ECN 438 Homework 1 Due 9/23 Fall 2013 1. The Smith family of Tempe, AZ buys a new Volvo station wagon made in Sweden. How would this be recorded in the U.S. national income and product accounts? a. Consumption would increase, imports would increase, and GDP would be unaffected. b. Consumption would be unaffected, imports would increase, and GDP would decrease. c. Consumption would increase, imports would increase, and GDP would be increase. 2. Which of the following would be included in the category “Gross Domestic Investment” (I) of the U.S. national income and product accounts? There may be more than one correct answer. a. tractors made by Caterpillar in Illinois and sold in the U.S. b. tractors made by Caterpillar in Illinois and sold in Europe. c. tractors made by Komatsu in Japan and sold in the U.S. 3. Which of the following would not be an example of U.S. capital outflow? a. Intel builds a new fabrication plant in Vietnam. b. Boeing sells a commercial aircraft to the government of China. c. Bank of America makes loans to businesses in Brazil. d. My father buys bonds issued by the government of Italy. 4. Balance of payments data for a country show that there is greater capital inflow than capital outflow, indicating that the net external wealth position of the country is declining. Which of the following are necessarily implied by this information? There may be more than one correct answer. a. C+I+G > GDP b. S < I c. X < M d. CA < 0 5. By the year 2020, Japan is expected to receive more in income from overseas investments than she pays in income to foreigners who own assets in Japan in an amount equal to 2.0 percent of Japan’s GDP. Also, because of a drop in saving associated with an aging population, Japan’s capital outflow in 2020 is expected to exceed capital inflow but only by 0.5 percent of her GDP. Given this forecast, we can expect the Japan’s balance of trade (exports minus imports) in 2020 to be _____% of GDP. -2- 6. Shown below are selected macroeconomic variables for a given country. Use the values given for the first four variables to determine the missing values for the last four variables. Gross domestic product (GDP) = 10,000 Gross national income (GNI) = 8,400 Current account balance (CA) = -500 Domestic investment (I) = 2,400 Balance of trade (X-M) = National saving (S) = Gross national expenditure (GNE) = Net capital outflow (KO-KI) = 7. Airbus (a European consortium) operates a plant in Alabama. To make a commercial aircraft, the plant purchases engines from a factory in Germany and instruments and assorted parts from aerospace companies in California. The Alabama plant manufactures the frame and assembles the aircraft. A typical Airbus plane which costs $30 mill contains $10 mill worth of engines, $8 mill worth of instruments and ...

1. ECN 438
Homework 1
Due 9/23
Fall 2013
1. The Smith family of Tempe, AZ buys a new Volvo station
wagon made in Sweden.
How would this be recorded in the U.S. national income and
product accounts?
a. Consumption would increase, imports would increase, and
GDP would be unaffected.
b. Consumption would be unaffected, imports would increase,
and GDP would decrease.
c. Consumption would increase, imports would increase, and
GDP would be increase.
2. Which of the following would be included in the category
“Gross Domestic
Investment” (I) of the U.S. national income and product
accounts? There may be
more than one correct answer.
a. tractors made by Caterpillar in Illinois and sold in the U.S.

2. b. tractors made by Caterpillar in Illinois and sold in Europe.
c. tractors made by Komatsu in Japan and sold in the U.S.
3. Which of the following would not be an example of U.S.
capital outflow?
a. Intel builds a new fabrication plant in Vietnam.
b. Boeing sells a commercial aircraft to the government of
China.
c. Bank of America makes loans to businesses in Brazil.
d. My father buys bonds issued by the government of Italy.
4. Balance of payments data for a country show that there is
greater capital inflow than
capital outflow, indicating that the net external wealth
position of the country is
declining. Which of the following are necessarily implied
by this information? There
may be more than one correct answer.
a. C+I+G > GDP
b. S < I
c. X < M

3. d. CA < 0
5. By the year 2020, Japan is expected to receive more in
income from overseas
investments than she pays in income to foreigners who own
assets in Japan in an
amount equal to 2.0 percent of Japan’s GDP. Also, because
of a drop in saving
associated with an aging population, Japan’s capital outflow
in 2020 is expected to
exceed capital inflow but only by 0.5 percent of her GDP.
Given this forecast, we
can expect the Japan’s balance of trade (exports minus
imports) in 2020 to be
_____% of GDP.
-2-
6. Shown below are selected macroeconomic variables for a
given country. Use the
values given for the first four variables to determine the
missing values for the
last four variables.
Gross domestic product (GDP) = 10,000

4. Gross national income (GNI) = 8,400
Current account balance (CA) = -500
Domestic investment (I) = 2,400
Balance of trade (X-M) =
National saving (S) =
Gross national expenditure (GNE) =
Net capital outflow (KO-KI) =
7. Airbus (a European consortium) operates a plant in Alabama.
To make a commercial
aircraft, the plant purchases engines from a factory in
Germany and instruments and
assorted parts from aerospace companies in California. The
Alabama plant
manufactures the frame and assembles the aircraft. A
typical Airbus plane which
costs $30 mill contains $10 mill worth of engines, $8 mill
worth of instruments and
other parts. The value added by the Alabama plant makes up
the remaining $12 mill.
How would U.S. GDP and its components be affected by the

5. production of an Airbus
plane in Alabama?
-3-
8. The following equations describe the macro economies of
two countries. Assume that
GDP and GNI are equal. They are denoted Y. Use the
information to answer the
questions below.
Note: The interest rates r and r* are in percent. Avoid
simple algebraic mistakes.
Home country: Y = 5000
C = 775 + .75(Y-T) – 150r
I = 1000 – 50r
G = T = 1000
Foreign country: Y* = 3750
C* = 700 + .75(Y*-T*) – 100r*
I* = 500 – 50r*
G* = T* = 750

6. a. Derive the national saving functions of each country.
National saving may be
defined as (Y–C–G). National saving will be a
function of the interest rate.
S =
S* =
Questions about an open economy equilibrium
b. Use the equilibrium condition “S+S* = I+I*” to determine
the equilibrium
world interest rate.
r = r* =
c. Given the equilibrium interest rate, what are the net capital
outflows of each
country?
S – I =

7. S* - I* =
d. What is the difference between GDP and GNE (absorption)
in each country?
Y – (C+I+G) =
Y* – (C*+I*+G*) =
EC 532 F13 Test2
For each of the following questions, explain you answer and
show your work. Make sure your answers
are backed up by numbers.
1. Suppose that individual demand for a product is given by Q =
1200 - 5P. Marginal revenue is
MR = 200 - 0.4Q, and marginal cost is constant at $ 20.
There are no fixed costs.
a. The firm is considering a quantity discount. The first 400
units can be purchased at a price of $120, and further units can
be purchased at a price of $80. How many units will the
consumer buy in total?
b. Show that this second- degree price- discrimination scheme is
more profitable than a single monopoly price.

8. 2. A monopolist sells in two geographically divided markets,
the East and the West. Marginal cost is
constant at $50 in both markets.

9. Demand and marginal revenue in each market are as follows:
Qe = 1200 – 2Pe
MRe = 600 – Qe
Qw = 800 – Pw
MRw = 800 – 2Qw
Where e represents the east, and w represents the west market.
a. Find the profit- maximizing price and quantity in each
market.
b. In which market is demand more elastic? How can you tell?
Describe.
c. Under what conditions, price discrimination is effective and
why?

10. 3. Consider a market with a monopolist and a firm that is
considering entry. The new firm knows that if
the monopolist “fights” (that is, sets a low price after the
entrant comes in), the new firm will lose
money. If the monopolist accommodates (continues to charge a
high price), the new firm will make a
profit
Entrant
Enter Don’t Enter
Monopolist Price High 20, 10 50, 0
Price Low 5,-10 10, 0
A. Is the monopolist’s threat to charge a low price credible?
That is, if the entrant has come, would
it make sense for the monopolist to charge a low price? Explain.
B. What is the Nash equilibrium of this game?
C. How could the monopolist make the threat to fight credible?

11. 4. Jill resigns from her job, at which she was earning $ 40,000
per year, and uses her $120,000 savings,
on which she was earning 5 percent interest, to start a business.
In the first year, she earns revenue of
$200,000, and her costs are as follows:
Rent $25,000
Utilities $12,000

12. Wages $30,000
Materials $20,000
a. Calculate Jill’s accounting profit.
b. Calculate Jill’s economic profit.
c. What makes economic profit different from accounting
profit?