USA: +1(669)289-8683 
Sign in
Pretend that you have a lemonade stand and that the demand for lemonade in your neighborhood is estimated to be:
Q = 60 – 100 P
Just like in the lecture, you get all the materials to make the lemonade for free so we assume that the costs of production are zero. Your goal, your objective, is to maximize profits which is the same as maximizing total revenue given the zero cost assumption.
a)
(5 points) What is the profit (revenue) maximizing price and quantity (in cups) of lemonade and the corresponding maximum profit.
Suppose that there was a demand shock so that the new estimated demand function for lemonade in your neighborhood changes to:
Q = 100 – 100 P
b)
(5 points) Name and support two reasons why demand would change like this.
c)
(5 points) Solve for the new profit (revenue) maximizing price and quantity (in cups) of lemonade and the corresponding profit.
d)
(5 points) Compare your quantity sold and your profit in part c) to the quantity sold and profit if you kept ‘sticky’ lemonade prices – that is, what would be the quantity sold and profit if you did not change prices?
GRAPHICS (30 points total for a correct and completely labeled diagram)
Just like in the lecture on the lemonade stand, draw a demand curve in your top diagram and a total revenue function below making sure that you exploit the fact that the horizontal axis is the same in the top and bottom diagrams. Label the initial equilibrium points according to your answer in part a) as points A. Then, label on both diagram as points B, the answer you gave in part c). We can think of this as the long run since you will increase price in the long run. Then, label as point C, the quantity sold and profit if you did not change price (i.e., your work from part d).
e)
(5 points) On a separate diagram, draw a supply curve that pertains to your behavior from points A to B and another supply curve that pertains to points A and C. Pretending that these are short-run aggregate supply curves, under which curve would macroeconomic (demand side) policies have the most effect on output? On prices? In other words, which supply curve is more Keynesian and which is more Classical?
f)
(5 points) Suppose that in order to change prices, you need to make a new sign which costs you $5, these are referred to as menu costs. Is it worth it for you to change prices, why or why not? Explain.
Your browser does either not support Javascript or has Javascript disabled. This assessment contains features that requires Javascript. Refer to your browser’s documentation to determine if Javascript is disabled and how to enable it. If you are using a browser that does not support Javascript switch to a different browser.
|
1. A fall in the tax rate on capital will cause the aggregate expenditure curve to shift up and the aggregate demand curve to shift to the left, all else constant. T/F 2.One reason that the aggregate demand curve slopes downward is that when prices rise, say in the US, the relative price of imports fall and thus, US citizens substitute away from domestically produced goods toward imported goods and thus, GDP in the US will fall (all else constant). T/F 3. Suppose the value of the US dollar changes from $1 = 1.2 euros to $1 = 1.30 euros. This being the case, imports from the US to Europe, have become more expensive to European citizens, all else constant. T/F 5.Assuming that natural gas for firm X is an important input to the production process, an increase in the availability of natural gas that lowers the price of natural gas, will result in a leftward shift of firm X’s supply curve. T/F 6. According to the lecture on the cyclical properties of the aggregate supply curve, I argued that aggregate demand side policy works better, in terms of influencing output, when the economy is operating at near full employment output relative to when the economy is operating at levels of output well below full employment. T/F 10. Suppose that expected inflation is 5% and thus, nominal wages rise, along with all other input prices by 5%. Suppose also, that actual inflation over this period was only 2%. In terms of the behavior of the short-run aggregate supply curve, it would shift up given the expectations of higher inflation and then shift downward to adjust for the actual rate of inflation. T/F 11. The more sensitive consumption is to real wealth, the steeper the aggregate demand curve. T/F 12. During the Great Recession, we argued that the aggregate expenditure curve shifted downward and the short-run aggregate supply curve and the aggregate demand both shifted to the left. T/F 13. Anything that shifts the investment demand curve to the right will also shift the aggregate demand curve to the right. T/F 14. The Obama administration in 2013 let a tax holiday expire which effectively increases income taxes for all workers who pay into social security. The effect of this increase in taxes, all else constant, would shift the consumption function down, the aggregate expenditure curve down, and the short-run aggregate supply curve to the left. T/F 15. Given that the working age population is shrinking in Japan, our discussion about the determinants of the potential growth rate of the economy suggests that this demographic reality would lower the potential growth rate of the economy for Japan, all else constant. T/F 16. One reason the short-run aggregate supply curve slopes upward is due to the ‘stickiness’ of input prices relative to output prices. We saw this in the plastering example when we let output prices rise and kept nominal wages constant. This being the case, the firm’s profit maximizing output raises with the rise in prices, all else constant. T/F 17. According to our discussion about the cyclicality of the aggregate supply curve, the closer the economy is to potential output, the more Keynesian the world and thus, the more effective aggregate demand side policies are in terms of effecting real GDP. T/F 18. If output prices rise without the nominal wage rising, then real wages rise and workers are willing to work more. This is one of the main reasons that the short-run aggregate supply curve slopes upward. T/F 19. When we discussed the stagflation of the 1970s, we argued that policymakers should have acted more aggressively with expansionary policies the fight the recession that occurred during that time. T/F 20. The more flexible wages and prices, the steeper the short-run aggregate supply curves. In fact, if prices and wages (and other inputs costs) are perfectly flexible then we are in a ‘classical’ world, where the short-run aggregate supply curve is vertical. T/F |
false
