Economics For Business Competition Macro Stability And Globalisation 2nd Edition Dermot McAleese - Solutions

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The meal plan at university A lets students eat as much as they like for a fixed fee of$500 per semester. The average student there eats 250 pounds of food per semester.University B charges $500 for a book of meal tickets that entitles the student to eat 250 pounds of food per semester. If the
You and your friend Joe have identical tastes. At 2 p.m., you go to the local Ticketmaster outlet and buy a $30 ticket to a basketball game to be played that night inSyracuse, 50 miles north of your home in Ithaca. Joe plans to attend the same game, but because he cannot get to the Ticketmaster
Use diagrams to explain the following statement:Outward shifts in the aggregate demand curve affect output only temporarily, whereasoutward shifts in the aggregate supply curve affect output permanently. And, whereasa positive demand shock raises prices, a positive supply shock reduces them.
In the context of the standard model in this chapter, why are countries more likely to impose stronger restrictions on immigration than on emigration?
When the fiscal implications of German unification in 1990 became apparent, the yield curve steepened. Explain why this should have happened.
In January 1994, the currencies of the French franc zone in Africa devalued by 50 per cent relative to the franc. This was followed by a rise in their inflation rate from 0.5 per cent per year in 1990-93 to 33 per cent in 1994. GNP, which had been falling in real terms by 1 per cent annually in
Why are some European politicians willing to surrender control of monetary policy and face stringent budgetary rules in return for monetary unification?
A British company has to make a US$1 million payment in three months' time. It has a sterling balance of £550,000 available now and requires advice on whether to invest this amount in sterling or in dollars.Given that:the US deposit rate is 5 per cent p.a.the sterling deposit rate is 8 per cent
'Overly strong currencies cut first into profits and then into market share, fewer jobs, financial instability and social unrest.' Comments of this nature were often made during 1995, as the Japanese yen soared and the Japanese economic growth declined.What indicators would you use to determine
Suppose the one-year interest rate on British pound deposits is 8 per cent, the dollar interest rate is 6 per cent, and the current $/£ spot rate is $1.50.(a) What do you expect the spot rate to be in one year?(b) Suppose both the US and UK implement new policies that lead to an expected future
Why do large differences in interest rates continue to prevail between countries notwithstanding the increasing international mobility of capital which must tend to reduce them? (Consider, in your discussion, the contrast between, say, 10-year government bond yields in Japan and the US, 1.6 per
Review recent trends in the current account balance of payments of any major industrial country. What would be the likely effect on the current account balance: (a)faster economic growth in the economy of its trading partners; (b) faster growth in its own economy; and (c) rapid inflation relative
Classify the following transactions in the UK balance of payments:(a) British Airways purchases a jet from Airbus for £60 million, and receives a three-year credit from a French bank to finance the transaction.(b) A US tourist travels to Britain and spends £1000 financed by dollar
Honey and Moon from Korea spend a working holiday in Britain. During their visit, they affect all four major components of the current account of the UK's balance of payments. What transactions could they have made?
How would you explain the rapid growth in capital account transactions relative to merchandise trade transactions in recent years?
Under what circumstances could a country simultaneously have a balance of trade surplus and a current account deficit?
Outline the main fiscal effects of migration from the perspective of home country and the host country respectively.
There has been much concern about the migration of skilled staff in technological R&D in central and eastern European countries to the West. During the period 1989 to 1993, for instance, around 70 per cent of Hungarian researchers left domestic research agencies and facilities, many of them
Suppose a country's unskilled workforce increases by 10 per cent as a result of immigration. Trace out the effects on (a) unskilled employees, (b) capital owners,(c) skilled professionals, and (d) government finances, in the host country and the home country. (Use a diagram such as Figure 18.3 to
Of the EU's 370 million citizens, only about 5 million live outside their country of birth, and only 3.1 million work outside it in another EU state (The Economist, 27 February 1996). Give economic reasons for this low degree of labour mobility.
Outline the main 'locational' advantages of your country for a foreign investor.How can/should this be improved?
What is the difference between 'direct' investment and 'portfolio' investment? Are the economic effects of the two types of investment likely to differ?
A foreign firm is proposing to set up a new 'greenfield' plant to manufacture auto parts in your country. List the economic benefits which you would expect to be generated by the plant, then draw up a list of likely costs.
Japanese car imports into Europe have been restrained by voluntary export quotas. Use a demand and supply diagram to show the effect of this quota on the price of Japanese cars in Europe. One research study found that the effect of the quota was to raise the price of the average Japanese car to the
Is there a case for the government using subsidies to encourage the development of domestic industries by helping them win export markets? Is this fair play, or is it a form of hidden protectionism?
Why do smaller countries trade more as a percentage of GNP than large countries?Does this help or hinder their efforts to improve living standards?
A stockbroking firm provides your business with a quarterly review containing forecasts of GNP growth for one, two and three years ahead. You are asked to evaluate the forecasting record of this firm. How would you propose doing this?
New Zealand's Fiscal Responsibility Act 1994 requires the government to identify and publish its fiscal objectives. The New Zealand government has specified prudent levels of public debt to be below 30 per cent of GDP in the short run and below 20 per cent in the longer term. Are these targets high
A country has a debt ratio of 130 per cent of GNP, it pays 10 per cent interest on this debt and its nominal growth rate is 7 per cent. What primary balance (as per cent of GNP) should it be targeting if it wants to stabilise the debt ratio? You are told that its total deficit is currently running
Would an average, well-run business agree to limit itself to a zero borrowing target over the business cycle? Why do some business lobbies urge governments to constrain government spending according to this rule? Is this a sensible rule for governments to adopt?
The 1996 Annual Economic Report of the European Commission stated that (in reference to the French economy):fiscal consolidation is a necessary condition for a stable macroeconomic environment conducive to growth and employment. It should enable an easing of monetary policy, compatible with the
Discuss the ways in which a persistent budget deficit could lead to inflation.
The government plans a reduction in income taxes, to be financed by borrowing, with the aim of increasing demand to stimulate the economy. Discuss this policy proposal.In your reply, comment on the perspective of Ricardian equivalence proponents on such a proposal.
How would you expect the following developments to impact on the NAIRU?(a) Greater anxiety on the workers' part about job security(b) A decline in the number of young entrants to the labour market(c) The growing importance of Internet job listings.
'Monetary policy must be defined in terms of its final goal. For us, this final goal is, without any shadow of doubt, price stability' (Dr H. Tietmeyer, President of the Bundesbank, address to the Zurich Economic Society, November 1993).(a) What does price stability mean?(b) Comment on the
'The bond market lost its momentum as higher than expected inflation lowered expectations of another German rate cut.' Interest rate analysis stresses the role of market expectations. Explain the logical sequence behind this statement.
On 7 November 1991, the financial press reported:(a) The Federal Reserve sought to revive the US economic recovery by cutting the discount rate by 0.5 percentage points to 4.5 per cent, the lowest level in 18 years.(b) The Fed explained that the discount rate was cut against a background
Suppose monetary policy 'eases'. How will the slope of the yield curve be affected?Explain how your answer might be influenced if the easing of credit led to a rise in expected inflation.
Addressing a symposium in 1994, D.T. Brash, Governor of the Central Bank of New Zealand, remarked that 'the best contribution monetary policy can make to growth and employment is to maintain stability in the general level of prices' (Address to the Federal Reserve Bank of Kansas symposium, Reducing
An investment report written in 1996 warned that:There is a fear that, for political reasons, the UK government will 'go for growth' over the life of this Parliament by increasing spending and cutting taxes while being more lax about interest rates, thus fuelling inflation. That said, the feeling
An investment report opened its 'investment outlook' section with the comment:We expect the global economic environment to be characterised by moderate economic growth and relatively low inflation, a combination which should lead to relatively low interest rates also.Is this statement referring to
In the present macroeconomic situation, the requirements of non-inflationary growth point to the importance of monetary policy in moderating demand where margins of spare capacity have virtually disappeared. ... It [monetary policy] should support a recovery of activity only where such margins
Suppose the UK inflation rate were to rise from 2 per cent to 10 per cent. Indicate three sections of the community that would lose and three that would gain from this. List three reasons why a resurgence of inflation might be bad for the British economy.
A central bank announces that inflation is 'public enemy number 1' and engages in restrictive monetary policy to reduce it from 6 per cent to 3 per cent.What would be the likely effects, if any, on output and unemployment? Would your answer be different in the long run and the short run? Can
Is inflation 'dead'? Evaluate the arguments in section 6 of this chapter.
Inflation targeting by the monetary authorities involves three steps:(a) deciding on a target inflation rate,(b) forecasting inflation, and(c) formulating and implementing a policy response should the forecast inflation rate deviate from its target level.Comment on each of these steps.(Note:
It is sometimes said that business tends to be soft on inflation because firms prefer an environment of rising prices to one of static or declining prices. Do you agree?
Discuss the reasons why one might expect, over the long run, countries with lower inflation to enjoy faster growth than those with higher inflation.
What is price stability? How is the inflation rate calculated? Why might standard measures of inflation overestimate the 'true' rate of price increase?
Suppose the national accounts for a country showed the following figures:wages and salaries£400 investment£200 money supply£450 corporate profits£100 rents and interest£150 depreciation£50 indirect taxes less subsidies£70 dividends sent abroad£50 income from agriculture£70 Compute the
Take any country listed in Table 11.2. Explain the difference between its GDP per head at purchasing power parity and at nominal exchange rates rates. Using data on the actual 1998 nominal exchange rates, compute the implicit PPP exchange rate for any three countries. Comment on the results.
Consider an economy with only three goods. Their market prices are P1 = 5, P2 =10 and P3 = 15. The production (and consumption) of each good during 1995 was Q1 = 20, Q2 = 25 and Q3 = 10.(a) What is the value of nominal GDP?(b) Assume that in 1996 prices rise to Pi = 6, P2 = 12 and P3 = 17, and
A person saves £10,000 of this year's income and spends it on new machinery. Explain how this would be recorded in the national accounts. Another person takes £10,000 from under the mattress and buys shares on the stock market. Would this be recorded in GDP?
Which of the following transactions should be included as part of GDP?(a) A consumer pays £10 for a meal at a restaurant.(b) A company buys a plant from another firm for £1 million.(c) A supplier sells computer chips to a firm that makes personal computers.(d) A person buys a second-hand car from
An investment project yields a revenue stream of 100 per year for 10 years. The cost of the project is 500. Suppose the pay-back period rule is four years, would you accept this project? What is NPV if the discount rate is 10 per cent? What is the IRR?
Suppose you are asked to decide whether a new machine should be purchased.Projected net returns (sales less costs) over the four-year life of the machine are: year 1,£2000; year 2, £4000; year 3, £4000; year 4, £6000. The machine costs £10,000. The firm uses a 10 per cent discount rate. Should
Suppose the price of a computer is £10,000. Its effective life is two years. Its marginal revenue product to the firm is £5000 for each year and its scrap value at the end of the period is £2000. The interest rate is 6 per cent per year. Calculate (a) the present value of the flow of marginal
Suppose a firm's output-labour input relationship was as follows:Number of Total output employees produced 120 250 390 4120 5145 6165 7180 8190 9195(a) Calculate the marginal product of labour at each employment level.(b) If price per unit was £1000 and the pay level was £20,000 per year, how
The principal-agent problem was discussed in Chapter 4. The way of resolving it is to draw up contracts which will protect the principal from the opportunism of the agent through (a) provision of incentives to the agent, (b) monitoring of the agent's performance, and (c) penalising the agent if
How, in your view, would a monopoly trade union determine its objectives in pay negotiations? Would it aim to maximise pay per person employed or the number of persons employed, or something in between? How would the answer affect the level of pay demanded by the trade union for its members?
Explain why the ocean fisheries are more likely to be over-fished than a privately-owned lake.
Consider a tax on petrol, imposed because of concern about air quality. The objective of the tax is to reduce vehicle emissions. Given that the price elasticity of demand for petrol is well below unity, examine the effects of the tax under each of the following headings.(a) Does it discourage an
The Swedish sulphur tax is estimated to have triggered a 40 per cent decline in the sulphur content of fuel oil between 1990 and 1992. The tax accomplished its environmental objectives, but yielded less revenue than the Treasury expected. Why might the Treasury have preferred a lower rate of tax
The costs of environmental protection are perceived as being too burdensome for many businesses confronting international competition in an increasingly open economy. It has also been argued that many governments struggling with large budget deficits cannot afford high environmental standards. Yet
According to the Delors White Paper (1993), low-cost efficient infrastructure is essential to promote competitiveness. With this in mind, it proposed a trans-European transport and communications network (TENS). List some of the reasons why government support is considered necessary for this type
The Commission for Social Justice Report, November 1994 (London: HMSO), drew attention to the following:(a) The richest 20 per cent of the UK population had 7 times the post-tax income of the poorest 20 per cent in 1991, compared with a multiple of 4 in 1977.(b) The 1991 multiple of the richest 20
Give examples of government interventions in your business which have been (a)helpful, and (b) unhelpful to the firm. Justify or criticise this intervention by reference to the analytical framework of this chapter.
Sometimes government intervention to correct an externality (say, a subsidy to tertiary education) has an adverse impact on its income-distribution objective(children of the better-off have a disproportionate probability of entering universities). What combination of measures might a government use
Using the arguments for state intervention outlined in this chapter, make a case for government support for:(a) small and medium-sized enterprises (SMEs),(b) urban transport,(c) railways,(c) education.
Give reasons in support of the view of EU business organisations, such as UNICE, that government spending's share of GDP in Europe should be reduced to the United States' level in order to speed up EU growth. Do you agree with this view?
The Delors White Paper (1993) identified as one of the 'fundamental imbalances' in the EU economy the fact that current levels of public expenditure, particularly in the social field, have become unsustainable and have used up resources which could have been channelled into productive investment.
Early in 2000, Brazil's Economic Defence Council, the anti-trust agency, was asked to approve a merger between Brazils' two top brewers to form a powerful new company AmBev (Business Week, 27 March 2000). The new company would have a 70 per cent share of the Brazilian beer market. The argument in
In Box 7.2, the statement is made that 'payment of a franchise fee [i.e. a fixed amount of money regardless how much of the product is sold] does not affect the dealer's profit-maximising level of sales. But a lower wholesale price does'. Explain this assertion with the aid of a diagram, using
In March 1996, two Swiss giants of the drugs industry, Ciba and Sandoz, announced a merger. This was a merger of record size, the combined market values of the two companies being $64 billion (£42 billion). By contrast, the value of Glaxo's bid for Wellcome in 1995 amounted to only £9
In the light of the following summary, comment on the motivation and effectiveness of the East German privatisation programme.In 1990 the Treuhandanstalt was the world's biggest holding company, with 12,370 businesses from coalpits to a Berlin horse-track. By the end of 1994, all but 100 had been
Write a memo to a newcomer on a competition authority explaining why and under what circumstances monopoly is inferior, from an economic point of view, to competition. In your memo, comment on the EU Competition Commissioner's assertion that 'competition policy plays a key role in creating an
According to the British Nobel prize-winner, Sir John Hicks, 'the best of all monopoly profits is a quiet life'. Compare this view with Schumpeter's hypothesis that firms with monopoly power were the driving force in innovation.
Suppose a group of firms organises a market-sharing agreement. They arrange not to compete with each other on their local markets. What would be the effect of such an agreement on the industry's profits? Why should a competition authority object? What arguments might the chief executive of the new
Who gains and who loses from the cartel? Is there an economic case for trying to break it up? If yes, is there any way of doing it?
An industry has a demand curve as follows:Price (£)10 98 76 54 3Quantity 12 34 56 78(a) Suppose the industry is composed of a monopolist with a constant MC equal to £3. What price and output are chosen?(b) Now suppose there are two firms, each with MC = AC = £3. What price and output will
Suppose there are ten identical producers of spring water. The constant marginal cost of extraction of the water is £1 per litre. The maximum extraction rate for each firm is 10 litres per day. Suppose the market demand curve for this water is as follows:(a) If the firms form a cartel, what will
The table below shows a demand curve facing a monopolist who produces at a constant marginal cost of £5.Price (£)9 87 65 43 21 0Quantity 01 23 45 67 89 Calculate the monopolist's marginal revenue curve and its profit-maximising price and output. What would be the equilibrium output and price for
Are there any countervailing forces tending to undermine competition?
(a) A monopolist sets a lower price in one market than another for the same good. Is this consistent with profit-maximisation?(b) You are now told that the lower price has been set below both average and marginal costs and that the firm is engaged in predatory pricing. Should the firm be prohibited
(a) Calculate the marginal and average costs for each level of output from the following data.(b) Explain how marginal and average costs are related.(c) Costs of £12 are incurred in the initial position, even though no output is being produced. How can this be explained?Output 01 23 45 6 7 89
The table below shows a firm's total costs over a range of output and the price corresponding to each quantity sold. Find out its profit-maximising level of sales and the corresponding price. (Compute the firm's total revenue, marginal revenue and marginal cost schedules.) (1) Output (goods
Suppose that a firm, with a total cost structure as shown in the table below, can sell as much output as it wants at a price of £10.(a) Derive its MC curve.(b) At what level of output will the firm reach the point of maximum profits?(c) Compute the average costs per unit at each output level. Is
statistics showing the world demand for oil:Price Quantity demanded(dollars per barrel)(millions of barrels per day)10 60,000 20 50,000 30 40,000 40 30,000 50 20,000 Your advice is needed on the following questions:(a) If the supply of oil is decreased so that the price rises from $20 to $30 a
Imagine that you are responsible for running a bus company and you have access to the following information about the elasticities of demand for bus travel:(a) income elasticity = - 0.4,(b) own-price elasticity = - 1.2,(c) cross-price elasticity with respect to rail fares = +2.1.How might this
Which of the following are likely to have a positive cross-elasticity of demand?(a) fishing rods and fishing permits,(b) imported rice and domestically produced rice,(c) taxi and bus fares,(d) cars and tyres,(e) beer and wine,(f)cameras and films.
In May 2000, a five-star London hotel quoted a mid-week nightly rate of £285. The same hotel was offering an Easter weekend rate of £165 per night. What does this tell you about the hotel's assessment of the price elasticity of demand of weekenders relative to mid-week occupants? (See Box 4.3.)Is
A study of electricity consumption shows that the income elasticity of demand is 0.3 in the short run and 0.6 in the long run, and that the price elasticity is -0.1 in the short run and -0.3 in the long run. Why, in your view, are long-run elasticities usually higher than short-run elasticities?
(a)Consider the economic consequences of a prohibition on the consumption of alcohol. What happens to the supply curve? What happens to the demand curve?How will the prohibition affect equilibrium consumption and price? What further indirect effects are likely to follow? (According to some writers,
The following table contains data on price, quantity supplied and quantity demanded.(a)Draw a diagram showing the demand and supply curves.(b)With this diagram, estimate the new equilibrium price and quantity after the imposition of a tax of £2 per unit.(c) Comment on the incidence of the tax.(d)
Consider the supply curve of oil for central heating. In each of the cases below, indicate whether there is a movement along the supply curve (and in which direction) or a shift of the supply curve (and whether left or right): (a) new oil fields start up in production;(b) the demand for central
India's per capita GNP was $2060 in 1998 (PPP basis). Assuming a growth rate of 3 per cent per person was sustained, how many years will it take India to reach average GDP level in the industrial countries of $23,420? Suppose industrial countries continue to grow at 2 per cent, how long before
An executive marries his housekeeper, who continues to work in the home after marriage. Explain what happens to GDP.
How ‘exportable’ is the Asian experience to regions such as Sub-Saharan Africa?
An article in Atlantic Monthly (October 1995) commented on the discordance between booming GNP figures for the US economy and an electorate which felt insecure and worse-off than before. The article explained this paradox of ‘gloomy voters in good times’ by the inadequacies of GNP as a measure
In judging an economy's growth performance, distinctions must be kept in mind between:(a) quantity and quality of growth;(b) the benefits of growth and the costs of growth;(c) the short and the long run.Discuss growth performance with respect to each of these headings.

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Economics For Business Competition Macro Stability And Globalisation 2nd Edition Dermot McAleese - Solutions

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