The economy of Microland is producing the following three goods:

1. The economy of Microland is producing the following three goods:

Output 2000 Output 2001 Price 2000 Price 2001
Pens 6 5 $1.00 $0.50
Pencils 10 12 $0.50 $1.00
Binders 2 3 $5.00 $5.00

(a) Calculate the nominal GDP for 2000.

(b) Calculate real GDP for 2001 using 2000 as the base year.

(c) Calculate the percentage increase in Real GDP from 2000 to 2001 using 2000 as the base year.

(d) Calculate Real GDP in 2000 using 2001 as the base year.

(e) Calculate the percentage increase in Real GDP from 2000 to 2001 using 2001 as the base year.



2. The economy of Macroland is represented by the following:

C=100+0.5Yd, T=2000, G=2000, I=200

(a) Calculate the equilibrium level of output. Graph your solution.

(b) If the government spending increases by 100 what is the new equilibrium level of output? Use the government spending multiplier.

(c) If the government increases taxes by 100 what is the new equilibrium level of output? Use the tax multiplier.

(d) If the government increases taxes and spending by 100 what is the new equilibrium level of output?

(e) Calculate the equilibrium level of output in case where taxes depend on income according to the following: T=-50+0.25Y.
3. By using clearly labeled AD and AS curves to illustrate your points, discuss the impacts of the following events on the equilibrium price level and equilibrium level of output in the short run.

(a) An expansionary fiscal policy with the economy operating near full capacity.

(b) A contractionary monetary policy during a period of high unemployment and excess industrial capacity.

(c) A strong hurricane destroys energy plants which causes energy prices to increase, assuming that the Fed attempts to keep interest rates constant by accommodating inflation.

(d) A contractionary fiscal policy supported by a cooperative Fed acting to keep output from falling.



4. McDonald’s has been producing hamburgers since 1948 and continues to implement strategies that make it a leader in the fast food industry. Suppose that when McDonald’s and its largest rival, Burger King, advertise, each company earns $0 billion in profits. When neither company advertises, each company earns profits of $8 billion. If one company advertises and the other does not, the company that advertises earns $48 billion and the company that does not advertise loses $1 billion.

(a) Write this game in normal form, i.e., payoff matrix.

(b) Under what conditions could collusion be profitable?



5. The market for soccer balls is dominated by two firms: Adidas and Puma. The research department of Adidas has discovered a new technology on how to make more durable soccer balls and is considering whether or not to adopt the new technology. Adoption would entail a fixed setup cost of C but would increase revenues. However, if Adidas adopts the new technology, Puma can easily copy it at a lower setup cost of C/2. If Adidas does not adopt the new technology, it will earn $10 and Puma will earn $4. If Adidas adopts and Puma does likewise, each firm will earn $30 in revenues. If Adidas adopts and Puma does not, Adidas would earn $40 in revenues while Puma would earn $0.

(a) Write this game in extensive form.

(b) Under what conditions (i.e., for what values of C) does Puma have an incentive to adopt the new technology if Adidas introduces it?

(c) If C = 24, should Adidas adopt the new technology? Explain.