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Explain the concept of income elasticity and cross price elasticity. Also explain how the nature of commodity is determined by positive and negative values of income elasticity.
Operating leverage is the outcome of the capital budgeting, while
financial leverage is the outcome of the capital structure decision. Do you agree? Explain with examples showing their role and importance in
the leveraging.
Johnny Rockabilly has just finished recording his latest CD. His record companyβs marketing department determines that the demand for the CD is as follows:
PRICE
NUMBER OF CDS
$24
10,000
22
20,000
20
30,000
18
40,000
16
50,000
14
60,000
The company can produce the CD with no fixed cost and a variable cost of $5 per CD.
a. Find total revenue for quantity equal to 10,000, 20,000, and so on. What is the marginal revenue for each 10,000 increase in the quantity sold?
b. What quantity of CDs would maximize profit? What would the price be? What would the profit be?
c. If you were Johnnyβs agent, what recording fee would you advise Johnny to demand from the record company? Why?
Qno.2 Assume that an economy is initially operating at the natural rate of output (full employment output). Use the AD-AS model to illustrate graphically the effects on price and output of an increase in government spending and a decrease in the cash rate. Explain your assumptions with respect to the range of aggregate supply of your analysis.
Income is rising, and income elasticity of demand is positive.
What is meant by state in the solow model? Explain how golden rule is different from steady state.
Consider following information from the Solow model in a continuous time, π = ππ
π β ππ,
πΜ = ππ(π) β (π + π + πΉ)π, π = π + π, where π =
π²
π¨π³
, g-is growth of technology, n-is labor force
growth rate, and πΉ- is rate of depreciation. Answer the following questions-
(i) What are the assumptions this production function violates? (1 Mark)
(ii) Find out the steady state and golden rule solution of π
β
, π¦
β
, π
β
? (2 Marks)
(iii) Find out the steady state and golden rule solution of per capita capital, output ratio and
consumption?
Consider the Cobb-Douglas production function in continuous time, π(π) = π²(π)
π
π(π―(π))
π
π,
π―(π) = π(π)π³(π), πΜ(π) = ππ(π(π)) β (ππ¨ + π + πΉ)π(π),
π¨Μ(π)
π¨(π)
= ππ¨,
π³Μ(π)
π³(π)
= π π(π) = π(π) +
π(π) + π(π), where, π(π) = ππ(π) and π > π. Answer the following questions-
(i) Derive the intensive form production function in per-capita terms. (1 Mark)
(ii) what is the steady-state and Golden-rule level of capital-output ratio and consumption? (2
Marks)
(iii) Explain the effect of government expenditure on output at the golden rule
Describe what will happen to total revenue in the following situations.
a. Price decreases and demand is elastic.
b. Price decreases and demand is inelastic.
c. Price increases and demand is elastic.
d. Price increases and demand is inelastic.
e. Price increases and demand is unitary elastic.
f. Price decreases and demand is perfectly inelastic.
g. Price increases and demand is perfectly elastic.
βThe growth rate of the economy is slowing down. Prices are going up rapidly. The government sticks to a money printing policy and policy of increasing its expenditure. Sri Lanka faces severe hardship in finding foreign exchange to repay debt and payment for important imports. Countryβs agriculture seems facing a troublesome path. And So many issues in the economyβ. Write an essay on Sri Lankaβs present economic crisis.
