1rst set of problems

Business Economics, Micro & Macro

Vilnius-Kaunas FALL SEMESTER 2009

ECONOMICS 1RST SET OF PROBLEMS

Fall Semester 2009

Lecturer P U E R T A S, J. M.

1rst SET OF PROBLEMS

Welcome to the fantastic Republic of Uzupis where according to its

Constitution a dog has the right to be a dog. You have been chosen
by the Uzupian Parliament as advisor of the Minister of Economy.
They will pay you not a lot of money (only 20.000 UKR, Uzupian
kronu)and it is a very difficult job!

The Uzupian Economy faces many problems. But the people of the
free and bohemian Republic of Uzupis trust you because you have
attended the lectures of the famous Lecturer Mykolas Durys and
studied the book “Principles of Economics” of Gregory Mankiw.

I wish you good luck!!

(*)The Uzupian Kronu is the currency of the country. Ukr (Uzupian kronu. 10 Ukr = 1
euro)

I remind you that you have to hand in all the exercises and readings before the
dead-line!!!!
EVALUATION CRITERIA: Sum A+B.

A) 2 points if you hand in the exercises before the dead-.line. If you hand in it after
the dead-line you will not get any point.

B)
8 points if there are not important mistakes in your answers.
5 points if there are some important mistakes in your answers.
3 points if there are many important mistakes.

0 points if you don’t hand in the exercises before or after the dead-line.

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 1rst set of problems
Business Economics, Micro & Macro
Vilnius-Kaunas FALL SEMESTER 2009

1) Construct graphically the production possibilities frontier for the Republic

of Uzupis, using the data given in the following table. Does the principle of
increasing cost hold the Uzupian economy? (check the slides)

Republic of Uzupis 2009 Production Possibilities

CANS OF BEANS (millions per CANS OF SOUP (Millions per

year) year)
75 0
60 6
45 11
30 15
15 18
0 20

2) Still you are living in the fabulous Republic of Uzupis where

”everybody has the right to make mistakes” (article 6 Republic of
Uzupis Constitution) The only free republic of artists in the world (it is
not a joke).

The thing is that they are great in Arts but not in dealing with Economics.
They have now some problems with the supply and demand of cans of
beans. Can you help them?

Republic of Uzupis 2009 supply and demand schedules for

cans of beans

PRICE QUANTITY DEMANDED QUANTITY SUPPLIED

70 20 14
90 19 15
110 18 18
120 16 20
140 14 22
160 12 24

(*)Quantities expressed in millions of units (cans of beans)

A) Try to graph the demand curve and the supply curve and show the
equilibrium price and quantity
B) Now suppose that it becomes not popular to eat beans, so the
quantity demanded at each price falls by 4 million cans per
year. What is the new equilibrium price and quantity. Show this
solution graphically.
C) Suppose instead that the most important Uzupian factories (that
produce cans of beans) decide to go out and to reduce the quantity of
product supplied (inside Uzupis) reducing the quantity supplied by 4

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 1rst set of problems
Business Economics, Micro & Macro
Vilnius-Kaunas FALL SEMESTER 2009

million cans of beans at every price. Find the new equilibrium price
and quantity and show it graphically.

D) What are the equilibrium price and quantity if the shifts described in
question B and C happen at the same time?

3) Alberto Pinto is a student enjoying his Erasmus at the fabulous Republic

of Uzupis. The republic experiences high level of inflation in the basic
products as french fries, pizzas, burgers, hot dogs and beer. Those products
constitute the basic diet of Alberto and their room mates. Last month the
price for fries increased from 20 Ukr (*) per kg to 22Ukr per kg. The amount
bought by Alberto falls from 10 to 8 kg. Calculate the elasticity of demand
using the midpoint formula (that is preferable when calculating the price
elasticity of demand because it gives the same answer regardless of the
direction of the change). Check the sample of slides “The elasticity and its
applications”.

(*)The Uzupian Kronu is the currency of the country. Ukr (Uzupian kronu. 10 Ukr = 1
euro)

After reading Chapter 6 ” Supply and demand and government policies”

(G.Mankiw book) solve the following problems:

4) The demand and supply schedules for hot-dogs are as follows

Price per hot-dog Quantity demanded Quantity

Supplied

11 ukr 1 milion of units 15 milion of units

10 ukr 2 12
9 4 9
8 6 6
7 8 3
6 10 1

a) What are the equilibrium price and quantity of hot-dogs sold?

b) Hot-dog manufacturers persuade the Government of Uzupis that hot-

dog consumption is good for the economy of the country. The
Uzupian Parliament votes to impose a price floor 2 Ukr above the
equilibrium price. What is the new market price? How may hot-dogs
are sold?

c) Irate college students (the main consumers of hot-dogs) march on

Uzupian Parliament and demand a reduction in the price of hot dogs.
The Parliament votes to repeal the price floor and impose a price
ceiling 1Ukr below the former price floor. What is the new market
price? How many hot dogs are sold?

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 1rst set of problems
Business Economics, Micro & Macro
Vilnius-Kaunas FALL SEMESTER 2009

5) The government of the Republic of Uzupis requires beer drinkers to pay a

20 Ukr. tax on each case of beer purchased.

a) Draw a supply-and-demand diagram of the market for beer without

the tax. Show the price paid by consumers, the price received by
producers, and the quantity of beer sold. What is the difference
between the price paid by consumers and the price received by
producers?
b) Now draw a supply-and-demand diagram for the beer market with the
tax. Show the price paid by consumers, the price received by
producers and the quantity of beer sold. What is the difference
between the priced paid by consumers and the price received by
producers? Has the quantity of beer sold increased or decreased?

6) After reading Chapter 4 “Supply and demand: how markets work”

(G.Mankiw book) answer the following question:

Popeye’s is living now in the Republic of Uzupis. He does not love anymore
his former girlfriend Olivia. Popeye’s has lost his job and he is living now
with his savings. As a result he buys more spinach. Is the spinach and
inferior or a normal good? What happens to Popeye’s demand curve for
spinach?

7) After reading Chapter 24 “Production and Growth” (G.Mankiw book)

answer the following question:

Suppose that Dacia, an auto company owned entirely by Romanians citizens

opens a new factory in the Republic of Uzupis

a) What sort of foreign investment would this represent?

b) What would be the effect of this investment on Uzupian GDP?
c) Would the effect on the GNP be larger or smaller?

8) After reading Chapter 23 ”Measuring nation’s income” (G.Mankiw book)

answer the following questions:

This is the GDP equation: Y=C+I+G+NX what components of GDP (if any)
would each of the following transactions affect?

a) A Uzupian family buys a new car

b) A citizen buys a new house
c) The firm Uzupis Bicycles & Co sells a old model from its inventory
d) You buy two cepelinai at “Prie Angelo Kavine”
e) The government of Uzupis repaves Filaretu gatvė
f) The mom of your fiancé buys a bottle of Spanish wine
g) Phillips Morris opens a new factory in Uzupis.

Below are some data from the Republic of Uzupis. Suppose the Republic
only produces kebabs and pizza. All the prices are in Ukr, the national
currency of Uzupis.

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 1rst set of problems
Business Economics, Micro & Macro
Vilnius-Kaunas FALL SEMESTER 2009

Year Price of Quantity in Price of pizza Quantity of

kebab millions pizza in
millions
2001 10 100 20 50
2002 20 200 20 100
2003 20 200 40 100

a) Compute nominal GDP, real GDP, and the GDP deflator for each year,
using 2001 as the base year.
b) Compute the percentage change in nominal GDP, real GDP and GDP
deflator in 2002 and 2003 from the preceding year.
c) Did economic well-being rise more in 2002 or 2003? Explain

9) After reading Chapter 25 ”Saving, investment and the financial system”

(G.Mankiw book) answer the following question:

Suppose the GDP of the Republic of Uzupis is Ukr 8 trillion, taxes are are Ukr
1.5 trillion, private savings are Ukr. 0.5 trillion. Assuming the Uzupian
economy is closed calculate Consumption, Government Purchases, National
Savings and Investment.

10) After reading Chapter 3 ”Interdependence and the gains for trade”
(G.Mankiw book) answer the following questions:

The workers of the Free Republic of Uzupis and the Holly Kingdom of
Kristiania can each produce 40 bicycles a year. An Uzupian worker can
produce 100 tones of potatoes a year, whereas a Kritianese worker can
produce 50 tones of potatoes a year. To keep things simple, assume that
each country has 100 millions workers.

a) For this situation construct a table analogue to table 3 (Chapter 3 G.M

book).
b) Graph the production possibilities frontier of the Republic of Uzupis
and the Holly Kingdom of Kristiania.
c) For Uzupis what is the opportunity cost of a bicycle? Of potatoes? For
Kristiania what is the opportunity cost of a bicycle? Of potatoes?
d) Which country has an absolute advantage in producing bicycles? In
producing potatoes?
e) Without trade half of each country’s workers produce bicycles and
half produce potatoes. What quantities of bicycles and potatoes does
each country produce?

11) After reading Chapter 25 ”Savings, investment and the financial

system” (G.Mankiw book) answer the following questions:

For each of the following pairs, which bond would you expect to pay a
higher interest rate? Explain.

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 1rst set of problems
Business Economics, Micro & Macro
Vilnius-Kaunas FALL SEMESTER 2009

a) A bond of the German government of a bond of the Republic of

Uzupis?
b) A bond that repays the principal in 2010 or a bond that repays the
principal in 2020?
c) A bond from Microsoft or a bond from “Mantas & Co”, a small
company my friend Mantas runs in his garage?

That’s it…. Please I prefer a hard copy of your work.

I remind you that you have to work individually. Don’t work in “teams” (if
not I will have to divide the mark between the members of the team).

I remind you as well that the readings and assignments represent an

important part of your grade. Check the syllabus!!!

If you deliver the assignment after the dead-line without any reasonable
excuse it will be also evaluated. But then you only will get 8 points as a
maximum!!!
CONSTITUTION OF THE REPUBLIC OF UZUPIS