Introduction to Micro Macro and Econometrics

Statistics for Economists

Econ1_F07_Final_Honors_Yuen.pdf-Econ Honors: Final Exam (Anthony Yuen)

TOTAL SCORE______ MC____ EXE 1____ EXE 2____ EXE 3____ Page 1 of 16 Econ 002- INTRO MACRO Prof. Luca Bossi May 12, 2014 FINAL EXAM -SUGGESTED SOLUTIONS- My signature below certifies that I have complied with the University of Pennsylvania's Code of Academic Integrity in completing this examination. In particular, I declare that I have not used a graphing calculator to complete this exam, nor notes and any material. ____________________________ ____________________ Student Name (printed) PennID ____________________________ ______________ ___________________________ Signature Date Your TA Name (printed) INSTRUCTIONS The exam is closed book. It is composed of 40 multiple choice questions and three exercises. All multiple choice questions are worth 1.5 points (so the total is 60 points for the multiple choice part). You can detach the answer sheet for the MC part at the end of the exam if this is more comfortable for you. If that is the case, be sure to put your name on it and to tell your TA to staple it back to the exam when finished. If you do not fill in the MC part on time and request extra time at the end of the exam to write the answers up, a proctor will take your name and you will receive a penalty of 5 points. ANSWER ALL QUESTIONS. TOTAL POINTS = 100. TOTAL TIME = 120 minutes Provide your answers on the exam sheet directly. Read all questions very carefully. Write legibly. EXAM TAKING POLICY If you need to use the restroom, raise your hand and wait for the proctor to come to you. Only one person can be out of the examination room at a time, and the proctor will hold onto your exam papers while you are out at the restroom. FOR THE DURATION OF THE EXAM, AND WITH THE EXCEPTION OF YOUR ALLOWED SCIENTIFIC CALCULATOR, YOU HAVE TO TURN OFF EVERYTHING ELSE THAT HAS A POWER BUTTON. NO CELL PHONES. NO BOOKS. NO NOTES. NO HELP SHEETS. NO TALKING TO EACH OTHER. YOU CANNOT CONNECT TO THE INTERNET. NO ASKING THE PROCTORS ANY QUESTION OR HELP TO SOLVE THE EXAM. WRITE IN PENCIL OR IN PEN AS YOU LIKE, BUT IF YOU WRITE IN PENCIL THERE IS NO POSSIBILITY FOR RE- GRADING. PLEASE WRITE YOUR NAME ON THE FIRST PAGE OF THE EXAM AND ON THE MC BUBBLE PAGE. PLEASE FOLLOW THE INSTRUCTIONS AS TO HOW TO SUBMIT YOUR EXAM AT THE END OF THE 2 HOURS. PLEASE DO NOT START THIS EXAM UNTIL INSTRUCTED TO DO SO. GOOD LUCK! Page 2 of 16 EXERCISE I (12 points total) On planet Krypton the following are all the transactions that took place last year, firms do not hold any inventories. Transactions among firms are for intermediate goods unless stated otherwise. Note also that some of these transactions involve more than one firm and others involve consumers of this planet. • Firm A sells its products for 30$ to firm B, 50$ to firm C, and 70$ to firm D. It also sells 100$ to Krypton’s consumers, and exports 40$ to Mother Earth. It pays wages for 30$, interests for 15$, rent for 16$, and finally it imports intermediate goods for 17$. • Firm B sells its products for 50$ to firm A, 80$ to firm C, and 20$ to firm D. It also sells 200$ to Krypton’s consumers, and exports 30$ abroad. It pays wages for 70$, interests for 14$, rent for 30$, and finally it imports intermediate goods for 20$. • Firm C sells its products for 80$ to firm A, 40$ to firm B, and 17$ to firm D. It also sells 300$ to Krypton’s consumers, and exports 100$ abroad. It pays wages for 120$, interests for 20$, rent for 110$, and finally it imports intermediate goods for 120$. • Firm D sells 20$ to firm A, 30$ to firm B, and 80$ to firm C. It also sells 400$ to national consumers, and exports 35$ abroad. It pays wages for 100$, interests for 11$, rent for 120$, and finally it imports intermediate goods for 30$. a) (4 POINTS) Find the value of Krypton’s nominal GDP according to the value added approach. Show your work and the details for each firm. b) (4 POINTS) Find the value of Krypton’s nominal GDP according to the expenditure approach. Show your work and the details of each component. c) (4 POINTS) Provide the definition of GDP according to the income approach (no need to compute it, just give the generic definition/formula). Compute profits for Firm A. Show your work and the details. PAPER FOR YOUR USE Solution: a) Value Added = Total sales – Intermediate goods bought GDP according to value added approach = sum of all value added by all firms at each stage of production . Components Firm A Firm B Firm C Firm D Total Intermediate goods bought $167 = 17 +50+80+20 $120 = 30+40+30+20 $330 = 50+80+80+120 $137 = 70+20+17+30 $754 Total Sales $290 = 30+50+70+100+40 $380= 50+80+20+200+30 $537 = 80+40+17+300+100 $565 = 20+30+80+400+35 $1772 Value Added $123 $260 $207 $428 $1,018 b) GDP according to expenditure approach = C + I + G + NX C = 100 + 200 + 300 + 400 = 1,000 I = 0 G = 0 EXP = 40 + 30 + 100 + 35 = 205 IMP = 17 + 20 + 120 + 30 = 187 GDP = 1,018 c) GDP according to Income approach = wages + interests + rents + profits

ECON | 1 and 2 and 10 | Introduction to Micro Macro and Econometrics | exam | TOTAL SCORE__ MC__ EXE 1

B. 2 C. 3 D. 4 Solution: C 12. (3 points) Two team members on a crew team, Katniss and Peeta, need to decide how much eﬀort to put into a race. Each can choose either eﬀort (E) or shirk (S). The payoﬀ matrix is speciﬁed as follows (where K is for Katniss and P is for Peeta): E S E K:4 , P:4 K:1, P:10 S K:10, P:1 K:2, P:2 Peeta Katniss The team will win the race as long as at least one of two members puts in eﬀort. Suppose that Katniss decides to give an incentive to Peeta and says to him: “if we win, I’ll give you half of my payoﬀ from the outcome.” In this case, I. Without the incentive there is no Nash Equilibrium that yields a win. II. With the incentive there is a Nash Equilibrium that yields a win. III. With the incentive both guys exert eﬀort. Which statement(s) is(are) correct? A. I only B. II only C. III only D. Both I and II E. Both II and III F. Both I and III G. I, II, and III H. None Solution: D Page 5 13. (3 points) Use the following diagram to answer the question. 0 20 40 60 80 100 0 20 40 60 80 100 a b c d cumulative population (in %) cumulative income (in %) Refer to the diagram. Which of the Lorenz curves in the diagram corresponds to the largest Gini ratio? A. a B. b C. c D. d Solution: D Short Answer Questions (64 points) 14. Consider an oligopoly consisting of two ﬁrms. The table below depicts each ﬁrms proﬁts (in million dollars), depending on what price both ﬁrms charge. In each cell ﬁrm A gets the ﬁrst proﬁt and ﬁrm B gets the second. Low price High price Low price 18, 18 14, 20 High price 20, 24 16, 16 Firm B Firm A (a) Which strategy does each ﬁrm choose in equilibrium when no collusion is allowed? Solution: Firm A chooses high, ﬁrm B chooses low (b) Suppose that collusion is allowed between the two ﬁrms. Could these ﬁrms beneﬁt from collusion? Explain. Solution: No the ﬁrms could not beneﬁt from collusion because they already maximize the joint proﬁt by playing their Nash Equilibrium strategies. Page 6 15. The market for potato chips is perfectly competitive. The inverse market supply and demand are: P s =0 . 1 Q, P d = 12 - 0 . 1 Q (a) Find the market equilibrium quantity and price, ( Q m ,P m ). Show your work. Solution: 12 - 0 . 1 Q m =0 . 1 Q m ⇒ Q m = 60 ,P m = $6 From now on, assume that the noise of eating potato chips annoys other people, cre- ating a negative externality. The marginal external harm depends on the quantity of potato chips eaten, Q : Marginal External Harm =0 . 1 Q (b) What is the equation of the marginal social beneﬁt (MSB)? What is the Pareto eﬃcient equilibrium quantity and price, ( Q e ,P e )? Show your work. Solution: MSB = MPB - (Marginal External Harm) = 12 - 0 . 1 Q - 0 . 1 Q = 12 - 0 . 2 Q At the eﬃcient equilibrium, MSB=MC, i.e. 12 - 0 . 2 Q e =0 . 1 Q e ⇒ Q e = 40 ,P e = $4 (c) At the market equilibrium ( Q m ,P m ), ﬁnd (i) total social beneﬁt, (ii) total variable cost, and (iii) deadweight loss. Show your work. Solution: Page 7

ECON | 1 and 2 and 10 | Introduction to Micro Macro and Econometrics | exam | B. 2 C. 3 D. 4 Solution: C 12.

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