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INTRODUCTION TO ECONOMIC ANALISIS

First Semester Exam: 06/02/04

Total time: 2 hours and 30 minutes

  1. Say whether you agree or disagree with the following statements and explain why:

a)A point inside the Production Possibilities Frontier (PPF) cannot be an efficient point.

b)If the quantity demanded of good x increases when the price of good y falls, we say that goods x and y are substitutes.

c)If at the current level of production of a competitive firm, marginal cost exceeds the market price, the firm can increase profits by decreasing the level of output production.

  1. First statement: If a competitive firm produces anything, it produces a quantity at which price equals marginal cost. Second statement: Yet, if at that quantity (at the quantity at which price equals marginal cost) the price is less than the Average Variable Cost, the firm is better off shutting down and not producing anything. Explain why these two statements are true.
  1. In the market for good x, the demand equation is

,

and the supply equation is

,

where and are respectively the quantities demanded and supplied and is the price of good .

a)Represent graphically these two equations.

b)Find out the equilibrium price and quantity.

c)Calculate the consumers, producers and total market surplus.

d)Suppose that the government imposes a maximum price of equal to 3. What will be the quantity finally produced and sold?

e)By how much will the total market surplus will have gone down as a result of the maximum price imposed by the government? On the basis of your results, would you say that the imposition of a maximum price is an efficient policy?

  1. Say whether you agree or disagree with the following statements and explain why:

a)A farmer sells wheat to a miller for € 2. The miller uses the wheat to make flour, which is sold to a baker for € 3. The baker uses the flour to make bread, which is sold to the public for € 5. The total contribution of these transactions to GDP is € 10.

b)The Spanish population of working age in 1997 was 32.2 million; of these, 16.0 million were out of the labour force (non active population). We know also that the unemployment rate that year was 20.4%. So, we can conclude that the number of unemployed people were 3.3 million.

c)In a closed economy, if total national saving is 5,000 billion €, and the government has a deficit of 1,000 billion €, we know that private saving must be 6,000 billion €.

  1. The financial system moves the economy’s scarce resources from savers (people who spend less than they earn) to borrowers (people who spend more than they earn). Discuss this statement and describe the institutions that form the financial system in a modern economy.
  1. A country produces three goods (A, B and C). The quantities produced and the price of the three goods are as follows:

Prices (€ per Kg.) / Quantities produced (Kgs.)
Year / A B C / A B C
1995
2000 / 1 1 1
1.2 1.4 0.8 / 100 100 100
120 150 110

a)Calculate nominal GDP in 1995 and 2000.

b)Using 1995 as base year, calculate real GDP and the GDP deflator.

c)What has been the real growth of this economy between 1995 and 2000? And the nominal growth? Why is real growth a better measure of economic progress than nominal growth?

d)Good A is produced and consumed entirely within the country, while every year 20 units of good B are exported and 25 units of good B are imported. What is the CPI (base 1995) of this economy?

e)Calculate the rate of inflation between 1995 and 2000 using both the GDP deflator and the CPI. Why do they differ?