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Economics and Capital Mobility

Analyses the effects of an increase in the cost of capital on a competitive industry. Consider both the short run and long run effects on equilibrium price and quantity, the number of firms and their output. A lump-sum tax, which is levied on a monopolist, will cause a fall in the quantity supplied and an increase in price. True or false? Explain your answer. (f) 2. Two economies produce only two goods, x and y. Economy 1 can produce either 80 units of y or 20 units of x (or any linear combination of the two). Economy 2 can produce either 40 units of y or 20 units of x (or any linear combination of the two).

Therefore, there exists no price for which economy 1 will gain from trading with economy 2. True or false? Explain your answer. The Nash Equilibrium in a Duopolistic Industry is a form off prisoner’s dilemma. True or false? Explain your answer. Uncle Joe has a dairy farm. His output per period is y units of dairy products. The family consumes two types of goods: dairy product y and other goods x. The difficulty of processing dairy products means that Joe has to sell his

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output to a corporation, Milky Devils, which prepares it for the market. The price which he receives from the corporation, c per unit of his output, is given by: p y .

The price of the goods in the market is given y p y O , p x O respectively. Describe and explain the initial choice which the family will make; If Milky Devils always pays the farmer a fixed fraction of the market price of the dairy product, could the family become worse off when the price of dairy products goes The corporation offers Joe to pay him less for each unit of his output but it promises that it would also reduce the market price of the dairy product. Assuming that what the corporation pays Joe is not a fixed proportion of the market price, could the family become worse off?

Under what conditions would the family become better off? Suppose now that the family has become distinctly better off by experiencing an increase in real income. Would the family necessarily buy more of y if dairy products were normal goods? Page 2 of 5 3. The Market for Calendars is comprised of two types of producers. There are commercial firms and there are charities which employ disadvantaged people. The market is competitive and the costs, which charities face, are higher than those of commercial firms which use more capital intensive technologies. The charities cover their losses through donations. A) The government wishes to support the charities and suggests levying a lump sum tax n the commercial firms. What are the implications of this for the short run and long run equilibrium in the industry? Consider here the effects of the scheme on charities (and their workers), commercial firms and consumers. Alternatively, the government is considering subsidizing the wages of the charities’ workers. What are the implications of this for the short run and long run equilibrium in the industry? Consider here the effects of the scheme on charities (and their workers), commercial firms and consumers. Describe the initial set up in the market.

Which of the schemes should the government choose? Some commentators argue that the best way to ensure workers’ hard work is by being generous and offering them, instead of Just a wage per hour, a bonus which is independent of how much they work (good will) together with a lower wage per hour worked. Of course, only people who work are entitled to the bonus. It is argued that any level of real income (measured in utility terms) achieved through equilibrium wages in the market, could have been obtained through this alternative method of payment. Explain how individuals choose how many hours to work.

How will the proposed change affect the supply of labor? Evaluate the commentators’ claim. Page 3 of 5 SECTION B Answer question 5 and one further question from this section. 5. Answer THREE of the following questions. By creating a surplus in the government budget while bringing about a surplus in the Balance of Payments, the government has brought about an increase in actual investment. True or false? Explain your answer. A decrease in the international interest rate will bring about an increase in output in an open economy with perfect capital mobility and a fixed exchange rate regime.

The loan multiplier is nothing but the inverse of the reserve ratio. True or false? Explain your answer. An expansionary fiscal policy in an open economy without capital mobility and a fixed exchange rate will always be effective. True or false? Explain your answer. 6. The open economy multiplier with a proportional tax is smaller than the multiplier with a lump-sum tax. Therefore, the slope of the IS curve with a proportional tax system will be steeper than its slope with a lump-sum tax system. True or false? An increase in the reserve ratio will have no effect on a closed economy with flexible prices and wages. True or false?

Explain your answer. The increase in oil prices also affects the prices of many other goods. Analyses the effects of such an increase on an oil exporting economy and on an oil importing one (separately): (a) When there is no capital mobility and exchange rate is fixed. When there is capital mobility and exchange rate is flexible. When there is capital mobility and exchange rate is fixed. DID 7. Consider a closed economy in which the poor earn a fraction of national income as well as receive donations from the rich. Naturally, their marginal propensity to consume is greater than that of the rich but only the rich pay the proportional tax (t).

In addition, the government has a strict balanced budget policy where government spending depends on the amount of tax raised. What will be the impact on the economy, of an increase in donations to the poor? Consider the implications for the economy when prices and wages are fixed? Would your answer to (b) have changed had prices and wages been flexible? What will be the effect of an increase in the tax rate on the economy? If donations are inversely related to tax levels, will an increase in the tax rate improve or worsen the state of the economy? 8. Compare the multiplier of the economy with and without donations.

Critics of the government claim that the least the government can do is exempt the donation from tax. What will be the effects of such an exemption on the economy when prices and wages are fixed, and also when they are flexible? Would your answer to (d) remain unchanged? The public of the major trading partner of an open economy perceive the risk of holding assets as greater than it used to be. Analyses the implications for the home economy when: (a) There is no capital mobility and the exchange rate is fixed. There is perfect capital mobility with a flexible exchange rate. END OF PAPER Page 5 of 5

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