03 Jun Question A3-9.Consider the problem of a household that will
Question
A3-9.Consider the problem of a household that will earn $I during its working life the present
and values consumption goods both in the present (Cp) and during its retirement years the
future (Cf). Supposethe real after-tax interest rate between the two periods is r.
(a) Write out the equation for the households budget line and illustrate it in a diagram with Cp
on the horizontal axis and Cf on the vertical axis. Identify the intercepts. What is the relative
price (opportunity cost) of Cp? Identify it on your diagram.
(b) Suppose the households preferences are such that it chooses positive consumption in each
period.
Illustrate this choice with an indifference curve and identify the level of saving in your diagram.
Comment on the households consumption pattern over time versus its income-earning pattern.
(c) One of the criticisms of monetary policy since the financial crisis of 2008 is that central banks
around the world have been pursuing a policy of financial repression. This line of argument
holds that that the policy-makers are reducing real after-tax interest rates (perhaps below zero)
in an effort to reduce the burden on borrowers (including governments) and thereby punishing
savers. Assuming that the household thinks of Cp as a normal good, show that such a policy
might result in the household choosing to save more or less in response to the reduction in the
interest rate. Make sure you illustrate and discuss the substitution and income effects.
(d) Now imagine a household that will earn income of $Ip in the present an $If in the future. In a
new diagram show that this household may switch from being a saver to becoming a borrower
as a result of the financial repression as discussed above. Be sure to explain the substitution
and income effects that explain this change in behaviour.
A3-10. Suppose the output (q) produced by different amounts of labour (L) hired by a firm is
given below:
L0123456
q 0 3 9 18 24 27 28
(a) Calculate and graph the marginal product curve for labour levels from 1 to 6. Does the firm
experience increasing marginal product? Decreasing marginal product? [4]
(b) Assume the firm has fixed costs equal to $192 and that each unit of labour costs $36. For
each of the 7 possible output levels calculate fixed cost (FC), variable cost (VC), and total cost
(TC). Show your full calculations for the output level q =24. Graph the FC, VC, and TC curves.
(c) At each of the possible (positive) output levels calculate average variable cost (AVC),
average total cost (ATC), and marginal cost (MC). Show your full calculations for the output
level q =24. In a new diagram, graph these values. [Hints: (i) If X additional units cost Y
additional dollars, then the appropriate MC number is Y/X. (ii) MC numbers are traditionally
plotted halfway between output levels since they apply to the move between these two levels
(they are not a measurement at a level).In this case, because the gaps between output levels
are uneven, this procedure would be complicated, so just graph MC at the end output level.]
(d) Suppose this firm operates in a perfectly competitive market where the market price is $4.00
per unit of output. How many units will the firm produce? What if the market price is $12.00?
What if the market price is 36.00? [4]
(e) Assume that the short-run cost curves are drawn for the long-run efficient plant size and that
all firms in the industry are identical. Are any of the market prices from part (d
Our website has a team of professional writers who can help you write any of your homework. They will write your papers from scratch. We also have a team of editors just to make sure all papers are of HIGH QUALITY & PLAGIARISM FREE. To make an Order you only need to click Ask A Question and we will direct you to our Order Page at WriteDemy. Then fill Our Order Form with all your assignment instructions. Select your deadline and pay for your paper. You will get it few hours before your set deadline.
Fill in all the assignment paper details that are required in the order form with the standard information being the page count, deadline, academic level and type of paper. It is advisable to have this information at hand so that you can quickly fill in the necessary information needed in the form for the essay writer to be immediately assigned to your writing project. Make payment for the custom essay order to enable us to assign a suitable writer to your order. Payments are made through Paypal on a secured billing page. Finally, sit back and relax.
About Writedemy
We are a professional paper writing website. If you have searched a question and bumped into our website just know you are in the right place to get help in your coursework. We offer HIGH QUALITY & PLAGIARISM FREE Papers.
How It Works
To make an Order you only need to click on “Order Now” and we will direct you to our Order Page. Fill Our Order Form with all your assignment instructions. Select your deadline and pay for your paper. You will get it few hours before your set deadline.
Are there Discounts?
All new clients are eligible for 20% off in their first Order. Our payment method is safe and secure.