Macroeconomics Answers

Question No. 02

A graduating MBA student has job offers from two brokerage firms. Firm #1 pays a straight salary of $70,000 (but no commission bonuses). Firm #2 pays a salary of $6,000 plus a commission bonus, with a fixed bonus schedule based on annual sales; the potential commission bonus for firm #2's job is as follows: $150,000 with a probability of 11%, $50,000 with a probability of 83%, $20,000 with a probability of 5%, and zero with a probability of 1%.

(a)       What is the expected monetary value of Firm #2's job?

(b)       The student claims to be indifferent between the two job offers. If this is true, is the student risk averse, risk loving, or risk neutral, and why?

Q.19 The average cost of producing 10 units is Rs 30, while the average cost of producing 20 units is Rs 20. Find the average cost of producing 30 units.

{Hint : Find Fixed cost. TC of 10 units = Rs 300, TC of 20 units = Rs 400, VC = Rs 10/ unit

Fixed cost = TC = FC + VC (10* 10) = 300 = FC + 100 = FC = 200. Thus, AC of producing 30 units will be Rs 16.67}

Critically evaluate and explain with help of graph (s) that monetary policy or 

fiscal policy is appropriate when goods market is sensitive to rate of interest and 

money market is relatively insensitive to rate of interest.

1.     You deposit $5000 in the bank for one year.

CASE 1: inflation = 0%, nom. interest rate = 20%

CASE 2: inflation = 10%, nom. interest rate = 30%

a.     In which case does the real value of your deposit grow the most? [1]

Assume the tax rate is 15%. 

a.     In which case do you pay the most taxes?[2]

b.     Compute the after-tax nominal interest rate, then subtract off inflation to get the after-tax real interest rate for both cases.[3]

2.     Explain whether the following statements are true, false, or uncertain. [4]

a.     “Inflation hurts borrowers and helps lenders because borrowers must pay a higher rate of interest.”

b.     “Inflation does not reduce the purchasing power of most workers.”

The MYZ Company is considering the purchase of a machine that costs 100 thousand dollars, and which has a lifespan of only two years, after which it has a zero scrap value. This investment, if undertaken, will generate gross returns of 40 thousand dollars and 64 thousand dollars at the end of the first and second years, respectively, after deducting all the costs except depreciation and interest costs. Should the Company go ahead with this investment when the prevailing rate of interest is 6 percent? Explain your answer

Suppose the money demand in an economy in which no interest is paid on money is M^d/p = 500+0.2Y-100i,

a) you're told that price =100, Y=100, and i=0.10.

Find the real money demand, nominal money demand and velocity.

b) the price doubles from p=10 to p=20. Find the real money demand, nominal money demand, and velocity.

mathematically and theoretically explain the difference between the is curve and the lm curve

A city government is considering renting space in an all‑day parking garage for its 100 employees. The government estimates these employees' demand function for parking spaces is 150 ‑ 50P (P ≥ $1), where P is the per-day price of parking, and the city will pass on the cost.

 (a)     If the city needs not charge each of its employees the same price for a parking space, what is the maximum amount the city could pay for the 100 spaces, and what would be the average cost per space?

 (b)    Assume the employees’ union insists that – per their contract – each employee must be charged the same price for parking, and the city’s response is to intend charging the price that maximizes its parking fee revenue. What price per space would the city charge under this circumstance, and how much less total dollar benefit would the employees receive?

Demand for Magnum Ice Cream is given by an equation as Q = 70 – 10P + 4 Px + 50 I  

Where, Q = Quantity of Magnum demanded, P = Price of Magnum Ice Cream, Px = Price of Walls Ice Cream, I = Per Capita Income

a.      Assume P = Rs 100, Px = Rs 120 and I = Rs 25 (Rs in thousands).  

Calculate        

(i)                Price Elasticity of Demand

(ii)             Cross Price Elasticity of Demand

(iii)           Income Elasticity of Demand 

How the elasticity does estimates help in managerial decision making?  

A city government is considering renting space in an all‑day parking garage for its 100 employees. The government estimates these employees' demand function for parking spaces is 150 ‑ 50P (P ≥ $1), where P is the per-day price of parking, and the city will pass on the cost.

 (a)     If the city needs not charge each of its employees the same price for a parking space, what is the maximum amount the city could pay for the 100 spaces, and what would be the average cost per space?

 (b)    Assume the employees’ union insists that – per their contract – each employee must be charged the same price for parking, and the city’s response is to intend charging the price that maximizes its parking fee revenue. What price per space would the city charge under this circumstance, and how much less total dollar benefit would the employees receive?