Reference no: EM133202742

1) Suppose that a very simple economy produces three goods: book, wheat, and cheese.  Suppose the quantities produced and their corresponding prices for 2020 and 2021 are shown in the following table:

a. What is nominal GDP in 2020?

b. What is nominal GDP in 2021?

c. What is real GDP in 2020, using 2021 as the base year?

d. What has been the percentage change in nominal GDP between 2020 and 2021?

e. What has been the percentage change in real GDP between 2020 and 2021, using 2021 as the base year?

2) Suppose the wage (w) is $20 and the price of coal (p) is $40 and a representative firm in the textile industry has two types of technologies available with a goal to produce one unit of cloth:

a. Calculate the production costs required for the two types of technology. Which technology would a firm choose?

b. Write down the equation of the isocost line for each technology. Make R the subject of the equation.

c. Draw the two isocosts on a diagram. Indicate Technologies A and B and the relative input price ratio.

d. Suppose the wage increases to $30 per unit and the price of coal decreases to $10 per unit. Calculate the new production costs for the two types of technology. Which technology would a firm choose?

e. Write down the equation of the isocost line for each technology after the change in the relative input price ratio. Make R the subject of the equation.

f. Draw the new isocosts on the same diagram and indicate the relative input price ratio.

g. Write down the equation to calculate the innovation rent. How much is the innovation rent?

3) Download the spreadsheet data that was used to create Figure 1.2 in your textbook The Economy. You can download the spreadsheet data by clicking on the xlsx link here:

Consider the following three countries: Gabon, Greece and Finland. 

a. For each one calculate the 90/10 ratio in 1980, 1990 and 2014. Note: For Gabon use 1982 which is the earliest year available.

b. Describe the differences in the 90/10 ratio between countries revealed by your calculations.

c. Describe the changes in the 90/10 ratio over time for each country.

d. See this article about Gabon:

Gabon aims to cut yawning poverty gap by ending its dependency on oil by Ruth Maclean in Libreville

On the basis of this article provide a brief explanation for the 90/10 ratio in Gabon between 1980 and 2014. (Word limit 150)

4) Using the model developed in The Economy Unit 3, Section 3.7, consider Alain who is a private tutor at a coaching college in Sydney. Prior to the coronavirus pandemic he had been receiving a wage of $50 per hour. 

Assume that Alain's spending on goods and services cannot exceed his earnings per day. Maximum consumption (c) per day is:

c = w(24 - t)    where t = hours of free time per day. 

a. Initially when facing w = $50 per hour Alain chooses to work 8 hours per day and have 16 hours of free time per day. Using a fully labelled diagram describe Alain's utility maximizing combination of free time and consumption.

b. Due to the financial impact of the coronavirus on the coaching college, the managers have reduced Alain's wage to $40 per hour. Using the same diagram as used in part "a" show Alains's new utility maximizing combination of free time and spending on goods and services assuming that his hours of free time each day decrease to 12 hours.

c. On your diagram decompose the overall change in hours of free time in response to the wage decrease into the (i) income effect and (ii) substitution effect. You must use words as well as the diagram to explain the decomposition of the overall change.

5) Consider the example of Greta and Carlos discussed in The Economy textbook Unit 1 Section 1.8 and Figure 1.9a and 1.9b. Assume the market price is now 1 tonne of wheat can be traded for 45 apples. Greta proposes a trade of 14 tonnes of wheat with Carlos.

a. What would Greta and Carlos have available to consume of both goods if the trade goes ahead?

b. Would both Carlos and Greta be better off after the trade? Explain.