Econ 1102

...

Demand: Qd = 200 – 0.5P

Supply: Qs = 100 + 0.5P

a. What is the price of MP3 players in Crossica when the country is an autarky?

b. The Government of Crossica decides to open the country to trade. Calculate how many MP3 players will be produced, consumed, and imported or exported in Crossica if, when opening to trade, the world price of MP3 players is $120.

c. Calculate the number of MP3 players Crossica will produce, consume and import or export if, instead, the world price of MP3 players is $40.

d. Based on a world price of $40, calculate how many MP3 players would be produced, consumed, and imported in Crossica if a tariff of $20 were imposed on each MP3 player imported.

e. What would be the tariff revenue generated from the tariff of $20 described in (d) above?

---------------------------------------------------------------

5. The following graph shows the domestic demand and the domestic supply in the market for computers in a small, closed economy called Thirsk.

[pic 1][pic 2][pic 3]

a. Suppose the country opens to trade. The world price for a computer is $400. Once Thirsk is open to trade, how many computers will be purchased in the domestic market? What is the price at which these computers will be sold?

b. The domestic computer producers have pressured the government to put a tariff of $100 on each imported computer. With the tariff in place, how many computers will be purchased in the domestic market? What is the price at which these computers will be sold?

c. Calculate the tax revenue for the government from the tariff. On the graph above, show the area which represents the amount of the tax revenue.

6. Robert Crawley has the following assets and liabilities: an estate valued at £1.2 million, two cars worth £100,000, land worth £240,000, bonds worth £200,000, stocks worth £50,000, taxes due of £600,000, a loan of £800,000, and debt owed to the Downton village shopkeepers of £30,000.

a. Calculate Robert’s assets, liabilities, and wealth.

b. In the month of January, Robert charges his cook’s food purchases of £5000, adding to the debt owed to the village shopkeepers. For January, is his saving positive, negative, or zero? At the end of the month, what is his wealth? Explain.

c. In the month of February, Robert uses some of his monthly income from the tenant farmers to pay off all his debts owed to the village shopkeepers. For February, is his saving positive, negative, or zero? At the end of the month, what is his wealth? Explain.

d. In the month of March, Robert charges his cook’s food purchases of £6000 early in the month, but pays off his debts at the village grocer by the end of the month. For March, is his saving positive, negative, or zero? At the end of the month, what is his wealth? Explain.

e. In the month of April, Robert learns that his bonds, which he had thought were worth £200,000, are actually worth nothing, as the company issuing the bonds did so fraudulently. For April, is his saving positive, negative, or zero? At the end of the month, what is his wealth? Explain.

7. Suppose that a recently-deceased great-uncle has left you a bequest of a $1000 twenty-year bond which he initially purchased in 1996 and which you will receive on June 1, 2015. The bond matures on May 31, 2016 and has one 10% coupon left to cash on that date.

a. Suppose that you want to sell the bond, but you have noticed that new one-year bonds are being issued with an interest rate of 4%. How much can you expect to sell your bond for? Explain, and show how you make this calculation.

b. Tomorrow morning, news reports speculate that, in a week or so, interest rates in Canada will rise, probably to 4.25%. Now how much can you expect to sell your bond for? Why?

c. Suppose that you discover that your bond is not a riskless government bond, but instead was issued by Shady Deals, Inc. Shady Deals has recently been faced with a class-action lawsuit, so investors are looking for a 5% risk premium before they are willing to purchase any shares or bonds of the firm. How does this influence your answer to (b)?

d. If Shady Deals wins its lawsuit, it will pay a dividend of $20 per share in one year. The stock price then will be $67 per share. Because you are named in his will, you are offered the chance today to buy your uncle’s 100 shares in Shady Deals at a price of $70 per share; if necessary, you can borrow the money to do so from the bank. Do you take the offer? Explain why or why not.