THE ECONOMIC ENVIRONMENT OF BUSINESS

Answers to Recommended Problems #2

Chapter 10

1. 

a.  Positive

b.  Zero

c.  Negative

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2. 

a.  m = -1 / (1 + -15) = 1 / 14 = 7%

b.  m = -1 / (1 + -8) = 1 / 7 = 14%

c.  m = -1 / (1 + -3) = 1 / 2 = 50%

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3. 

a.

m = -1 / (1 + -3) = 1 / 2 = 50%

P = 10 * (1 + 0.50) = 15 => the optimal price is not being charged

b.  The price should be lowered to 15.

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6. 

m = -1 / (1 + -2) = 100%

m = -1 / (1 + -5) = 25%

Ratio = (1 + 1.00) / (1 + 0.25) = 1.6

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8.

a.  Sports fans will buy the sports package (price = 50, maximum willing to pay = 50), parents will buy the kids package (price = 50, maximum willing to pay = 50), and generalists will buy the combined package (price = 70, maximum willing to pay = 80).  Neither sports fans nor parents will  buy the combined package (price = 70, maximum willing to pay = 60).

 b. The company makes a higher profit because, without the combination package, generalists wouldn't buy either package (price = 50, maximum willing to pay = 40 for each package).

Extra - A more interesting question would be to determine the profit maximizing price for each package and for the combination (assuming equal numbers of parents, sports fans, and generalists):

Sports package:

P = 10 => all three groups buy => TR = 3 * 10 = 30

P = 40 => sports fans and generalists buy => TR = 2 *40 = 80

P = 50 => only sports fans buy => TR = 1 * 50

The profit maximizing price is $40, assuming no marginal cost for providing the package (which would be the case for cable television).  Using the same approach, the profit maximizing price for the kids package is also $40.  The total profit from selling both packages is 80 + 80 = 160.

Combination package:

P = 60 => all three groups buy => TR = 3 * 60 = 180

P = 80 => only generalists buy => TR = 1 * 80 = 80

The profit maximizing price for the combination is 60.  Profit made is 180, which is higher than the 160 made when pricing the packages individually.

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Chapter 11

6.

a.  Nominal GDP = real GDP = $50

b.  

(1) Nominal GDP = $95, real GDP = $50

(2) Nominal GDP = $95, real GDP = $95

(3) Nominal GDP = $182.50, real GDP = $95

c.

(1) Increase in nominal GDP was due exclusively to price changes; there was no change in real production.

(2) There was no increase in prices; increased production was reflected entirely in real GDP.

(3) Both production and prices increased.  Real GDP was higher, but less the nominal GDP as inflation was taken into account.

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7.  

Percentage change in nominal GDP = ($14,028.7 - $13,377.2) / $13,377.2 = 4.87%

Percentage change in real GDP = ($13,206.4 - $12,958.5) / $12,958.5 = 1.91%

GDP deflator ₂₀₀₇ = $14,028.7 / $13,206.4 * 100 = 106.23

Percentage change in the price level = (106.23 - 103.23) / 103.23 = 2.91%

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Chapter 12

3.  You should show the graphs of each of these:

a.  Aggregate expenditures decrease because C and I would decrease

b.  Aggregate expenditures decrease because C would decrease

c.  Aggregate expenditures decrease because I would decrease

d.  Aggregate expenditures decrease because X would decrease => (X - M) would decrease

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5.  Please do b instead of c

b. 

Multiplier = m = 1 / [1 - (c₁ + i₁ - m₁)] = 1 / [1 - (0.8 + 0.1 -0.15)] = 4

Δ equilibrium income = Δ autonomous expenditures * m = +100 * 4 = +400

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Chapter 13

3.  Simple deposit multiplier = 1 / rr = 1 / 0.20 = 5

Money multiplier = (1 + c) / (c + rr + e) = (1 + 0.05) / (0.05 + 0.20 + 0.15) = 2.625

The money multiplier is lower because some money is taken out of the system and not used to create more money.

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Chapter 14

2.

a.  C decreases, E shifts down, AD shifts left

b.  I increases, E shifts up, AD shifts right

c.  X decreases, E shifts down, AD shifts left

d.  M_S decreases, interest rates increases, C, I decreases, E shifts down, AD shifts left

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Chapter 15

1.

.