Set of problems. Macroeconomics, Microeconomics, Business Economics.

1. 2nd set of problems
Business Economics, Micro & Macro
Vilnius-Kaunas 2009/2010
ECONOMICS 2nd SET OF PROBLEMS
Fall Semester 2009/Spring Semester 2010
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, Darth 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 President of the Republic, Lord Jedi el-Lama, with the support of the
Seimas or Assembly of the Republic, has appointed you as 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 and autocratic government of the Holly Kingdom
of Kristiania ruled by the weird Bishop Sith Darth Absalon Johansen
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 and good luck !!!
(*)The Uzupian Kronu is the currency of the country. Ukr (Uzupian kronu. 10 Ukr = 1 euro)
Picture: “2+2 is 5” taken in Kaunas (on a wall besides “Blues & Orange” Bar) Kaunas, Lithuania.
September 2009.
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2. 2nd set of problems
Business Economics, Micro & Macro
Vilnius-Kaunas 2009/2010
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?
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3. 2nd set of problems
Business Economics, Micro & Macro
Vilnius-Kaunas 2009/2010
c) If it is known that at least 200 desks can be sold each day, what price
should be charged to guarantee no loss?
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 function 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 function is TC(x)=7000+30x.
Compute the marginal profit when 200 units are produced and sold and when
300 units are produced and sold.
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4. 2nd set of problems
Business Economics, Micro & Macro
Vilnius-Kaunas 2009/2010
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?
9) Would each of the following groups be happy or unhappy if the Ukr
appreciated?
a) French pension funds holding 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 Saiemas or Assembly 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?
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5. 2nd set of problems
Business Economics, Micro & Macro
Vilnius-Kaunas 2009/2010
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 the Republic of Uzupis (that is like the FED
in US or the European Central Bank in the Eurozone) requires banks to
hold 5 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 Ukr
2500 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 policy?
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.
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6. 2nd set of problems
Business Economics, Micro & Macro
Vilnius-Kaunas 2009/2010
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?
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 opens a factory in Uzupis.
d) An Uzupian mutual fund sells its General Motors stock to an Italian
investor.
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7. 2nd set of problems
Business Economics, Micro & Macro
Vilnius-Kaunas 2009/2010
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!!!
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