SCHOOL OF COMPUTING & ENGINEERING SCIENCES

BACHELOR OF SCIENCE IN INFORMATICS AND COMPUTER SCIENCE

&
BACHELOR OF SCIENCE IN COMPUTER NETWORKS AND CYBER SECURITY

ICS 1105 & CNS 1105: FUNDAMENTALS OF ECONOMICS

ASSIGNMENT & CAT 2

DUE DATE: Wednesday, 27th September 2023

Instructions
 Students to answer these questions as per assigned groups
 Each group to submit a hard copy of write up of this task on 27 Sep 2023
 Total marks for each group will be upto a maximum of 20 marks
GROUP 1 {20MARKS}
Question 1

a) Find equilibrium income. Show that the government budget deficit (the difference
between government spending and tax revenues) is $5 billion (4 marks)
b) Parliament has passed a law, which requires that the deficit be zero this year. If the
budget adopted by Congress has a deficit that is larger than zero, the deficit target
must be met by cutting spending. Suppose spending is cut by $5 billion (to $75
billion).
i. What is the new value for equilibrium GDP? (4 marks)
ii. What is the new deficit? (2 marks)
iii. Explain carefully why the deficit is not zero (2 marks)

1
Question 2
Consider the information in the graph below

Use it to find find the values for the following costs at an output level of 500.
a) Total fixed cost (2 marks)
b) Total variable cost (2 marks)
c) Total cost (2 marks)
d) Marginal cost (2 marks)

GROUP 2{20MARKS}
Question 1
The Smythe chicken farm outside Little Rock, Arkansas, produces 25,000 chickens per
month. Total cost of production at Smythe Farm is $28,000. Down the road are two other
farms. Faubus Farm produces 55,000 chickens a month, and total cost is $50,050.Mega Farm
produces 100,000 chickens per month, at a total cost of $91,000. These data suggest that
there are significant economies of scale in chicken production. Do you agree or disagree with
this statement? Explain your answer (4 marks)

Question 2

The required reserve ratio is 10 percent.

a) How much is the bank required to hold as reserves given its deposits of $3,500?
(3 marks)
b) How much are its excess reserves? (3 marks)

2
 c) By how much can the bank increase its loans? (3 marks)
d) Suppose a depositor comes to the bank and withdraws $200 in cash. Show the bank’s
new balance sheet, assuming the bank obtains the cash by drawing down its reserves
(4 marks)
e) Does the bank now hold excess reserves? Is it meeting the required reserve ratio? If
not, what can it do? (3 marks)

GROUP 3 {20MARKS}
Question 1
Assume that you are hired as an analyst at a major New York consulting firm. Your first
assignment is to do an industry analysis of the tribble industry. After extensive research and
two all-nighters, you have obtained the following information:
_ Long-run costs:
Capital costs: $5 per unit of output
Labor costs: $2 per unit of output
_ No economies or diseconomies of scale
_ Industry currently earning a normal return to capital (profit
of zero)
_ Industry perfectly competitive, with each of 100 firms producing
the same amount of output
_ Total industry output: 1.2 million tribbles
Demand for tribbles is expected to grow rapidly over the next few years to a level twice as
high as it is now, but (due to short-run diminishing returns) each of the 100 existing
firms is likely to be producing only 50 percent more.
a) Sketch the long-run cost curve of a representative firm (5 marks)
b) Show the current conditions by drawing two diagrams, one showing the industry and
one showing a representative firm (5 marks)
c) Sketch the increase in demand and show how the industry is likely to respond in the
short run and in the long run (5 marks)

Question 2
Why is M2 sometimes a more stable measure of money than M1? Explain in your own words
using the definitions of M1 and M2 (5 marks)

GROUP 4 {20MARKS}
Question 1
Suppose the number of employed people in an economy is 121,166,640. The unemployment
rate in this economy is 10.4 percent, or .104, and the labor force participation rate is 72.5
percent, or .725.
a) What is the size of the labor force? (4 marks)
b) How many people are unemployed? (4 marks)
c) What is the size of the working-age population? (4 marks)

3
Question 2
Use the data in the following table to explain what happened with respect to economic
growth and the standard of living in each of the three countries (8 marks)

GROUP 5 {20MARKS}

Question 1
The following table gives some figures from a forecast of real GDP (in 2005 dollars) and
population done in mid-2010.

a) Variable Billions
Real GDP 2010 (billions) $13,406
Real GDP 2011 (billions) $13,792
Population 2010 (millions) 310.2
Population 2011 (millions) 313.2
According to the forecast, approximately how much real growth will there be between
2010 and 2011? (2 marks)
b) What is per capita real GDP projected tobe in 2010 and in 2011? (4 marks)
c) Compute the forecast rate of change in real GDP and per capita real GDP between
2010 and 2011 (4 marks)

Question 2
The consumer price index (CPI) is a fixed-weight index. It compares the price of a fixed
bundle of goods in one year with the price of the same bundle of goods in some base year.

a) Calculate the price of a bundle containing 100 units of good X, 150 units of good Y,
and 25 units of good Z in 2008, 2009, and 2010 (4 marks)
b) Convert the results into an index by dividing each bundle price figure by the bundle
price in 2008 (3 marks)
c) Calculate the percentage change in your index between 2008 and 2009 and again
between 2009 and 2010.Was there inflation between 2009 and 2010? (3 marks)

4
 GROUP 6 {20MARKS}
Question 1
GDP calculations do not directly include the economic costs of environmental damage—for
example, global warming and acid rain. Do you think these costs should be included in GDP?
Why or why not? How could GDP be amended to include environmental damage costs?
(5 marks)

Question 2
In a simple economy, suppose that all income is either compensation of employees or profits.
Suppose also that there are no indirect taxes.

Calculate gross domestic product from the following set of numbers. Show that the
expenditure approach and the income approach add up to the same figure (10 marks)

GROUP 7 {20MARKS}
Question 1
Explain why imports are subtracted in the expenditure approach to calculating GDP (3
marks)

Question 2
Saving and spending behavior depend on wealth (accumulated savings and inheritance), but
our simple model does not incorporate this effect.
Consider the following model of a very simple economy:

5
 a) If you assume that wealth (W) and investment (I) remain constant (we are ignoring the
fact that saving adds to the stock of wealth), what are the equilibrium levels of GDP
(Y), consumption (C), and saving (S)? (6 marks)
b) Now suppose that wealth increases by 50 percent to 1,500. Recalculate the
equilibrium levels of Y, C, and S (6 marks)
c) What impact does wealth accumulation have on GDP? (2 marks)
d) Many were concerned with the very large increase in stock values in the late 1990s.
Does this present a problem for the economy? Explain (3 marks)

GROUP 8 {20MARKS}
Question 1
The following table contains nominal and real GDP data, in billions of dollars, from the U.S.
Bureau of Economic Analysis for 2008 and 2009. The data is listed per quarter, and the real
GDP data was calculated using 2005 as the base year. Fill in the columns for the GDP
deflator and for the percent increase in price level (10 marks)

Question 2
Larson has started a home wine-making business and he buys all his ingredients from his
neighborhood farmers’ market and a local bottle manufacturer. Last year he purchased $4,000
worth of ingredients and bottles and produced 2,000 bottles of wine. He sold all 2,000 bottles
of wine to an upscale restaurant for $10 each. The restaurant sold all the wine to customers
for $45 each. For the total wine production, calculate the value added of Larson and of the
restaurant (10 marks)

6
 GROUP 9 {20MARKS}
Question 1
After suffering two years of staggering hyperinflation, the African nation of Zimbabwe
officially abandoned its currency, the Zimbabwean dollar, in April 2009 and made the U.S.
dollar its official currency.Why would anyone in Zimbabwe be willing to accept U.S. dollars
in exchange for goods and services? (3 marks)

Question 2
You are given the following data concerning Freedonia, a legendary
country:
Consumption function: C = 200 + 0.8Y
Investment function: I = 100
AE _ C + I
AE = Y
a) What is the marginal propensity to consume in Freedonia, and what is the marginal
propensity to save? (3 marks)
b) Graph equations (3) and (4) and solve for equilibrium income (6 marks)
c) Suppose equation (2) is changed to (2´) I = 110.
i. What is the new equilibrium level of income? (4 marks)
ii. By how much does the $10 increase in planned investment change equilibrium
income? What is the value of the multiplier? (4 marks)