Graduate (S) Business Administration 509 THE ECONOMIC ENVIRONMENT OF BUSINESS
	Spring 2017

Pricing and Macroeconomic Measurement

The homework should be written on 8 1/2 by 11 or A4 paper. When calculations are required, you must show all work unless the answer is obvious. The homework is due on Tuesday, March 14. 

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1.  A restaurant decides to employ third degree price discrimination by having special pricing for customers who are over 55.  For one particular menu item, the marginal cost of production is equal to $5 for all customers.  But the price elasticity of demand for regular customers is -1.25 and -1.40 for those over 55.  What should be the price of this menu item for each group?

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2. Suppose an economy has the following national income data (in US$ billions):

Gross private domestic investment	170
Depreciation expenditures	110
Compensation of employees	580
Personal taxes	70
Net interest	60
Imports	120
Exports	100
Government consumption expenditures and gross investment	200
Income earned, not received	90
Proprietor's income	80
Income received, not earned	130
Rental income	40
Personal consumption expenditures	700

Based on these data, calculate the gross domestic product, national income, corporate profits, personal income, disposable income, and personal saving for this economy.

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3.  Suppose a country produces the following products:

Item	2010 Quantity	2010 Price	2016 Quantity	2016 Price
Haircuts	380,000	$10	540,000	$12
Gasoline	3,000,000	$3.00	3,600,000	$3.50
Pizzas	400,000	$13	600,000	$16

a.  Calculate the nominal GDP for both 2010 and 2016.

b.  Calculate the real GDP for 2016, using 2010 as the base year.

c.  Calculate the GDP deflator for 2016, with 2010 as the base year.  What is the amount of inflation between 2010 and 2016, according to the GDP deflator?

d.  Suppose that, in 2010, the average consumer in this economy consumed 8 haircuts, 720 gallons of gas, and 20 pizzas.  In 2016, the average consumer consumed 12 haircuts, 640 gallons of gasoline, and 25 pizzas.  Calculate the Consumer Price Index for 2016, using 2010 as the base year.

e.  Suppose the Consumer Price Index in 2017 is 120.  What is the rate of inflation from 2016 to 2017?  Express your answer as a percentage (not a decimal), rounded to one decimal place.

f.  Suppose your company borrowed $100,000 through a 6-year loan  in 2010.  What is the real value of that amount when you repaid it in 2016, based on the Consumer Price Index calculated in (d)?

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4.  Suppose an economy had 33.5 million people employed, 2.6 million unemployed, and 13.7 million not in the workforce.  Calculate unemployment rate and the labor force participation rate in this economy.  Express your answer as a percentage (not a decimal), rounded to one decimal place.