Tag: Economics – Others

Unit 12 Worksheet: The Labor Market
Judy’s Teddy Bears operates in a competitive industry. Judy is one of many teddy bear producers in the market. Also, Judy’s is one of many companies hiring teddy bear factory workers.
The market price of a teddy bear is $10. The table below tells us how many teddy bears Judy’s can make per day with the following amounts of labor. Complete the first two columns.
Labor
Total Product
MP
MRP P=$10
MRP P=$15
1
10
_______
_______
_______
2
18
_______
_______
_______
3
24
_______
_______
_______
4
28
_______
_______
_______
5
30
_______
_______
_______
Why is the marginal product of each additional worker decreasing? Is the 5th worker less skilled than the 1st?
The marginal revenue product of the 5th worker is $20. What does this mean in plain English?
The market wage for teddy bear factory workers is $60/day. How many workers will the factory hire? Why?
Name _________________________________
On the graph below, graph the firm’s MRP. What curve is this?
Draw the supply curve for labor as faced by the individual firm.
How many workers will the firm hire?
Suppose the price of teddy bears increases to $15.
Recalculate MRP — enter answers in the last column.
Draw the new demand curve (just approximate — it doesn’t have to be exact). What happened to demand?
How many workers will the factory hire now?

In this question
In this question, you must estimate a time series model for consumer prices in South Africausing data in the Excel file ECS4863.xls . You are provided with the following data:
Variable names and descriptions:
SA_CPI = South African headline consumer price index (all urban areas)
EXCH= South African rand per euro
Rand = South African rand per US dollar
OIL = Brent crude oil in South African rand per barrel
M3 = South African money supply in million rands
EU_CPI = Euro area Harmonised consumer price index
US_CPI = United States of America consumer price index
NB, Log transform all the variables. L indicates the logarithmic function is used.
3.1 3.2
Use the data to calculate the annual consumer price inflation and annual South Africaper Euro exchange rate growth. [ N.B Calculate the month-on-same-month of theprevious year (i.e. 12 months) inflation and growth rate]. Plot both series in a scatterplotand comment on the relationship. Perform the Ganger causality test and interpret theresults. Find the correlation coefficient between the series and determine if it isstatistically significant (6)
Test the variables LOIL, LEXCH, and LEU_CPI for stationarity (transform all applicablevariables). Also comment on their respective orders of integration. Provide your resultsin the table below (please add rows where necessary): (9)
Variable Model Lags ADF teststatistic Conclusion
LOIL Trend &InterceptInterceptNone
LEU_CPI Trend&InterceptInterceptNone
LEXCH Trend &InterceptInterceptNone
Statistically significant at the: 10% level (*), 5% level (**), 1% level (***)
You can assume that all other variables are non-stationary, integrated of order I(1).
3.3 Test for possible cointegration between variables
(i) Estimate the following long-run cointegration equation using OLS. Copy and paste your EViews results window in your answer sheet.
(1)_ = 0 + 1 + 20 + 3_ + 43 + . ( 1)
(ii) What are your apriori expectations in terms of sign? (4)
(iii) Interpret the estimated coefficients in equation (1). (4)
(iv) Determine the hypothesis of complete exchange rate and euro area consumer pricepassthrough to the South African consumer price index, that is, 1 = 1 and 3 = 1 (4)
(v) Determine whether LM3 and LEU_CPI are redundant variables in equation (1). (4)
(vi) Determine whether LUS_CPI and LRAND are omitted variables in the model (4)
(vii) Generate the residual series for your long-run equation and determine if cointegrationexists between the variables in the long-run model. (3)
3.4 Construct a short-run (Error Correction) component for your model
_ = 0 + 1_1 + 20 + 301 + 4_ + 531 +61 + 71 + . (2)
(i) Estimate the short-run cointegration equation. Copy and paste your EViews resultswindow in your answer sheet.
(ii) Interpret the coefficients 1 to 7 of the short-run model. (7)
(iii) Perform the required diagnostic and stability tests on the residuals of the Error CorrectionModel given by equation (2). Interpret the test results and make conclusions. (8)
a) Jarque-Bera
b) Breusch Godfrey LM TEST
c) Glejser test
d) Ramsey RESET

Voluntary contributions toward a public good
Antonio and Dmitri are considering contributing toward the creation of a botanical garden. Each can choose whether to contribute $200 to the botanical garden or to keep that $200 for a pool table. Since a botanical garden is a public good, both Antonio and Dmitri will benefit from any contributions made by the other person. Specifically, every dollar that either one of them contributes will bring each of them $0.90 of benefit. For example, if both Antonio and Dmitri choose to contribute, then a total of $405 would be contributed to the botanical garden. So, Antonio and Dmitri would each receive $360 of benefit from the botanical garden, and their combined benefit would be $720. This is shown in the upper left cell of the first table.
Since a pool table is a private good, if Antonio chooses to spend $200 on a pool table, Antonio would get $200 of benefit from the pool table and Dmitri wouldn’t receive any benefit from Antonio’s choice. If Antonio still spends $200 on a pool table and Dmitri chooses to contribute $200 to the botanical garden, Antonio would still receive the $180 of benefit from Dmitri’s generosity. In other words, if Antonio decides to keep the $200 for a pool table and Dmitri decides to contribute the $200 to the public project, then Antonio would receive a total benefit of $200 + $180 = $380, Dmitri would receive a total benefit of $180, and their combined benefit would be $560. This is shown in the lower left cell of the first table.
Complete the following table, which shows the combined benefits of Antonio and Dmitri as previously described.
Of the four cells of the table, which gives the greatest combined benefits to Antonio and Dmitri?
When both Antonio and Dmitri contribute to the botanical garden
When neither Antonio nor Dmitri contributes to the botanical garden
When Antonio contributes to the botanical garden and Dmitri doesn’t, or vice versa
Now, consider the incentive facing Antonio individually. The following table looks similar to the previous one, but this time, it is partially completed with the individual benefit data for Antonio. As shown previously, if both Antonio and Dmitri contribute to a public good, Antonio receives a benefit of $360. On the other hand, if Dmitri contributes to the botanical garden and Antonio does not, Antonio receives a benefit of $380.
Complete the right-hand column of the following table, which shows the individual benefit of Antonio.

If a nation’s production possibilities curve is as shown below, the opportunity cost of an extra gun:
increases as more guns are produced.
increases and then decreases as more guns are produced.
decreases as more guns are produced.
decreases and then increases is more guns are produced.
remains constant as more guns are produced.
Society will be at points inside the production possibilities curve when:
resources are not used efficiently.
there is full employment of resources.
per capita income is increasing.
income is distributed equally to all.
all of the above.
Suppose that a society’s production possibilities curve is as follows:
Output (per year)
Possibility
Food (millions of tons)
Tractors (millions)
A
0
30
B
4
28
C
8
24
D
12
20
E
16
14
F
20
8
G
24
0
Is it possible for this society to produce 30 million tons of food per year?
Can it produce 30 million tractors per year?
Suppose this society produces 20 million tons of food and 6 million tractors per year. Is it operating on the production possibilities curve? If not, what factors might account for this?
Plot the production possibilities curve in the graph.
What is the cost to society if food output is increased from 12 to 16 million tons per year? If this increase occurs, what effect do you think it will have on this society’s production possibilities curve next year?
Suppose that this society is governed by a dictator who feels that a tractor is worth infinitely more than a ton of food. What point on the production possibilities curve (of those presented in the table above) would the dictator choose? What problems would arise if he chooses this point?
Suppose that a government faces a choice among various levels of defense, represented by the production of missiles, and of food, represented by the production of corn. The following figures indicate the various combinations of missiles and corn that the country can produce:
Possibility
Missiles (number per year)
Corn (millions of bushels per year)
A
0
11
B
2
10
C
4
8
D
6
6
E
8
3
F
10
0
Plot the relevant production possibilities curve below.
Can this country produce more than 12 million bushels of corn per year? Can it produce more than 10 million bushels per year? Can it produce more than 11 missiles per year? Can it produce more than 9 missiles per year?
Suppose that the government of this country decides that, in the interests of national security, it must produce 4 missiles per year. What is the maximum number of bushels of corn it can produce?
Measured in terms of corn, what is the cost of producing 4 missiles per year rather than 2 missiles per year?
Suppose that this country develops and obtains new technology that enables it to produce 50 percent more corn at each level of missile production shown in the table above. Will the new production possibilities curve be closer to, or farther from, the origin than the one graphed in part a?
Under the conditions described in part e, what is the cost of producing 4 missiles per year rather than 2 missiles per year?

OUESTION 2 (20)
2.1 Assume that ESKOM is the sole provider of electricity in South Africa. To meet the monthly demand for electricity in the country, which is represented by the estimated inverse demand function P=1200-4Q. the utility company has set up two electric generating facilities: QK kilowatts are produced at Kusile facility (K) and QM kilowatts are produced at Matimba facility (M). The total output therefore is Q=QK QM The costs of producing electricity at each facility are estimated as CK(QK)=8000 6QK2 and CM(QM)= 6000 3QM2. Determine the profit-maximising amounts of electricity to produce at the two facilities, the optimal price and the utility company’s profits.
2.2 The table below provides information for three firms that enjoy market power such that the marginal revenue (MR) for each of the firms can be represented by the expression: MR = P [1 εlonp εlonp], where P = price of the product, and εlonp = own price elasticity of demand for the firm’s product. MC is the marginal cost.
COUESTION 3 (20)
Inter-district Bus Line (IdBL), a new transport company that entered the transport service provision market in the Free State province is considering some altematives to consolidate its market power. Three alternatives in this decision-making process are in the table. These are: increasing comfort in the bus such that passengers can watch TV while traveling and lure more customers; increasing the bus fleet such that with more buses, the time interval between each bus is reduced, and lastly, keep the status quo. There are three possible2outcomes that IdBL faces and the probabilities for these three possibilities are 0.2 for good market, 0.5 for an average market and 0.3 for a bad market. The net profitloss in thousands of South African Rands (ZAR) for the various alternatives and for various market conditions are presented in the table below.
Payoff Table (Net profit/loss in ZAR)
ALTERNATIVE
Good market
Average market
Bad Market
Increasing comfort in the bus
75000
25000
-40000
Increasing the fleet with same specifications
100000
35000
-60 000
Keep status quo
0
0
0
3.1 What criterion do you recommend applying to this situation? Give reasons and provide calculations. (6)
3.2 Calculate the Expected Value of Perfect Information in this situation. Show all working.
3.3 Develop the opportunity loss table for this situation. What decisions would be made using the mini-max regret criterion and the minimum expected opportunity loss criterion? Show all working.

The government announces programs designed to reduce the share of income going to the top quintile from 60% to 20%. You predict that the most likely result is that:◻ mean household income will fall, because the highest income earners will earn less and work less.median household income will rise, because some of the 40% of redistributed income will be transferred to thethird quintile.after redistribution, each quintile will receive 20% of total wealth.◻ the lowest quintile will receive the 40% taken from the top quintile and switch places.

Japanese tourists traveling to the US increases.
The supply curve shifts to the right for which currency? USD or yen?
The demand curve shifts to the right for which currency? USD or yen?
Which currency has appreciated? USD or yen? (This is the strong currency.)
Which currency has depreciated? USD or yen? (This is the weak currency.)
Did Xn increase or decrease for the US?
Did AD, PL, RGDP Output, employment increase or decrease?
The Federal Reserve of the United States raises interest rates, which are currently higher than the euro.
The supply curve shifts to the right for which currency? USD or euro?
The demand curve shifts to the right for which currency? USD or euro?
Which currency has appreciated? USD or euro? (This is the strong currency.)
Which currency has depreciated? USD or euro? (This is the weak currency.)
Did Xn increase or decrease for the US?
Did AD, PL, RGDP Output, employment increase or decrease?
The Federal Reserve of the United States lowers interest rates, which are now lower than the India rupee.
The supply curve shifts to the right for which currency? USD or rupee?
The demand curve shifts to the right for which currency? USD or rupee?
Which currency has appreciated? USD or rupee? (This is the strong currency.)
Which currency has depreciated? USD or rupee? (This is the weak currency.)
Did Xn increase or decrease for the US?
Did AD, PL, RGDP Output, employment increase or decrease?
The price level of goods and services in the US decreases relative to the Canadian dollar.
The supply curve shifts to the right for which currency? USD or Canadian dollar?
The demand curve shifts to the right for which currency? USD or Canadian dollar?
Which currency has appreciated? USD or Canadian dollar? (This is the strong currency.)
Which currency has depreciated? USD or Canadian dollar? (This is the weak currency.)
Did Xn increase or decrease for the US?
Did AD, PL, RGDP Output, employment increase or decrease?
US citizens begin traveling abroad in greater numbers to Mexico.
The supply curve shifts to the right for which currency? USD or peso?
The demand curve shifts to the right for which currency? USD or peso?
Which currency has appreciated? USD or peso? (This is the strong currency.)
Which currency has depreciated? USD or peso? (This is the weak currency.)
Did Xn increase or decrease for the US?
Did AD, PL, RGDP Output, employment increase or decrease?
The price level of US goods and services increases relative to the yuan in China.
The supply curve shifts to the right for which currency? USD or yuan?
The demand curve shifts to the right for which currency? USD or yuan?
Which currency has appreciated? USD or yuan? (This is the strong currency.)
Which currency has depreciated? USD or yuan? (This is the weak currency.)
Did Xn increase or decrease for the US?
Did AD, PL, RGDP Output, employment increase or decrease?

Lucy (L) and Kitty (K) are two lumberjacks working in the forest near Paradise Pond and the Mill River. Each player has a fallback position of a payoff of 12. The interaction between the two lumberjacks works as follows. Lucy and Kitty may choose between chopping wood for 12 hours and chopping wood for 6 hours. Their actions and preferences provide a normal form game as represented by the following Table
Table [[, Kitty], [, Chop 6 hours, Chop 12 hours], [, Chop 6 hours, 51, 51], [Lucy, 66, 24, 12, 12], [, Chop 12 hours, 66], [,,]]
Does either player have a strictly dominant strategy in the Game? Is there a dominant strategy equilibrium? Explain. [3 points]
What are the players’ best responses in the Game? Show all the steps. [2 points]
What is/are the Nash equilibrium/ equilibria of the game? Explain. [3 points]
Define Pareto-efficiency. What are the shortcomings of Pareto efficiency as a criterion for policy-making? [2 points]
Redraw the game as a sequential game with Lucy as the first mover and Kitty as the second mover. [5 points]
Assume that both players are Homo economicus. Show and explain how the game would be solved using backward induction. What would the Nash equilibrium of the game be? [5 points]
Now, instead of Homo economicus, assume that Kitty is still the second mover. But assume now that both Lucy and Kitty are Homo reciprocans and they like to reciprocate the actions of others. Let us test out what this would look like by giving each player an extra payoff of 2 units if they take the same action that the other player takes, but leave their payoffs unmodified if they take a different action. Draw the game tree and solve for the Nash equilibrium. Explain what happens and compare it to your answer when the two players were both Homo economicus. [5 points]
8. Aanchal and Bradyn are two self-regarding traders engaged in exchange over sour snakes (x) and peanut butter cups (y). Their utility functions are given by the following:
Aanchal: uA=(xA)14(yA)34
Bradyn: uB=(xB)14(yB)34
Aanchal has an initial endowment of 13 sour worms and 5 peanut buttercups. Bradyn has an initial endowment of 7 sour worms and 10 peanut butter cups.
i. What is Aanchal’s marginal rate of substitution of peanut butter cups for sour worms ( mrsA )? What is Bradyn’s marginal rate of substitution of peanut butter cups for sour worms (mrsg)? [5 points]

Apila Homework: Aggregate Supply4. Short-run equilibrium and long-run aggregate supply
The following graph shows several aggregate demand and aggregate supply curves for an economy whose potential output is $5 trillion. The curves are labeled a,b,c, and d. Three points on the graph are also indicated by grey stars and labeled K, L, and M.
Identify which curve on the previous graph corresponds to each of the following descriptions. If the curve described is not shown on the graph, choose Not Shown. In the descriptions, AD represents aggregate demand; SRAS represents short-run aggregate supply; LRAS represents long-run aggregate supply.
Description
a
b
c
d
Not Shown
SRAS if the expected price level is 70
LRAS
AD
SRAS if the expected price level is 60
SRAS if the expected price level is 50
Suppose the economy is currently in short-run equilibrium at point L. In this case, the economy is producing at an output level q, its potential output. At current prices and wage levels, real wages are q, what firms and workers expected when they agreed on wage contracts. In the long run, if the price level and the nominal wage are both flexible, wages will q, , which will cause the q, curve to shift to theq, Assuming the other two curves do not change, the economy will reach a new equilibrium at an output of q, and a price level ofq,

Case Study 15: The Copper Cable Conundrum in a Competitive MarketZambiaLink Cables Ltd. is a mid-sized firm producing copper wires and cables for export and domestic use. The company recently entered a regional Southern African market where numerous small and large firms operate under conditions of imperfect competition. The management observed aggressive marketing campaigns and slight variations in product specifications across competitors, which gave them reason to believe that the market is structured under monopolistic competition.The firm must decide how to set its pricing policy given its lack of total market control. A consultant economist was hired to evaluate ZambiaLink’s strategy. The consultant noted that while the market exhibited many sellers and similar but differentiated products, entry and exit were relatively easy. Additionally, consumer loyalty was influenced by branding and advertising, not price alone. ZambiaLink, currently breaking even, is considering shifting its strategy to include stronger brand identity, investment in quality differentiation, and potential price increases to reflect perceived value.
REQUIRED:
1. Identify and explain the characteristics of the market structure ZambiaLink is currently operating in. How does this structure influence the firm’s pricing strategy?
2. How does product differentiation affect the pricing decisions in monopolistic competition, and what implications does this have for ZambiaLink’s branding efforts?
3. What role does advertising play in market structures with imperfect competition? Discuss the potential impact of increased advertising on ZambiaLink’s demand curve.
4. Evaluate the degree of pricing power ZambiaLink has within its market structure. What factors determine this degree of pricing discretion?
5. If ZambiaLink were to transition into a more oligopolistic market due to mergers and acquisitions in the industry, how would this shift affect its pricing and non-price competition strategies?