SOSC1449 Understanding Our Economy
Assignment 1
Due: 17 March 2023 23:59
1. Demand and supply:
Gloria’s Demand Schedule
|
Price
|
Quantity Demanded
|
|
8
|
1
|
|
7
|
4
|
|
6
|
6
|
|
5
|
8
|
|
4
|
10
|
|
3
|
12
|
|
2
|
14
|
|
1
|
16
|
Taylor’s Demand Schedule
|
Price
|
Quantity Demanded
|
|
5
|
2
|
|
4
|
4
|
|
3
|
6
|
|
2
|
8
|
|
1
|
10
|
A. Given the two students’ demand schedules for bubble tea, plot the individual demand curve for each student on a Price-Quantity figure. [5 points]
B. Plot the aggregate demand curve for the two students. [5 points]
C. If the market price is 4.2, how many bubble teas are bought by each of the students? [5 points]
D. Compute the consumer surplus when the market price is 3.5. [5 points]
2. The labor market for college graduates can exhibit four possible scenarios based on changes in demand and supply: (1) A profession hires more college graduates, and their wage increases. (2) A profession hires more college graduates, but their wage decreases. (3) A profession hires fewer college graduates, and their wage increases. (4) A profession hires fewer college graduates, and their wage decreases. For each scenario, start with an initial supply and demand diagram for the labor market (with wage on the vertical axis and quantity of college graduates on the horizontal axis). Then, shift either the demand curve, the supply curve, or both to illustrate how the market reaches the described outcome. Label the initial and new equilibrium points clearly. [20 points]
3. Suppose an economy produces only computers and coffees. In Year 1, it produces 150 computers at a price of $20 each and 100 coffees at $10 each. In Year 2, it produces 200 computers at a price of $200 each and 200 coffees at $100 each. Using Year 1 as the base year, calculate the percentage increase from Year 1 to Year 2 for the following variables:
a. Nominal GDP [4 points]
b. Real GDP [4 points]
c. CPI (base year quantity weights) [4 points]
d. GDP deflator (final year quantity weights) [4 points]
In Year 3, the economy produces 400 computers at a price of $250 each and 200 coffees at $150 each. Using Year 1 as the base year for real GDP and CPI, calculate the percentage increase from Year 2 to Year 3 for the following variables:
e. Nominal GDP [4 points]
f. Real GDP [4 points]
g. CPI (base year quantity weights) [4 points]
h. GDP deflator (final year quantity weights) [4 points]
4. Growth model:
1. Describe, using a mathematical equation, how capital stock accumulates over time in an economy. [2 points]
2. Identify the two main forces driving the accumulation of capital over time. [2 points]
3. On a graph with output (Y) on the vertical axis and capital stock (K) on the horizontal axis, plot the production function and saving function. [2 points]
4. On the same graph, with output (Y) on the vertical axis and capital stock (K) on the horizontal axis, add the depreciation function. [2 points]
5. Using the same Y-K graph, illustrate the dynamics of catching-up growth, showing how capital stock evolves over time (starting from a very low capital and a very high capital), and mark the steady-state equilibrium. [2 points]
6. Derive the function Kt+1=f(Kt) that represents the capital accumulation process depicted in the graph shown below. [2 points]
7. Suppose a country starts with a capital stock per worker, K0, below its steady- state level. Using the graph above, describe how the country’s capital stock grows over time. [2 points]
8. For the country in question 7, explain how the growth rate of capital per worker changes as it approaches the steady state. [2 points]
9. After reaching the steady state, does output per worker exhibit permanent growth? One line to explain why or why not. [2 points]
10. Describe the effects on output (Y) and capital stock (K) if a policy increases the savings rate (s) in the economy, using the Solow model framework. [2 points]
11. Describe the effects on output (Y) and capital stock (K) if a policy increases total factor productivity (A) in the economy, using the Solow model framework. [2 points]
Suppose that when capital per worker is below a subsistence level (K< Kbar), there is no saving because all income is consumed for survival. When capital per worker exceeds this level (K> Kbar), saving occurs normally.
12. Rewrite the capital accumulation equation mathematically for the case where K
13. Rewrite the capital accumulation equation mathematically for the case where K>Kbar, [2 points]
14. Illustrate the capital accumulation dynamics for both cases (K< Kbar and K>Kbar) using the graph below. [2 points]