What is the level of national income

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Economics for Construction and Engineering Coursework Assignment

Answer ALL Questions; Show all numerical working throughout:

Q1. A perfectly competitive firm faces a price of £14 per unit. It has the following short-run cost schedule:

Output	0	1	2	3	4	5	6	7	8
TC (£)	10	18	24	30	38	50	66	91	120

(a) Copy the table and put in additional rows for average cost and marginal cost at each level of output. (Enter the figures for marginal cost in the space between each column.)

(b) Plot AC, MC and MR on a diagram.

(d) How much (supernormal) profit is made at this output?

(e) What would happen to the price in the long run if this firm were typical of others in the industry?

Q2. The following represent the economy of a small country:

Consumption = 1500

Investment = 300

Government Spending = 800

Imports = 200

Exports = 150

Marginal propensity to consume out of disposable income = 0.8

Lump sum taxes = 700

(a) What is the level of national income?

(b) What is the level of private saving in this economy?

(c) Suppose the full employment level of income is given by 3000. What kind of output gap is the economy experiencing? Explain using a 45 degree diagram.

(d) Briefly identify at least two reasons that may have caused the output gap found under (c)?

(e) By how much should government spending change to remove the output gap?

Q3. 'Since government spending is part of aggregate demand, government should fund a national house building programme to kick-start the economy'

(a) Discuss and illustrate the rationale for such a policy in the short term.

(b) How effective are such policies with respect to stimulating the economy in the long run? Use appropriate diagrams to illustrate your views.

Q4. (a) The charts below show unemployment in the UK economy.

(i) Explain how unemployment is calculated using the 'Labour Force Survey' and the 'Claimant Count' methods.

(ii) Explain this chart. Why does the 'Claimant Count' show lower values than the 'Labour Force Survey'?

(b) Given the different types of unemployment, which one is likely to worsen in each of the following cases? Why?

(i) The introduction of robots in manufacturing.

(ii) The Bank of England raises interest rates.

(iii) Legislation is passed guaranteeing everyone a minimum wage that is 80% of the national average.

(iv) The government decides to close job centres in an attempt to save money.

(i) The Bank of England cuts interest rates and the economy booms.

(ii) As a result of falling unemployment, trade unions become more militant and demand higher wages.

(iii) The government raises the rate of value added tax (VAT).

(iv) Increasing industrial concentration leads to more oligopolistic collusion to raise prices.

(d) The Phillips curve indicates that there is a stable trade-off between inflation and unemployment. Do you agree with this statement? Explain.

Reference no: EM131463476

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