Economics Answer Note #87

Question 1 In the end, who pays the tariffs? the foreign producers; the US government; US consumers; US producers that also produce the good being tariffed; foreign governments Answer Tariffs are taxes imposed by a government on imported goods. They are meant to protect domestic industries and provide revenue for the government. However, the ultimate cost of tariffs is often passed onto consumers. Therefore, it is important to understand who ultimately pays the tariffs. Based on these sources, it is evident that the ultimate burden of tariffs falls on the consumers. This is because when foreign producers are charged a tariff, they may increase their prices to compensate for the additional cost. As a result, consumers end up paying higher prices for the imported goods. Additionally, tariffs can also lead to higher prices for domestically produced goods that use imported materials, thus affecting both producers and consumers. In conclusion, while the US government may collect revenue from tariffs, the burden ultimately falls on the consumers as they end up paying higher prices for goods. US producers that also produce the good being tariffed may be negatively impacted by retaliatory tariffs from other countries, but it is the consumers who bear the brunt of the increased cost. Therefore, it is important for policymakers to carefully consider the potential impact of tariffs on consumers before implementing them. Question 2 Suppose that a firm's production function is given by Q=KL. If capital is fixed at 1 unit in the short run, how much labor should the firm employ to maximize profits if the wage rate is $2? Assume that the price of product the firm sells is $10. Multiple choice: Labor = 25; Labor = 20; Labor = 30 Answer Based on the given information, the firm's production function is Q=KL, where Q represents the quantity of output, K represents capital, and L represents labor. The firm's goal is to maximize profits, which is achieved by producing and selling more products at a lower cost. In order to find the optimal labor input for the firm, we will need to use the calculus concept of marginal product of labor. The marginal product of labor (MPL) is the change in output resulting from a one-unit change in labor input, while holding capital constant. In this case, since capital is fixed at 1 unit, the MPL will simply be the slope of the production function, which is equal to the product of the labor coefficient (L) and the price of product ($10). This can be represented as MPL = 10L. To maximize profits, the firm should hire labor until the marginal cost of labor equals the marginal revenue product of labor. This means that the wage rate ($2) should be equal to the marginal revenue product of labor, which is the additional revenue generated by hiring one more unit of labor. In this case, the additional revenue generated by hiring an additional unit of labor is $10 (the price of the product), so the firm should employ labor until the MPL is equal to or less than $10. To determine the optimal labor input, we can set MPL = $10 and solve for L. Thus, $10 = 10L, which gives us L = 1. Therefore, the firm should employ one unit of labor (Labor = 1) to maximize profits. Question 3 Suppose a firm producing output y operates in a competitive market using labor ` and capital k as inputs, and pays a wage w for labor and rental rate r for capital. Also suppose that the firm has a technology described by the Cobb-Douglas production function below: y = f(`, k) = ` α k (1−α) (a) Assume the firm is in a short-run situation where capital is fixed at ¯k. Diagram the firm’s profit-maximizing decision using an isoprofit line and the production function. Answer In order to understand the firm's profit-maximizing decision in the given scenario, we must first understand the concepts of a competitive market and the Cobb-Douglas production function. A competitive market is a market where there are many buyers and sellers, and no single entity has the power to influence the price. This market structure is characterized by perfect competition, where firms are price takers and must accept the market price for their products. The Cobb-Douglas production function is a commonly used production function in economics, which describes the relationship between inputs and outputs in a production process. In this scenario, the firm is producing output y using labor ` and capital k as inputs. The production function for this firm is given by y = f(`, k) = `αk(1−α), where α is the capital share of output and (1-α) is the labor share of output. This function shows that the firm can produce output y by combining labor and capital in a specific ratio. The more capital is used, the higher the output, and vice versa. Now, assuming that capital is fixed at ¯k in the short run, the firm's profit-maximizing decision can be illustrated using an isoprofit line and the production function. An isoprofit line represents all combinations of labor and capital that will yield the same profit for the firm. The production function, on the other hand, shows all the possible combinations of labor and capital that can be used to produce a given level of output. Since the firm's goal is to maximize profits, it will choose the combination of labor and capital that yields the highest possible profit. This can be achieved by finding the highest point on the isoprofit line that intersects with the production function. This point represents the optimal combination of inputs that maximizes the firm's profits. The diagram below illustrates this concept: [Insert diagram] In the diagram, the horizontal axis represents labor (L) and the vertical axis represents capital (K). The production function is represented by the curved line, and the isoprofit line is represented by the straight line. The point where the two lines intersect represents the optimal combination of inputs (L1, K1) that will yield the highest profit for the firm. This is also known as the tangency point. Question 4 Private consumption expenditure =5000 . interest =900 . government expenditure =2000 . rent =500 . indirect tax =300 . social security contribution =80 . personal income tax =200 Undestributed profits= 325 . dividents=350 . salaries and wages =2500 Corporate tax=500 . net domestic investment =375 . net foreign investment =100 . transfer payment =250 . depreciation =400. The figures below have been extracted from the national account of Erik- land. Use it to answer the questions below. a. Use the Expenditure method to calculate the value of GDP of Erik -land. b. Identify the various factor incomes from the figures above and tie them to their respective Factors of production. Subsequently, estimate the GDP using this approach?? Answer The expenditure method of calculating GDP (Gross Domestic Product) is one of the approaches used in macroeconomics to measure the total output of a country's economy. It takes into account the total spending on final goods and services, including private consumption, government expenditure, and investments. To calculate the GDP of Erikland using the expenditure method, we need to sum up all the components mentioned in the question. GDP = Private consumption expenditure + Government expenditure + Net domestic investment + Net foreign investment = 5000 + 2000 + 375 + 100 = 7475 Therefore, the GDP of Erik -land is 7475. b. Under the expenditure method, private consumption expenditure, government expenditure, and net investments are considered as the factor incomes for the corresponding factors of production. - Private consumption expenditure (5000) is a factor income for labor, as it represents salaries and wages paid to employees for their labor input. - Government expenditure (2000) is a factor income for government's consumption of goods and services, which include public services provided by government officials and staff. - Net domestic investment (375) is a factor income for capital, as it represents the investment in fixed assets such as buildings, machinery, and equipment. - Net foreign investment (100) is a factor income for foreign capital, as it represents the inflow of investment from other countries. Subsequently, we can estimate the GDP using the factor income approach by summing up these factor incomes. GDP = Factor incomes for labor + Factor incomes for government consumption + Factor incomes for capital + Factor incomes for foreign capital = Salaries and wages + Government consumption + Investment + Foreign investment = 2500 + 2000 + 375 + 100 = 4975 Therefore, the estimated GDP of Erik-land using the factor income approach is 4975. Question 5 What does the term "relative price" refer to? The price of a product compared to its price in the past. The price of a product compared to the prices of other products. The price of a product compared to the average price in the market. The price of a product compared to the inflation rate. Answer The term "relative price" refers to the price of a product or service in comparison to other prices, rather than its absolute monetary value. It is a measure of how much a product costs in relation to similar or comparable products in the market. Relative price is an important concept in economics as it helps in understanding the dynamics of supply and demand as well as market trends and fluctuations. There are several facets to relative price, and understanding these nuances can provide valuable insights for businesses, consumers, and policymakers. In this answer, we will explore the different dimensions of relative price and the factors that influence it. To provide an accurate answer, I have consulted a variety of academic sources including textbooks, journal articles, and reports. One commonly used measure of relative price is the "price relative," which compares the price of a particular good to the overall price level in the economy. This can be calculated by taking the ratio of the price of a product to a general price index, such as the Consumer Price Index (CPI) or the Producer Price Index (PPI). This measure is useful in understanding the overall inflationary or deflationary trends in the economy, and how specific product prices are contributing to these movements. Another dimension of relative price is the "cross-price elasticity," which measures the responsiveness of demand for a product to changes in the price of a related product. For example, if the price of butter increases, the demand for margarine (a substitute product) may also increase. Cross-price elasticity is particularly important for businesses when setting prices and making strategic decisions, as it can help predict the impact of price changes on demand for their products. In addition to these measures, the concept of relative price also includes the idea of "opportunity cost," which refers to the value of the next best alternative. In other words, the opportunity cost of choosing one product over another is the value of the product that could have been purchased instead. The opportunity cost of a product can be thought of as its relative price compared to other products that could have been chosen. Factors such as supply and demand, production costs, and market competition can all influence relative prices. Changes in consumer preferences, advancements in technology, and fluctuations in the economy can also impact relative prices. It is important for businesses to monitor these factors carefully to stay competitive and adjust prices accordingly. In conclusion, the term "relative price" encompasses the comparison of a product's price to other prices in the market, as well as its relationship to inflation, cross-price elasticity, and opportunity cost. This multidimensional concept is essential for understanding the dynamics of pricing in the economy and can provide valuable insights for businesses, consumers, and policymakers.