EBK ECONOMICS: PRINCIPLES AND POLICY
13th Edition
ISBN: 8220100605932
Author: Blinder
Publisher: Cengage Learning US
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Chapter 12, Problem 4DQ
To determine
The difference in the
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3. The multiplier effect of a change in government purchases
Suppose there is some hypothetical closed economy in which households spend $0.80 of each additional dollar they earn and save the remaining $0.20.
The marginal propensity to consume (MPC) for this economy is0.8 , and the spending multiplier for this economy is5 .
Suppose the government in this economy decides to decrease government purchases by $300 billion. The decrease in government spending will lead to a decrease in income, creating an initial change in consumption equal to-$240 billion . This decreases income yet again, leading to a second change in consumption equal to-$192 billion . The total change in demand resulting from the initial change in government spending is-$1.5 trillion .
The following graph shows the aggregate demand curve (AD1AD1) for this economy before the change in government spending.
Use the green line (triangle symbol) to plot the new aggregate demand curve…
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- Not use ai pleasearrow_forwardNot use ai pleasearrow_forwardAtlas Games is considering selling a new educational board game that is designed to introduce teenagers (ages 13 to 18) to the complexities of taxes, corporate takeovers, and market manipulation. The company must decide quickly whether to proceed with selling this game. Production of this game will require an investment of $6 million to complete the game's design, marketing, and setup for production, and an additional production cost of $8 per game. At the same time, Galileo Games, a competitor, is considering selling a new and similar educational board game. Galileo Games' new educational board game will compete directly with Atlas Games' new educational board game. Production of this game at Galileo Games will require an investment of $10 million and an additional production cost of $8 per game. Market research shows that there are 2.5 million potential customers in the market for educational games, and each customer is willing to pay $20 for an educational game regardless of…arrow_forward
- Question 1 options: Atlas Games is considering selling a new educational board game that is designed to introduce teenagers (ages 13 to 18) to the complexities of taxes, corporate takeovers, and market manipulation. The company must decide quickly whether to proceed with selling this game. Production of this game will require an investment of $6 million to complete the game's design, marketing, and setup for production, and an additional production cost of $8 per game. At the same time, Galileo Games, a competitor, is considering selling a new and similar educational board game. Galileo Games' new educational board game will compete directly with Atlas Games' new educational board game. Production of this game at Galileo Games will require an investment of $10 million and an additional production cost of $8 per game. Market research shows that there are 2.5 million potential customers in the market for educational games, and each customer is willing to pay $20 for an…arrow_forwardConsider that two major airlines, Delta Air Lines and American Airlines, operate on a competitive route from New York to Los Angeles. Both airlines offer similar services, have comparable cost structures, and regularly interact in the market where they can choose to set either high fares (cooperative pricing) or low fares (competitive pricing). Each airline's profit for this route depends on the pricing strategy chosen by both airlines as described by the following payoff matrix: Strategy High Fare American Airlines High Fare ($ million) Low Fare ($ million) (10, 10) (2,40) Delta Air Lines ($ million) Low Fare ($ million) (40, 2) (8,8) Now consider that the airlines compete repeatedly and they both use a trigger strategy to maintain high fares over time. Specifically, with this strategy,each airline agrees to set high fares as long as the other airline does the same. However, if any airline undercuts by setting a low fare, the other responds by setting low fares indefinitely as…arrow_forwardConsider that two major airlines, Delta Air Lines and American Airlines, operate on a competitive route from New York to Los Angeles. Both airlines offer similar services, have comparable cost structures, and regularly interact in the market where they can choose to set either high fares (cooperative pricing) or low fares (competitive pricing). Each airline's profit for this route depends on the pricing strategy chosen by both airlines as described by the following payoff matrix: Strategy High Fare American Airlines High Fare ($ million) Low Fare ($ million) (10, 10) Delta Air Lines ($ million) Low Fare ($ million) (2,40) (40, 2) (8,8) Now consider that the airlines compete repeatedly and they both use a trigger strategy to maintain high fares over time. Specifically, with this strategy,each airline agrees to set high fares as long as the other airline does the same. However, if any airline undercuts by setting a low fare, the other responds by setting low fares indefinitely as…arrow_forward
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