2nd set of problems

Business Economics, Micro & Macro

Vilnius-Kaunas FALL SEMESTER 2009

ECONOMICS 2nd SET OF

PROBLEMS
Fall Semester 2009

Lecturer M_i_q_u_e_l P_U_E_R _T_ A _S,

STILL LOST IN THE REPUBLIC OF UŽUPIS

STILL you are in the bohemian and creative Republic of Uzupis where
according to its Constitution “everyone has the right to understand
nothing”. You did pretty well in your previous assignment. You have been
successful in your job as an advisor of the Minister of Economy.
Unfortunately the Minister of Economy, Lord Miltonas Friedmanas, has been
impeached because somebody discovered he had secret and illicit relations
with the wife of Roberto Mortadela, a famous capo of the Sicilian mafia, that
is operating in the Republic since it regained the independence.

Then the Parliament has decided that you will be the new Minister of
Economy. This is a very tough work because the Uzupian economy still faces
many problems due to the financial international crisis and the permanent
commercial conflicts with the autocratic government of the Holly Kingdom of
Christiania.

The people of the free Republic of Uzupis trust you because you have been
good student and attended the lectures of the neo-Keynesian Lecturer
Mykolas Durys and studied the book “Principles of Economics” of the
Harvard teacher Greg Mankiw. You will get good money for your new job,
the astonishing amount of 100.000 UKR per month. (*)

God bless you !!!

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

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 2nd set of problems
Business Economics, Micro & Macro
Vilnius-Kaunas FALL SEMESTER 2009

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.

I remind you that you have to hand in all the exercises and readings before the
dead-line!!!!

Costs, break-even point, and marginal analysis

For these exercises I recommend you that read Chapter 13 of G.Mankiw

and the special set of slides you will find in the blog
http://mpuertas.blogsppot.com. Click the label cost the production,
economies of scale, and marginal analysis

1) “Kava be Pienu UAB” is an Uzupian small company specialized in the

production of coffee. The variable cost of processing 1 kg of coffee beans is
50 cents of Krona. The fixes costs per day are 300 Ukr.

a) Give the linear cost equation and draw its graph

b) Find the cost of procession 1.000 kg of coffee beans in one day.

2) “Uzupis Sunkeles & Vestidos” is a firm that has a small factory in

Filaretu avenue. The main street of Uzupis. The company is making
fashionable dresses for the beautiful girls of the Republic. The cost of labor
and materials per dress is 200 Ukr. and its fixed cost are 20.000 Ukr per
day. If each dress sells for 250 Ukr. How many dresses should be produced
and sold to gurantee that the business breaks even? Draw a graph.

3) “Uzupis Baldai & Co” is a small Uzupian company that produces

beautiful desks for good students. Only for the good ones.

Suppose the total daily cost in Ukr. of producing x desks is given by the
following equation

TC= 3.5x+5000

a) If each desk sells for 100 Ukr., what is the break-even point?
b) If the selling price is increased to 150 Ukr. per desk, what is the new
break-even point?
c) If it is known that at least 200 desks can be sold each day, what price
should be charged to guarantee no loss?

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 2nd set of problems
Business Economics, Micro & Macro
Vilnius-Kaunas FALL SEMESTER 2009

Additive tax and market equilibrium

4) The demand for kebabai is represented, in the Republic of Uzupis, by the

following linear equation: 6p+3x=400

The supply is represented by the equation p=5/6x+20

a) Find the equilibrium price and quantity

b) Find the equilibrium price and quantity after a tax of 10 UKR. per unit
is imposed. Find the increase in price and the decrease in quantity
demanded.

Marginal Cost, Marginal Revenue and Marginal Profit:

5) “Duona and donuts UAB” is a bakery specialized in producing

amazingly tasty bread and cookies. The company has the following cost
function:

TC(x)= 0.002x³ - 0.4x²+50x+2000

TC means Total Cost. And x is the quantity of product.

Determine the marginal cost when the production is given by x=50,

x=100 and x=150. Draw a graph (relation between Marginal Cost and
quantity of output produced by the company)

6) “Angelas Alute & Co” is a brewery specialized in the production of

liquor Starkas. Its revenue fuction is given by the following equation

R(x)=20x-0.01x²

Where x is the number of items sold. Determine the marginal revenue of

the company. Evaluate the marginal revenue when x=300

7) The demand equation for the liquor Starkas is p+0.2x=90. And its cost
production fuction is TC(x)=7000+30x.

Compute the marginal profit when 200 units are produced and sold and
when 300 units are produced and sold.

After reading Chapter 29 ” Open-Economy macroeconomics :basic

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

8) 1 litre of milk costs Ukr 5 in the Republic of Uzupis and 15 KP (Kristianian

Pound) in the Holly Kingdom of Kristiania. What would the krona-pound
exchange rate be if purchasing-power parity holds? If a crazy monetary
expansion decided by the autocratic Kristinanian government caused all
prices in the of Kristiania to double, so that milk rose to 30 KP, what would
happen to the krona-pound exchange rate?

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 2nd set of problems
Business Economics, Micro & Macro
Vilnius-Kaunas FALL SEMESTER 2009

9) Would each of the following groups be happy or unhappy if the Ukr

appreciated?

a) French pension funds holtind Ukr. government bonds

b) Uzupian manufacturing industries
c) Happy and noisy Erasmus Spanish students packaging and ready for
their Erasmus experience in Uzupis.
d) An Uzupian firm trying to purchase property abroad.

10 ) If a Japanese car cost 500.000 yen, a similar Uzupian car cost 100.000
Ukr, and a Ukr. can buy 10 yen, what are the nominal and real exchange
rates?

After reading Chapter 32 ” A Macroeconomic theory of the open Economy”

(G.Mankiw book) answer the following questions:

11) Suppose that the Parliament of the Republic of Uzupis passes an

investment tax credit, which subsidizes domestic investment. How does this
policy affect national saving, domestic investment, net capital outflow, the
interest rate, the exchange rate and the trade balance?

12) Suppose the citizens of United States develop a strong taste for the
Uzupian beer. Answer the following questions in words and using a diagram.

a) What happens to the quantity of Uzupian net exports?

b) What happens to the value of Ukr in the market for foreign-currency
exchange?
c) What happens to the demand for Ukr in the market for foreign-
currency exchange?

After reading Chapter 27 ” The Monetary system” (G.Mankiw book) answer

the following questions:

13) Suppose that the T-account of the Uzupio Commercial Bankas is as

follows

Assets Liabilities
Reserves 100.000UKR Deposits Ukr 500.000
Loans 400.000

a) If the Central National Bank of Uzupis (that is like the FED in US or

the European Central Bank in the Eurozone) requires banks to hold 5

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 2nd set of problems
Business Economics, Micro & Macro
Vilnius-Kaunas FALL SEMESTER 2009

percent of deposits as reserves, how much in excess reserves does

Uzupio Commercial Bankas now hold?
b) Assume that all the other banks hold only the required amount of
reserves. If the Uzupio Commercial Bankas decides to reduce its
reserves to only the required amount, by how much would the
economy’s money supply increase?

14) Uzupian Bohemian Bankas UBB is a small bank of Uzupis. The bank
holds Ukr2500 millions in deposits and maintains a reserve ratio of 10
percent.

a) Show a T-account for UBB.

b) Now suppose that UBB’s largest depositor withdraws Ukr. 10 million in
cash from her account. If UBB decides to restore its reserve ratio by
reducing the amount of loans outstanding, show its new T-Account.
c) Explain what effect UBB’s action will have on the other banks of
Uzupis.
d) Why might it be difficult for UBB to take the action described in part
b? Discuss another way for UBB to return to its original reserve ratio.

After reading Chapter 9 “Application. International trade” (G. Mankiw book)

answer the following questions:

15) The beer-makers in the Republic of Uzupis petitioned you as Minister of

Economy to tax beer imported from the Holly Kingdom of Kristiania. They
argue that this tax would both raise tax revenue for the Republic and raise
employment in the country beer industry. Do you agree with this petition?
Do you think that it is a good policiy?

16) The world price of sugar is below the no-trade price in the Holly
Kingdom of Kristiania and above the no-trade price in the Republic of
Uzupis. Using supply-and-demand diagrams and welfare tables as those in
the Chapter 9 (G.Mankiw book) show the gains from trade in each country.
Compare the results for the two countries.

17) After reading “Economies of Scale: the break-even point analysis” ( you
will find the document in “ A mouse in my kitchen”) solve the following
problem.

“Kebabai & Koldunai is a restaurant specialized in serving traditional

Uzupian food. The restaurant serves 400 meals a day at an average price of
300 Ukr. The variable cost of each meal is 100 UKR and there are fixed costs
of running the restaurant of 15.0000 Ukr a day.

a) What profit is made by the restaurant?

b) What is the average total cost of a meal?
c) By how much would the average cost of a meal fall if the number
served rose to 450 euros a day?

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 2nd set of problems
Business Economics, Micro & Macro
Vilnius-Kaunas FALL SEMESTER 2009

After reading Chapter 31 “Aggregate demand and aggregate supply” (G.

Mankiw book) answer the following questions:

18) Suppose that the Uzupian economy is currently in recession. If the

government take no action, how will the economy evolve over-time? Explain
in words and using an aggregate-demand/aggregate-supply diagram.

19) Explain whether each of the following events will increase, decrease or
have no effect on long-run aggregate supply:

a) The Republic of Uzupis experiences a wave of immigration.

b) A terrible earthquake damages the infrastructures and factories of
the republic.
c) The Parliament raises de minimum wage to 100 Ukr per hour.
d) Intel invents a new and more powerful computer chip.

20) How would the following transactions affect the Uzupian net capital
outflow? Also, state whether each involves direct investment or portfolio
investment.

a) An Uzupian beer company establishes an office in Pilsen (Czech

Republic)
b) Coca-cola sells stock to the Uzupian Bohemian Bankas UBB
c) Suzuki open a factory in Uzupis.
d) An Uzupian mutual fund sells its Generam Motors stock to an Italian
investor.

That’s it…. if you do well the people of Uzupis will be happy …and probably
you will get a good mark 

I would prefer a “hard copy” of your homework.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!!!