650.

(E) If both firms know all of the information in the payoff matrix, but do not cooperate, what will be Rankin wheels daily profit?

Understand that Roadway is going to go early no matter, so then Rankin will choose early also as it has the highest payoff of $900. For this question, even if they had cooperated they still would have chosen the same quadrant.

Welker does it so well.

Sunday, October 23, 2016

Resource Costs/ Labor Cheat Sheet

Need a copy e-mail wcwaugh@aol.com

2007 Microeconomics FRQ #2

watch me answer it here

https://youtu.be/HBKyr2hCIJA

(A) Using the specific information above, draw a correctly labeled graph of HZRad's current supply curve for unskilled labor.

Most of these questions are almost all identical. Recognise that the phrase, "can hire all the unskilled labor it needs at a wage of $90 per day per worker." is telling you that the there is a perfectly competitive market for labor. Lets graph it.

(B) What is HZRad's profit maximising output level? Explain.

Profit Max is where MRP=MRC, sounds familiar, yes!

A Table is helpful, learn (memorise) how to set this table up.

You are given the first two columns, Labor, Total Product, Price of the Good and the Wage Rate.

The MRP is the amount brought in by adding that worker into the production. The 1st worker brings in $400 and we pay her $90. Yes, we want to hire this person. The 2nd worker brings in $500 and we pay him $90. Yes, we want to hire him. We go down until the MRP=MRC and this is where profit is maximised. Notice, that at the 5th person we hire they are bringing in $100 and costing us $90.

MRP does not equal MRC but it is as close as we can come without loosing money. The 6th person hired would only bring in $80 and would cost us $90, a loss of $10. So don't hire the 6th person.

You can't hire a piece of someone so marginally we can either hire 5 or 6 and the 5th makes us some profit while the 6th costs us money.

Answer - Output level = 75 units of the good. The 5th worker

(C) Suppose the company uses a new technology to increase the productivity of the workers.

(i) How will the new technology affect the quantity of the workers hired? Explain.

(ii) How will the new technology affect the wages paid to the workers hired?

So, if HZRad's technology improves each and every worker will be able to be more productive. Lets pretend that every worker will be able to double their productivity.

Notice that with our workers productivity being doubles it is now profitable to hire the 6th worker as she brings in $160 and we only pay her $90. We wouldn't hire the 7th worker as he only brings in $40 but would cost us $90.

Answer (i) - If technology increases the productivity of the workers then more workers can potentially be hired as they become marginally profitable. MRP curve will shift rightward. QL hired will increase.

Laymen's terms (if you make money off of them - hire them)

Answer (ii) - I would not pay them higher wages. If I buy new machines that make my workers more productive why on the green Earth would I pay them more money. Remember my goal is to make a profit. I pay my workers enough to keep them working for me. I invest in new technology and expect to make more profit. Competition is what raises wages not benevolence. This assumes that I'm the only one with the new technology.

But, If the problem says that the the MARKET has the new technology then everyone will become more productive and I will have to pay my people more money as wages will rise. I will have to attract more people into the industry to work for me.

Check out my cheat sheet, Labor Cheat Sheet

Freak-onomics podcast - How to be more productive - Here

Saturday, October 22, 2016

2007 Microeconomics FRQ #1

2007 Microeconomics FRQ #1

Sometimes music makes it go down smooth.
https://www.youtube.com/watch?v=_NNOaYNqLo8

So, you must understand that a patent is a government sanctioned monopoly. Yes, I know that seems dramatic but a patent is a governmental guaranteed or privilege that allows you to sue anyone that copies your idea and the courts will find in your favour if you have a patent.

(A) Assume that GCR is making economic profit. Draw a correctly labeled graph and show the profit-maximising price and quantity.

(B) Assume that the government imposes a lump-sum tax on GCR.

(i) What will happen to the price and quantity? (Explain.)

(ii) What will happen to GCR profits?

Ok, so the important thing to know about lump-sum taxes is that they don't effect the MC curve.

What in the F&#$K does that mean Mr. Waugh, you say. It means, my dear friend that a lump sum tax is to be paid by any company in the industry no matter if they produce or not.

Let us make it personal. Mr Waugh owns a waffle cart outside of the school gate and every morning students stop by and buy coffee from the cart. The principle stops by at the end of the day and explains that I will have to give him a hundred dollars to keep selling coffee at the front gate.

Consider the $100 to be a lump sum tax. We think of lump-sum tax as a Fixed Cost.

A fixed cost affects your ATC (Average Total Cost) as ATC is a combination of fixed and variable costs. Remember - ATC = FC + VC

Since it is a lump-sum tax the ATC will shift up. Your fixed costs will increase and therefore mathematically your ATC must increase.

Answer (i) -You would not be producing anymore quantity of coffee because the principles $100 tax does not affect the demand for coffee. So quantity will not change and if quantity produced does not change you will not need to hire more people so VC (Variable Costs) will not change.

* When you see (VC) think (Labor) and you only need more labor to produce a higher quantity.

Answer (ii) - If you are taxed and your making profits, well now you are making less profits. Shifting the ATC straight up reduces your profits but doesn't affect quantity or price.

Check out the cheat sheet on Lump-sum taxes and subsidies. Here

(i) What will happen to market price and quantity? Explain. (Explain means why!!!)

(ii) What will happen to profits?

OK, so per-unit subsidies or taxes are looked at as VC (variable costs) Remember (Think Labor)

So, VC will decrease meaning that the MC (marginal cost curve) will shift rightward.

Why, Mr. Waugh does a per-unit subsidy affect the MC curve. If I'm given cash for every cup of coffee that I sell at my coffee cart it lowers my costs and thus raises my profit per cup. More profit per cup means that I will want to produce more quantity. Lets look at a graph.

Answer - As we are given money (per-unit) our ATC curve decreases because the ATC curve is composed of FC and VC and Per-unit subsidies reduce our VC and therefore our ATC. A decrease in the VC shifts the MC curve rightward. Then we find a new Profit Max (MR=MC) and notice that price falls and quantity increases. Profit also increases.

(D) Now assume the Patent expires. What will happen to GCR's profit in the long run. Explain.

If GCR's patent goes away then other firms will be able to use GCR's anti-spyware. Profit attracts firms into the industry and therefore GCR's profits will decrease.