Name________________________ ECON 251 Final Ingersoll Final Exam This exam is due as a submission to Canvas on the specified date. You may not work with anyone else. There are 6 free response questions, some with multiple parts, worth a total of 70 points. There are multiple choice questions on Canvas worth a total of 30 points. There are 100 points total on the exam. Please provide the best answer to each question. 1) Consider the differences between the perfectly competitive and the monopolistically competitive structures on the same market: (20 points total) a) Which structure yields a higher market quantity? (3 points) b) Which has a higher market price? (3 points) c) Which maximizes total surplus? (3 points) d) How is the profit max rule different between perfect competition and monopolistic competition? (3 points) Consider a monopolistically competitive firm in general: f) Graph a standard profit maximizing monopolistically competitive firm. Include on your graph the profit maximizing price, quantity, and profits for the firm. (8 points) 2) Assume that demand for a product that is produced at zero marginal cost is reflected in the table below. (15 points total) Quantity Price 0 $60 100 $55 200 $50 300 $45 400 $40 500 $35 600 $30 700 $25 800 $20 900 $15 1000 $10 1100 $5 1200 $0 a. What is the profit-maximizing level of production for a group of oligopolistic firms that operate as a cartel? (5 points) b. What profit does each firm make if they each produce half of the quantity discussed in part (a)? (5 points) c. Assume that this market is characterized by a duopoly in which collusive agreements are illegal. What market price and quantity will be associated with the Nash equilibrium? (5 points) 3) Compare a perfectly (1st degree) price discriminating firm versus a single price monopolist by answering the following questions. (10 points total) a. What makes the pricing techniques different? (5 points) b. How is welfare (consumer, producer, total surplus) different between the two pricing methods? (5 points) 4) Suppose the airplane production market is a duopoly between Boeing and Airbus. (10 points total) a. Boeing and Airbus can make more profits if they both restrict their production from their current production levels, but they do not. Why are they stuck at this equilibrium? (5 points) b. Suppose Boeing offers to sign a legally binding contract with Airbus stating that if either firm produces above the restricted production level mentioned in (a) above, the overproducing firm must pay a fee to the firm that produced the restricted amount. If the fee was set at the correct level, could this change the expected equilibrium in the market? Why? (5 points) 5) Artie and Beth have just broken up. They shared a love for the movies, but in the end that is all they shared. This week, two new blockbuster movies, a sci-fi thriller and a drama, are coming out. Both Artie and Beth are excited about seeing both movies. However, they are not excited about seeing the movie in the same theater as each other. (10 points total) a. The following normal form game represents the situation described above. What are the Nash Equilibria of this game? Do they make sense given the above situation? Why? (5 points) Beth Artie Sci-Fi Drama Sci-Fi -5,-5 10,10 Drama 8,8 -5,-5 b) Artie sends a text to Beth, saying that he will be attending the Drama movie. Given that she receives the text, which movie do we expect Beth to go to? (5 points) 6) What was your favorite part of the course? (5 points) ECON 250 Principles of Macroeconomics FINAL EXAM ECON 250 - 01: Principles of Macroeconomics FINAL EXAM The Final Exam is worth 200 points. There are two parts to this exam- a multiple-choice portion and a written portion, worth 100 points each. The multiple choice portion will be available as a “Quiz” in Canvas from 9:35 – 11:25 AM on Thursday, May 6, 2021 for 60 minutes. You will be able to download the ECON 250 WRITTEN FINAL EXAM.doc file from the Assignments page in Canvas. It will be available from 7:00 am on Thursday, May 6, 2021. The Final Exam is “open textbook, open note,” but you may use NO other resources. The book and notes that you use must be your own and from this course alone. You may not take any part of this exam in the presence of any other person, nor discuss it with anyone until after it is due. All work must be your own. You may not use any other outside assistance, including any other web resources, Chegg or other notes, cheat sheets, instructors manuals, etc., or any other way of undermining the integrity of your work. Any evidence of a violation of these instructions will result in a score of zero on the entire Final Exam. The point value for the written questions and problems are listed. For written answers, write your responses clearly in the space provided. For numerical and graphical questions, you must neatly show your work for credit. Write out your answers on a separate sheet (no need to type the math), numbering each problem and putting your name on each page. Write neatly- if I can’t read it, it gets you no points. Please circle, box, or otherwise clearly indicate your answer to each question. Scanning your written work into a single file is preferred, but you may take clear photos of each page. Save your files as: YOUR LAST NAME Econ 250 Final Exam Page x {.doc/.pdf/.jpeg, etc.} where x is the number of the page (number your pages in order with the problems of the exam). Upload your file(s) in the Final Exam Written Assignment in Canvas. Please do not submit .pages files or links to Google Docs as they are not handled within Canvas. Please do not use .HEIC format for your photos, as they are incompatible with the Canvas viewer. Save copies of all your work. If you have questions about these instructions or about the meaning of any question on the exam, you may email me before 8 pm on Thursday, May 6. Do not use the Canvas Messaging system for exam questions, as I have noticed a delivery delay of up to one day. ECON 250 Final Exam, Spring 2021 Show your work for credit. ECON 250 Principles of Macroeconomics FINAL EXAM 1. (15 pts) a) Define and briefly explain what is meant by “GDP”? b) Name the five expenditure components of GDP (GDP = _?_). c) Briefly explain what is included in each of these components. 2. (10 pts) Show your work for the following questions. If nominal output rises from $240 billion to $259 billion, and the GDP deflator rises from 100 to 105, a) What is the percentage increase in nominal output? _____________ b) What is the percentage increase in the price index? _____________ c) By how much does real output change? _____________ d) To what value would the deflator have had to rise for real income to remain constant? _____________ 3. (15 pts) (a) Why is knowing the level of potential output important to designing appropriate fiscal policy? ECON 250 Principles of Macroeconomics FINAL EXAM (b) Using Aggregate Demand and Supply curves, graphically illustrate a situation in which expansionary fiscal policy could be helpful to a national economy. Briefly explain. (c) Using Aggregate Demand and Supply curves, graphically illustrate a situation in which the same expansionary fiscal policy could be damaging to a national economy. Briefly explain. 4. (15 pts) a) Define the “crowding out” effect. ECON 250 Principles of Macroeconomics FINAL EXAM b) Using a graph of the market for loanable funds, illustrate and briefly describe how the crowding out effect works. 5. (10 pts) Why might it be reasonable to expect that low unemployment might be associated with higher inflation? Discuss in terms of the Aggregate Demand / Aggregate Supply model. ECON 250 Principles of Macroeconomics FINAL EXAM 6. (20 pts) Show your work! For all parts a) through f) below, refer to the graph shown for a small country that is a price-taker internationally for this product. Assume the international supply of this product is perfectly elastic (horizontal) at a price of $1.00 per unit. a) If there are no trade restrictions, this country will produce _________ units. b) At the world price, they will import ___________ units. c) Starting from a free trade equilibrium, a tariff in the amount of $0.50 per unit would be expected to cause domestic consumption to change from _________ units to _________ units. d) Starting from a free trade equilibrium, a tariff in the amount of $0.50 per unit would be expected to cause imports to change from _________ units to _________ units. e) If government imposes a tariff in the amount of $0.50 per unit, it will collect revenue in the amount of $ _________ . f) To have the same effect on imports as a $0.50 per-unit tariff, the government would need to set an import quota of _________ units. g) If the government wanted to eliminate all imports, what is the minimum level of tariff that they would need to impose? _________ ECON 250 Principles of Macroeconomics FINAL EXAM 7) (15 pts) Starting in each case with a graph showing an equilibrium in the foreign exchange market between the Japanese yen and the US (measured in y/$), show AND clearly discuss the impact on the level of the exchange rate of the following (each case is independent): a) An increase in growth and incomes in the US. Is this an appreciation or depreciation of the Japanese yen? b) an increase in inflation in Japan together with a decline in Japanese interest rates. Is this an appreciation or depreciation of the US $? 100% 9:06 AM Thu May 6 aggregate accounting uemmes the relationsmp among these subaggregates. Calculating GDP The previous chapter talked about total output. Economists call total output gross domestic product (GDP). Gross domestic product (GDP) is the total market value of all final goods and services produced in an economy in a one-year period. GDP is probably the single most-used economic measure. When economists, journalists, and other analysts talk about the economy, they continually discuss GDP, how much it has increased or decreased, and what it's likely to do. Gross domestic product (GDP) is the aggregate final output of residents and businesses in an economy in a one-year period. Aggregate final output (GDP) consists of millions of different services and products: apples, oranges, computers, haircuts, financial advice, and so on. To arrive at total output, somehow we've got to add them all together into a composite measure. Say we produced 7 oranges plus 6 apples plus 12 computers. We have not produced 25 comapplorgs. You can't add apples and oranges and computers. You can only add like things (things that are measured in the same units). For example, 2 apples + 4 apples = 6 apples. If we want to add unlike things, we must convert them into like things. We do that by multiplying each good by its price. Economists call this weighting the importance of each good by its price. For example, if you have 4 pigs and 4 horses and you price pigs at $ 200 each and horses at $400 Page 149 each, the horses are weighted as being twice as important as the pigs. Multiplying the quantity of each good by its market price changes the terms in which we discuss each good from a quantity of a specific product to a value measure of that good. For example, when we multiply 6 apples by their price, 25 cents each, we get $1.50; $1.50 is a value measure. Once all goods are expressed in that value measure, they can be added together. Once all goods are expressed in a value measure, they can be added together. Take the example of 7 oranges and 6 apples. (For simplicity let's forget the computers, haircuts, and financial advice.) If the oranges cost 50 cents each, their total value is $3.50; if the apples cost 25 cents each, their total value is $1.50. Their values are expressed in identical measures, so we can add them together. When we do so, we don't get 13 orples; we get $5 worth of apples and oranges. If we follow that same procedure with all the final goods and services produced in the economy in the entire year, multiplying the quantity produced by the market price per unit, we have all the goods and services an economy has produced expressed in units of value. If we then add up all these units of value, we have that year's gross domestic product. The Components of GDP Since anything produced will be bought by someone we can measure outnut by the 9:06 AM Thu May 6 100% The Components of GDP Since anything produced will be bought by someone, we can measure output by the expenditure people make to buy that output. On the expenditure side, GDP is usually divided into four categories depending on who buys the output. The four expenditure categories that comprise GDP are consumption, investment, government spending, and net exports. Web Note 7.1 7 GDP Data Consumption is spending by households on goods and services. Consumption includes such things as food, shampoo, televisions, furniture, and the services of doctors and lawyers. This is the production in the economy that consumers buy. When you buy a smartphone, you are contributing to consumption expenditures. Investment is spending for the purpose of additional production. Investment includes business spending on factories and equipment for production, the change in business inventories, and purchases by households of new owner-occupied houses. Investment is output that is used to produce goods and services in the future. You should take note that when economists speak of investment as they discuss aggregate accounting, they don't mean the kind of activity taking place when individuals buy stocks rather than consume goods, economists call such activity saving. So in economists' terminology when you buy a bond or stock rather than consuming, you are saving. When that savings is borrowed by businesses to buy factories, tractors, computers, or other goods or services that will increase their output, they are investing. The amount they spend on goods that will increase future output is what in aggregate accounting is called investment. You might have been surprised to see the change in inventories and residential construction included in investment. Inventories are goods that have been produced, so they must be counted if one is going to include all produced goods, which is what GDP is designed to include; inventories represent goods to be sold in the future. They are a type of investment by the firm. Residential construction is part of investment because most of the housing services from a new house will be provided in the future, not the present. Government spending is goods and services that government buys. When the government buys the services of an analyst, or buys equipment for its space program, it is undertaking economic activity. These activities are classified as government expenditures. In thinking about government expenditures, you should note that they include expenditures Page 150 that involve government production. Although government generally does not sell its “production” but provides it free, aggregate accounting rules count government 9:06 AM Thu May 6 100% Consumption is spending by households on goods and services. Consumption includes such things as food, shampoo, televisions, furniture, and the services of doctors and lawyers. This is the production in the economy that consumers buy. When you buy a smartphone, you are contributing to consumption expenditures. Investment is spending for the purpose of additional production. Investment includes business spending on factories and equipment for production, the change in business inventories, and purchases by households of new owner-occupied houses. Investment is output that is used to produce goods and services in the future. You should take note that when economists speak of investment as they discuss aggregate accounting, they don't mean the kind of activity taking place when individuals buy stocks rather than consume goods, economists call such activity saving. So in economists' terminology when you buy a bond or stock rather than consuming, you are saving. When that savings is borrowed by businesses to buy factories, tractors, computers, or other goods or services that will increase their output, they are investing. The amount they spend on goods that will increase future output is what in aggregate accounting is called investment. You might have been surprised to see the change in inventories and residential construction included in investment. Inventories are goods that have been produced, so they must be counted if one is going to include all produced goods, which is what GDP is designed to include; inventories represent goods to be sold in the future. They are a type of investment by the firm. Residential construction is part of investment because most of the housing services from a new house will be provided in the future, not the present. Government spending is goods and services that government buys. When the government buys the services of an analyst, or buys equipment for its space program, it is undertaking economic activity. These activities are classified as government expenditures. In thinking about government expenditures, you should note that they include expenditures Page 150 that involve government production. Although government generally does not sell its “production” but provides it free, aggregate accounting rules count government production at the government's cost of providing that output. Many government payments do not involve production, so the government's budget is much larger than government spending included in GDP. The most important category of government spending that is not included in GDP is transfer payments-payments to individuals that do not involve production by those individuals. Transfer payments include Social Security payments and unemployment insurance among others. These payments are not part of GDP since there is no production associated with them. Net exports is spending on goods and services produced in the United States that foreigners buy (exports) minus goods and services produced abroad that U.S. citizens buy (imports). (In economics and business, the word net is used to distinguish two offsetting flows: expo which represent a spending flow into the country, and imports, which represent a spel flow out of the country.) The reason we have to use the “net concept” for exports is that 9:06 AM Thu May 6 1 100% Summarizing: GDP measures aggregate final production taking place in a country. This production can be subdivided into expenditure categories, and all production must fit into one of the four categories. A shorthand way of expressing this division of GDP into expenditure categories is: GDP = Consumption + Investment + Government spending + Net exports or GDP = C + I + G + (X - M) Since all production is categorized into one or another of these four divisions, by adding up these four categories, we get total production of U.S. goods and services. Table 7-1 gives the breakdown of GDP by expenditure category for selected countries. Notice that, in all countries, consumption expenditures is the largest component of production. Q-1 Calculate GDP with the information below: Consumption = 60 Investment = 20 Government spending = 20 Exports = 10 Imports = 15 TABLE 7-1 Expenditure Breakdown of GDP for Selected Countries GDP (U.S. $ in billions) Consumption (% of GDP) Investment + (% of GDP) + Government Spending (% of GDP) Exports (% of GDP) Country = + United $19,485 69% 17% 17% 12% States China 25,240 39 44 15 20 Germany 4,370 53 20 17 47 Japan 5,620 56 24 20 16 Mexico 2,570 65 24 12 37 Nigeria 1,170 79 15 7 13 Poland 1,190 59 20 18 54 Note: Percentages may not sum to 100 due to rounding. Values are for 2017, specified in U.S. dollars, adjusted purchasing power parity. 9:06 AM Thu May 6 100% Two Things to Remember about GDP In thinking about GDP, it is important to remember that (1) GDP represents a flow (an amount per year), not a stock (an amount at a particular moment of time); and (2) GDP refers to the market value of final output. Let's consider these statements separately. Two important aspects to remember about GDP are: 1. GDP represents a flow. 2. GDP represents the market value of final output. GDP Is a Flow Concept Say a student just out of college tells you she earns $8,000. You'd probably think, “Wow! She's got a low-paying job!” That's because you implicitly assume she means $8,000 per year. If you later learned that she earns $8,000 per week, you'd quickly change your mind. The confusion occurred because how much you earn is a flow concept; it has meaning only when a time period is associated with it: so much per week, per month, per year. A stock concept is an amount at a given point in time. No time interval is associated with it. Your weight is a stock concept. You weigh 150 pounds; you don't weigh 150 pounds per week. Web Note 7.2 I Global Comparisons GDP is a flow concept, the amount of total final output a country produces per year. The per year is often left unstated, but is essential. GDP is usually reported quarterly (every three months), but it is reported on an annualized basis, meaning the U.S. Department of Commerce, which compiles GDP figures, uses quarterly figures to estimate total output for the whole year. The store of wealth, in contrast, is a stock concept. The stock equivalent to national income accounts are the wealth accounts—a balance sheet of an economy's stock of assets and liabilities. Table 7-2 shows a summary account of U.S. net worth from the wealth accounts for the United States in 2017. These are stock measures; they exist at a moment of time. For example, on December 31, 2017, the accounting date for these accounts, U.S. household and nonprofit net worth was $99.7 trillion. TABLE 7-2 U.S. National Wealth Accounts in 2017 (net worth) Dollars (in trillions) 9:06 AM Thu May 6 100% TABLE 7-2 U.S. National Wealth Accounts in 2017 (net worth) Dollars (in trillions) $99.7 Household and nonprofit net worth Tangible wealth $34.0 Owner-occupied real estate $27.9 Consumer durables 5.7 Other 0.4 Financial wealth 65.7 Corporate equities 26.6 Noncorporate equities 11.8 27.3 Other (pension reserves, life insurance, etc.) Government net financial -19.1 assets Federal -16.7 State and local -2.4 Total net worth 80.6 Source: Financial Accounts of the United States - Z.1, Board of Governors of the Federal Reserve (www.federalreserve.gov/releases/zl). The value of the government's financial liabilities is greater than the value of its financial assets, which is why it shows up as a negative percentage. Page 152 REAL-WORLD APPLICATION Gross Output: A New Revolutionary Way to Measure the Economy? 9:10 AM Thu May 6 100% Real versus Nominal GDP Now let's look specifically at the GDP deflator, the price index that includes all goods and services in the economy expressed relative to a base year of 100. This is the deflator used to deflate nominal output by the rise in inflation to arrive at real output. Doing so gives us the output we would have had, had the price level remained constant. Let's consider an example. Say nominal GDP rises by 10 percent from $16 trillion to $17.6 trillion. To determine how much of that 10 percent rise is real, we have to determine whether the price level has changed. Say that prices have risen by 5 percent. That means that the GDP deflator has increased from 100 to 105 (100 + 5). To calculate real Page 160 GDP we deflate nominal GDP by dividing nominal GDP in the second year (the year when prices rose) by the GDP deflator and multiplying by 100: $17.6 Real GDP = x 100 = $16.76 trillion. 105 Real GDP, in this case, is $16.76 trillion, which is GDP that would have existed if the price level had not risen. In other words, real GDP rose not by $1.6 trillion, but by $760 million. The relationship between real GDP, nominal GDP, and the GDP deflator can be stated more generally, Q-6 Nominal output has increased from $10 trillion to $12 trillion. The GDP deflator has risen by 15 percent. By how much has real output risen? Real GDP = = Nominal GDP X 100 GDP deflator Rearranging terms, we can also provide a formula for calculating the GDP deflator: Nominal GDP GDP deflator = x 100 Real GDP To move from the GDP deflator to the rate of inflation, you calculate the change in the deflator from one year to another, divide the change in the deflator by the initial year's deflator, and multiply by 100. Inflation = Change in deflator X 100 Initial deflator For example, if the initial deflator is 101 and the current deflator is 103, divide the difference, 2, by the initial deflator, 101, and multiply by 100. Doing so gives an inflation 9:10 AM Thu May 6 100% GDP deflator = Nominal GDP X 100 Real GDP To move from the GDP deflator to the rate of inflation, you calculate the change in the deflator from one year to another, divide the change in the deflator by the initial year's deflator, and multiply by 100. Inflation Change in deflator x 100 Initial deflator For example, if the initial deflator is 101 and the current deflator is 103, divide the difference, 2, by the initial deflator, 101, and multiply by 100. Doing so gives an inflation rate of 1.98 percent: Inflation = 103 – 101 101 X 100 = 1.98 For numbers close to 100, simply subtracting the two deflators (103 – 101 = 2) provides a reasonably good approximation to the rate of inflation. The growth rate of nominal and real GDP can be calculated by the same method; you calculate the difference between the figures for the two years, divide that difference by the initial year figure, and multiply by 100. For example, if GDP rises from $20 trillion to $20.6 trillion, the difference is $600 billion. Dividing that by the initial year's GDP, $20 billion, and multiplying by 100 gives you a growth rate of 3 percent. The growth rates of real GDP, nominal GDP, and inflation are related. Specifically: % change in real GDP = % change in nominal GDP – Inflation Doing that subtraction is what economists mean when they say that real GDP is equal to nominal GDP adjusted for inflation. We can see these relationships in the table below, which lists nominal GDP, the GDP deflator, and real GDP for recent years and their percentage changes from the previous year. Nominal GDP GDP Deflator Real GDP 2015 levels in billions $18,219.3 104.8 $17,384.8 2016 levels in billions 18,707.2 105.9 17,665.0 % change from 15 to '16 2.7 1.1 1.6 9:10 AM Thu May 6 100% 1 E: Doing that subtraction is what economists mean when they say that real GDP is equal to nominal GDP adjusted for inflation. We can see these relationships in the table below, which lists nominal GDP, the GDP deflator, and real GDP for recent years and their percentage changes from the previous year. Nominal GDP GDP Deflator Real GDP 2015 levels in billions $18,219.3 104.8 $17,384.8 2016 levels in billions 18,707.2 105.9 17,665.0 % change from 15 to '16 2.7 1.1 1.6 2017 levels in billions 19,485.2 107.9 18,058.6 % change from 16 to '17 4.1 1.9 2.2 Notice that you can arrive at the growth rate in real GDP by subtracting inflation Page 161 from the percentage change in nominal GDP. For example, from 2016 to 2017 real GDP rose by 2.2 percent, which equals the growth of nominal GDP, 4.1 percent, minus inflation of 1.9 percent. Real GDP is what is important to a society because it measures what is really produced. Considering nominal GDP instead of real GDP can distort what's really happening. Let's say the U.S. price level doubled tomorrow. Nominal GDP would also double, but would the United States be better off? No. We'll use the distinction between real and nominal continually in this course, so to firm up the concepts in your mind, let's go through another example. Consider Russia in 2016 and 2017, when nominal GDP rose from 61,098 billion rubles to 65,192 billion rubles while the GDP deflator rose from 100 to 103.7. Dividing nominal GDP in 2017 by the GDP deflator and multiplying by 100, we see that real GDP rose by only 3 percent. So much of Russia's growth was in prices. Other Real-World Price Indexes There are a variety of other price indexes that can be used to determine the amount of inflation. They differ from the GDP deflator in the goods that they include in the index and in some technical issues in how they determine the relative importance of each good. Three additional measures we'll consider here are the consumer nrice indey the nersonal
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