Problem 1. Consider the Sticky price model that we discussed during the lecture, and suppose that The firm with flexible prices follow p = P + a(Y – Y), • The firm with sticky prices follow, the same rule but take the expectation of the RHS, i.e.,_p = E[P+ «(Y – Y)]. Further, assume that_a = 2, Y = 100, EP = 60, s = 0. 25 a) Derive the SRAS curve (i.e.,obtain an equation for the SRAS). b) Draw a figure show the SRAS and LRAS curves on the figure. c) Derive the SRAS curve when EP increases to EP=120. d) Derive the SRAS curve when EP is still the same as in part a (i.e., EP=60), But

Problem 1. Consider the Sticky price model that we discussed during the lecture, and suppose that The firm with flexible prices follow p = P + a(Y – Y), • The firm with sticky prices follow, the same rule but take the expectation of the RHS, i.e.,_p = E[P+ «(Y – Y)]. Further, assume that_a = 2, Y = 100, EP = 60, s = 0. 25 a) Derive the SRAS curve (i.e.,obtain an equation for the SRAS). b) Draw a figure show the SRAS and LRAS curves on the figure. c) Derive the SRAS curve when EP increases to EP=120. d) Derive the SRAS curve when EP is still the same as in part a (i.e., EP=60), But

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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7. A car manufacturer builds both left-hand and right-hand drive cars. It estimates that its costs and the demand faced in each of these respective markets can be modelled by the functions below Р 3D 520 — 30, P, = 720 – 4Q2 100Q1 + 120Q2 + 4Q1Q2 - - TC =
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Consider a 2 period oil extraction setting. The inverse demand for oil is given as ?(?) = 20 − ?. The MC of extraction is MEC = Q. The discount rate is r = 0.05. a) If the initial stock of oil in the ground is S = 25, what will be the extraction and price each period? b) If S = 15, what will be the extraction and price each periods?
Suppose that the economy is populated by two types of firms, firms with sticky prices and firms with flexible prices. These firms set their prices according to p° =EP, pf =P+ «(Y – Y), where the superscript s and f denotes sticky and flexible price firms. Suppose the fraction of firms with sticky prices is equal to 0, meaning that 1 – 0 firms have flexible prices. Further, let a = 2 and 0 = 0.75. (a) Derive the short-run aggregate supply curve. Suppose that the natural rate of out- put is given by Y 0 to 200. 100 and EP = 40. Plot the SRAS for output levels ranging from (b) Suppose that new technology reduces the fraction of firms with sticky prices from 0.5. Is the new short-run aggregate supply curve steeper or flatter than the curve found in (a)? Plot this curve in the same diagram for the same values of P. (c) Suppose Okun's Law obeys a(Y – Ý) = -ß(u – u") where ß Assume that the fraction of sticky price firms remains at 0 = this Phillips curve. 3 and u" 5. 0.5. Derive and plot (d)…
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3. Consider a duopoly market, where two firms sell differentiated prod- ucts, which are imperfect substitutes. The market can be modelled as a static price competition game, similar to a linear city model. The two firms choose prices pi and p2 simultaneously. The derived demand functions for the two firms are: D, (P1, P2) = + P2-P1 and D2 (P1, P2) =+ 2, where S > 0 and the parameter t > 0 measures the degree of product differentiation. Both firms have constant marginal cost c > 0 for production. S 2t S %3D 2
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Please see how I've responded to the 2 questions below...Do you concur are am I off track here. What will the dollar amount of economic gain or economic loss be? The amount of loss would be Quantity*(ATC-Price)= 9*(17.5-16)=$13.5 What will be the price and quantity where the firm will shut down? Price where there is not able to recover average variable cost in the market. Shut down price is $12 and Quantity is 7 units
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Problem 2: Presently, APlus Transport and Big Movers are the only suppliers of services that haul heavy construction equipment between jobs within the Midwest. No other suppliers have the equipment necessary to perform the service. The market inverse demand for these hauling services is given below. P = 4,030-4Q where P is price per trip and Q is total number of trips per year. For simplicity, also assume that neither firm has fixed costs. From company records, you are given the following variable cost function for each firm: a. C. TVC = 300 TVCB = 80QB b. Calculate the Cournot market equilibrium price-output solutions for each firm including their respective profits. d. Assume these two competitors operate as a two-firm Cournot duopoly. Find the reaction functions for each firm. Suppose Big Movers shuts down operations so that APlus now has a monopoly in this market. What is the price, quantity, and profits for APlus after this change? Summarize the results of your findings over the…