MATH0002: ECONOMICS 1 SUMMER TERM 2022
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SUMMEt TEtM 2022
DEPAtTMENT OF MATHEMATICS-MANAGED ONLINE EXAMINATION
MATH0002： ECONOMICS 1 (COMBINED STUDIES)
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Answer ALL questions from Part A, ONE question from Part B and ONE question from Part C. Questions in Part A carry five per cent of the total mark each and questions in Part B and Part C carry twenty-five per cent of the total mark each.
In cases where a student answers more questions than requested by the examination rubric, the policy is that the student,s irst set of answers up to the required number will be the ones that count (not the best answers). All remaining answers will be ignored.
PART A
Answer ALL questions from this section.
A.1 Mexico and the Dominican Republic are the top avocado producing countries in the world. suppose that avocado workers in Mexico go on strike. what is the efect of the strike on the Mexican market of avocados？ what is the efect of the strike on the Dominican Republic market of avocados？Use a supply and demand diagram to illustrate the efect of the strike on each of these markets. Explain whether there is a shift in the supply curve, demand curve or neither and how the equilibrium on each market changes.
A.2 Joe,s current monthly income is ε2ooo of which he spends ε8oo on food. Joe,s income elasticity of food is equal to 2. suppose Joe,s monthly income rises to ε215o. what percentage of his income will Joe spend on food after the increase in his income？ will Joe spend a higher or lower percentage of his income on food？
A.3 Mary considers 2 veggie burgers and 3 tofu burritos to be perfect substitutes. write down a possible utility function, U (v, t) describing Mary,s preferences for veggie burgers (v) and tofu burritos (t). suppose the price for a veggie burger is pv = 1o, the price for a tofu burrito is pt = 7 and Mary,s budget for veggie burgers and tofu burritos is 8o (all prices are in Us dollars). what is Mary,s consumption of veggie burgers (v) and tofu burritos (t)？
Now suppose Mary,s budget (m) for veggie burgers and tofu burritos varies over time. what are Mary,s Engel curves for veggie burgers and tofu burritos, respectively, assuming the prices do not change？
A.4 consider the production function f (L, K) =“min(L, K), where L and K denote the units of
labour and capital employed, respectively. Let 山 = the wage per unit of labour and let T = the rental cost per unit of capital. Derive the long-run total cost, average cost and marginal cost curves as functions of the quantity produced, q.
A.5 suppose you run airm that produces cereal boxes and your total cost function is C(q) = 1o+
, where q is the total quantity produced. Given the market price for a cereal box is p = ε6, what is the quantity of cereal boxes that your irm produces？ Now suppose that your average cost doubles and that you continue at the same production level. could you still be maximising proits in the short-run？ How about in the long-run？
A.6 suppose that the government increases transfer payments to private households, but these trans- fer payments are not inanced by tax increases. Instead the government borrows to pay for the transfer payments. Explain how this policy afects equilibrium output in the short-run.
A.7 Explain how the central Bank changes the money supply and interest rate using ”open market operations” .
A.8 Consider a labour market with search frictions, where unemployed workers move into jobs at a rate f while employed workers lose their jobs at a rate s. Furthermore, suppose that unemployed workers become discouraged and leave the labour market at rate δ . Letting s = δ = 1% and f = 9%）obtain the steady-state unemployment rate, u）and briely discuss the impact of δ on u.
A.9 suppose policy makers wish to increase long-run steady state consumption per worker. Based on the solow growth model, explain what must happen to the savings rate to achieve this objective.
A.1O Briely discuss whether the following argument is true or false: ”The nominal and the real exchange rates always move in the same direction.”
PAtT B
AnsweT ONE question fTom this section, i.e. eitheT B1 oT B2.
B.1 Owen’s utility function for two goods, X and Y , is U(X, Y ) = X15 Y45 , where X and Y represent the quantities of good X and good Y consumed, respectively. The prices of goods X and Y are pX = £2 and pY = £8, respectively, and Owen’s exogenous income is £m.
(a) Determine owen,s marginal rate of substitution (MRS) between goods X and Y. Does the MRS increase or decrease as the amount of X increases relative to the amount of Y along an indiference curve？Justify your answer carefully.
(b) what is the optimal consumption bundle of goods X and Y for owen？
(c) Derive owen,s demand curves for goods X and Y , respectively.
(d) Now suppose that the price for good X increases to px = 4, due to a tax imposed by the government. what is owen,s new optimal consumption bundle of goods X and Y？what is the loss in owen,s surplus？
B.2 The Uk demand for reusable cofee mugs is Qd = 1000 - 4p, where p is the market price for a reusable cofee mug. There are currently 20 identical domestic irms producing reusable cofee mugs, each with total cost function C(q) = 100 + 
. Uk consumers also have access to a large foreign supply of reusable cofee mugs, which they ind identical to the domestically produced ones. Assume that the world-wide price for a reusable cofee mug is p = 托9.
(a) Determine the domestic supply curve of reusable cofee mugs. Assuming there is free trade on the market of reusable cofee mugs, what is the equilibrium on the Uk market of reusable cofee mugs？ How many reusable cofee mugs are imported from abroad？
(b) what is the proit for each domestic irm of reusable cofee mugs in the short-run？ How many domestic irms do you expect will stay in the market in the long-run？
(c) Suppose that the Uk wants to impose an ad valorem tax, τ , on all imports of reusable cofee mugs. what is the minimum such tax, τmin that the Uk should impose on imports to make sure that the 20 existing domestic irms stay on the market？
(d) what is the change in consumer surplus when τmin found in part (c) is imposed on imports of reusable cofee mugs？ what is the dead weight loss？
PAtT C
AnsweT ONE question fTom this section, i.e. eitheT C1 oT C2.
c.1 consider a closed economy in the short-run with the following characteristics:
C = co + c1 (Y - T), T = to + t1 Y, I = do - d1i, and i = i
Notation: C is consumption, Y is output, T denotes taxes, I is investment,i is the interest rate, i is the target interest rate. Government spending is exogenous, and denoted by G. Parameters co , c1 , do , d1 and t1 are positive and c1 < 1. Notice that unlike the textbook model, T is now proportional to Y.
(a) A progressive tax system is one where higher levels of income are taxed more heavily in percentage terms. what condition could be imposed on parameter to to obtain a progressive system？
(b) obtain the IS curve for the economy. what happens to the IS curve if the tax rate t1 is increased？
(c) obtain the short-run equilbrium output; thus comment on the goods market multiplier.
(d) Let co = 1, c1 = O.75, G = 3, to = O, t1 = O.2, do = 1, d1 = O.5 and i = O.1. First, calculate the equilibrium output and the budget deicit. Then, ind out by how much the government needs to cut spending to reduce the deicit to zero. Explain why this amount is not the same as the deicit.
c.2 A closed economy is initially in a medium-run equilibrium: output is resting at potential output; the actual and expected inlation rates are 2% and inlation expectations are anchored at 
= 2%.
(a) using the IS-LM-Pc model, draw a sketch of the initial equilibrium. Be sure to discuss the lower bounds for the nominal and real interest rates.
(b) A newly elected government vows to drastically cut government spending (”iscal consol- idation”). Describe the impact of this policy in the short-run. How does the short-run equilibrium output and inlation compare to their counterparts in the initial medium-run equilibrium if the central bank does not change the interest rate？
(c) Describe the medium-run correction process. Be sure to discuss the change in output, inlation and interest rate.
(d) How does the zero lower bound on the nominal rate make a iscal consolidation more di伍cult？ could such a policy lead to a delation spiral？
2023-08-25