Lots of economics help :(

May 2014
29
0
Sydney
Hi guys, i understand this is a lot to ask but I really dont understand these questions or how to go through them. It would be great if you could help me out.

cheers


Consider a competitive economy with one type of consumer and one type of firm. There is one physical (perishable) good in the economy and two dates (call them 1 and 2). Each consumer receives an endowment of the good at date 1 and nothing at date 2. At date 1, each consumer consumes part of their endowment and saves the rest (S), at a real interest rate, r. The utility function of each consumer is such that saving is an increasing function of the real interest rate; S = a∙(1 + r), for some positive value, a. At date 1, each firm borrows funds on the loans market (ultimately, from consumers), and uses these funds to purchase the good (at date 1). Each firm has access to a constant-returns technology, where one unit of the good is invested at date 1 and yields X units of output at date 2.


30. The equilibrium (net) real interest rate is given by:

a) r = X.
b) r = X + 1.
c) r = X - 1.
d) r = 1/X.


31. The equilibrium quantity saved (and invested) is given by:

a) S = a∙(1 + X).
b) S = a∙X.
c) S = a∙(2 + X).
d) S = a∙(X – 1).


32. In equilibrium, the profit of every firm is:

a) Negative.
b) Zero.
c) Positive.
d) None of the above.


33. Suppose firms all experience the same improvement in technology. Such a change can be represented by:

a) A decrease in X.
b) An increase in X.
c) No change in X.
d) None of the above (as it will depend on the circumstances).






34. As a result of the technological improvement described in question 33, the equilibrium level of profit for each firm will:

a) Decrease.
b) Increase.
c) Remain unchanged.
d) None of the above.


35. As a result of the technological improvement described in question 33, the equilibrium real interest rate will ___, while the equilibrium quantity saved and invested will ____.

a) Decrease; decrease.
b) Decrease; increase.
c) Increase; decrease.
d) Increase; increase.


The following information will be used for questions 36-39.
Consider an economy with two dates (call them 1 and 2), and one physical (perishable) good available for consumption at both dates. Both goods are assumed to be normal. An individual receives an endowment of the good at both dates and transfers income over time using bonds (with a net real interest rate of r). The individual saves (borrows) when their demand for bonds is positive (negative).


36. With endowments and the interest rate fixed, if the individual increases their demand for bonds, then their consumption at date 1 will ____, while their consumption at date 2 will ____:

a) Decrease; decrease.
b) Decrease; increase.
c) Increase; decrease.
d) Increase; increase.


37. Suppose the individual’s endowment at date 2 decreases. As a consequence, the individual will consume ____ at date 1, consume ____ at date 2, and save ____.

a) Less; less; less.
b) Less; less; more.
c) More; more; less.
d) More; more; more.







38. The utility maximising level of saving by the individual will be ____ function of their endowment at date 1.

a) A decreasing.
b) An increasing.
c) A constant.
d) None of the above.


39. The utility maximising level of saving by the individual will be ____ function of their endowment at date 2.

a) A decreasing.
b) An increasing.
c) A constant.
d) None of the above.


The following information will be used for questions 40-46.
Consider a competitive economy with one type of consumer and one type of firm. The number of firms is fixed (so the entry of new firms in pursuit of profit is not a concern), each firm is owned by a single consumer (and there are as many firms as consumers), each firm has access to the same decreasing-returns technology, where the good is invested at date 1 and output is produced at date 2, and there are no fixed costs. Each consumer has an endowment of the good at date 1 and receives profits (from their firm) at date 2.
At date 1, each firm borrows funds from the loans market (ultimately, from consumers), and uses these funds to purchase the good at date 1. Further, at date 1, each consumer consumes part of their endowment and saves the rest(at a real interest rate, r). The utility function of each consumer is such that saving is an increasing function of the real interest rate. The equilibrium of the economy is given by a real interest rate, r, such that saving equals the investment demand by firms.


40. The optimal level of investment for a firm – given by the inputs purchased at date 1 - is:

a) A decreasing function of the real interest rate.
b) An increasing function of the real interest rate.
c) Unchanging in the real interest rate.
d) None of the above (as it will depend on the circumstances).






41. Suppose a consumer suddenly believes the dividend they will receive at date 2 will be lower than they previously thought. As a consequence, the consumer will:

a) Save less.
b) Save more.
c) Save the same as before.
d) None of the above (as it will depend on the circumstances).


42. Suppose a firm experiences a technological fall, so they produce less output at date 2, for the same input at date 1. For any real interest rate, the profits of the firm will:

a) Decrease.
b) Increase.
c) Remain unchanged.
d) None of the above (as it will depend on the circumstances).


43. Suppose that all firms experience the technological fall described in question 42 (they produce less with the same input). For any real interest rate, the aggregate saving of consumers will.

a) Decrease.
b) Increase.
c) Remain unchanged.
d) None of the above (as it will depend on the circumstances).


44. Suppose that all firms experience the technological fall described in question 42 (they produce less with the same input). As a consequence, for any real interest rate, investment will ____, while saving will _____.

a) Decrease; decrease.
b) Decrease; increase.
c) Increase; decrease.
d) Increase; increase.


45. Suppose that all firms experience the technological fall described in question 42 (they produce less with the same input). As a consequence, the equilibrium real interest rate will:

a) Fall.
b) Rise.
c) Remain unchanged.
d) None of the above (as it will depend on the circumstances).




46. Suppose that all firms experience the technological fall described in question 42 (they produce less with the same input). As a consequence, the equilibrium level of saving and investment will:

a) Fall.
b) Rise.
c) Remain unchanged.
d) None of the above (as it will depend on the circumstances).