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Business Economics ECON 8069 Reading Time: None Writing Time: 3.5 Hours Permitted Materials: Ruler, Calculator, Pen and Paper Page 1 of 5 – Business Economics (ECON 8069) Answer all questions on a single pdf file, then upload your answer pdf to Tur- nitin on Wattle. Answers are expected to be succinct but complete. Answers that are too long and irrelevant will be penalized. Part A - 60 points Each question in this part is a True, False, or Uncertain question. For each question you must answer whether the statement in italics is True, False, or Uncertain, and justify your response. Statements made not in italics should be taken as fact/assumptions. Each question in this part is worth a maximum of 10 points. 1. With the removal of cigarettes from prisons, many prisoners have begun using packet noodles for trade among themselves. These packet noddles cannot be considered to be money as their use-value deteriorates over time as the noodles spoil. 2. Consider an economy which produces only Missiles and Rice, with production given by Table 1. Suppose consumers in this economy consumed these goods also accord- ing to Table 1. Year Price of Missiles Missiles Produced Missiles Consumed Price of Rice Rice Produced (kg) Rice Consumed (kg) 2020 $10M 10 12 $1 15M 12M 2021 $11M 11 14 $1.05 16M 12.5M Table 1: Data pack In this economy, the percentage change in the GDP deflator from 2020 to 2021 is greater than the inflation rate. 3. Suppose the economy operates according to the Solow-Swan model. Suppose further that the government wants to increase economic well-being. To achieve it’s goal, the government could enact policies to increase the savings/investment rate in its economy. 4. According to the Nash Bargaining model of employment, the government should increase the minimum wage as it provides a Pareto improvement to society. 5. GDP (Gross Domestic Product) is an effective measure of the economic well-being of a typical citizen of a society. 6. While there are potential arguments for restricting international trade, in general most economists would argue for reductions in barriers to international trade. Page 2 of 5 – Business Economics (ECON 8069) Part B - 50 points Each question in this part is worth 25 points in total. Each question contains multiple sub-questions. As always, you must answer all questions to the best of your ability, and justify all responses. 1. Emerging in November 2019, and becoming increasing prominent into February and March 2020 up until the present, the COVID crisis has had a very significant impact on the economy and society at large (in case you were unaware). a) Suppose the COVID crisis and lockdown has caused a temporary 40% fall in the demand for labour in the economy. Suppose that the Supply of labour has not changed. As this shock is expected to be temporary, there is very strong downward wage rigidity in the economy. Using the Labour Market and Production Function model, argue why we expect output to fall by less than 40%. b) Suppose we have the shock as in part (a) but the fall in demand for labour is now recognised as permanent. This removes the downward wage rigidity. What effect does the removal of downward wage rigidity have on aggregate output? c) Assume the economy is as in part (b). That is, 40% drop in Demand for Labour, and no downward wage rigidity. Would higher inflation have an impact on real output? Explain your reasoning (as always). d) Give possible reasons why the usual CPI measure may not be a good measure of the cost-of-living for consumers during COVID. e) Given your experience of COVID, would you expect inflation to be higher than expected over this period, or lower than expected? Why do you think this? f) What kinds of policies might be employed by the Central Bank to help increase output? Why might these policies be effective? Page 3 of 5 – Business Economics (ECON 8069) 2. The national government is concerned about foreign supply of cheap internationally- produced rice pushing down the price of rice for domestic farmers, putting rural areas at risk of recession. The government is considering three policies to raise the price faced for domestic producers: (i) a tax consumers must pay when they buy imported import rice, (ii) a subsidy to domestic producers when they grow and sell rice, or (iii) doing both policies together. Suppose the autarky price for rice is $100 per tonne, while the world price is $50 per tonne. The government is considering a tax on imported rice of $20 per tonne, and/or a subsidy to domestic production of $20 per tonne. For the remainder of this question, please refer to the diagram below (which is not to scale): Supply Demand $ 100 $ 90 $ 70 $ 50 qs q′s q ′′ s q ∗ q′′d q ′ d qd A B C D E F G H I J K L M N O P Q R S T U V W X Y Z q p Rice Imports For each of the following questions, when asked to perform a welfare analysis, please indicate Consumer Surplus (for example) by indicating which areas of the graph cor- responds to Consumer Surplus. For example, you might say “Consumer Surplus = P + Q + R”, or “Consumer Surplus = PQR”. You must also give a brief explanation for why that area is consumer surplus. Similarly for Producer Surplus, Government Revenue, etc. For ease of marking, please try to give the letters in alphabetical order. Page 4 of 5 – Business Economics (ECON 8069) a) Perform a Welfare Analysis on the autarky equilibrium. That is, describe and show the Consumer Surplus, Producer Surplus, Government Tax Receipts, and Total Surplus. b) Perform a Welfare Analysis on the free trade equilibrium. That is, describe and show the Consumer Surplus, Producer Surplus, Government Tax Receipts, Total Surplus, and any Deadweight Loss. c) Suppose the government introduces a tax on imported rice, so that consumers must pay the government $20 per tonne of rice imported. (i) Argue why this would increase the price paid by domestic consumers to $70 per tonne. (ii) Perform a Welfare Analysis on the effect of this tax. That is, describe and show the Consumer Surplus, Producer Surplus, Government Tax Receipts, Total Surplus, and any Deadweight Loss. (iii) For any Deadweight Loss identified, give an intuitive description of why this deadweight loss exists. d) Suppose the government introduces a producer subsidy on domestic rice, so that farmers receive $20 per tonne of rice produced. (i) Argue why producers will sell rice as if they faced a price of $70, even though the consumer price in shops would remain $50 per tonne. (ii) Perform a Welfare Analysis on the effect of this subsidy. That is, describe and show the Consumer Surplus, Producer Surplus, Government Tax Receipts, Total Surplus, and any Deadweight Loss. (iii) For any Deadweight Loss identified, give an intuitive description of why this deadweight loss exists. e) Compare the effects of these two policies. Make a recommendation to the government of which policy they should implement, if they are only going to implement one of them. f) Suppose the government chooses to implement both policies simultaneously. Perform a Welfare Analysis on the effect of this combination of policies. That is, describe and show the Consumer Surplus, Producer Surplus, Government Tax Receipts, Total Surplus, and any Deadweight Loss. For any Deadweight Loss identified, give an intuitive description of why this deadweight loss exists.