Part II - Supply and Demand (18 points - 3 points each) There are six separate questions below. Each question begins with a news headline. After you read the headline in bold, please answer the question directly below it. Examine what happens to equilibrium price and equilibrium quantity in the market listed below the headline. In answering these questions, please provide the correct graphical representation of each situation (i.e., in the first question, you should provide a graph for the market for vacations to Hawaii). Identify whether the demand curve or supply curve is impacted in the given market and make sure to explain why the curve would be impacted. Please explain how you came to your answer (the more detail you give the more points you receive). Each question is worth 3 points. 1) Household incomes increased 25% over the last year How does this impact the market for vacations to Hawail? 2) Bad weather leads to a lower than expected harvest of the orange crop How does that impact the market for apple juice at local grocery stores? 3) The State of Connecticut imposes tolls on route 1-95 (the main route used to travel to NYC for many workers) How does this impact the market for train tickets on the Metro-North into New York City? 4) The John Deere Company manufactures a new tractor that allows farmers to harvest their crops in 12 the time it used to take to harvest How does this impact the market for cereal? 5) The U.S. Government mandates that fast food restaurants (like Mcdonald's) have to increase the quality of their beef used in the production of their hamburgers How does this impact the market for McDonald's hamburgers? 6) Meteorologists predict an above average amount of snow for the Northeast United States this coming winter How does this impact the market for snow blowers in the Northeast United States?Question 1 (15 points) Suppose that the demand facing firms producing Golf clubs in Home and Foreign is given as follows. Q: = S - -b(P: - P) The cost of producing Golf clubs is given by TC(Q;) = F + (*Qi a) (6 points) Assume that the parameters for Home are as follows. SH = 1440, b = 2, F=5, C =1. Compute the equilibrium values of n, P, and Q. {Hint: either derive the expression for marginal revenue from the demand curve above or use the expression for marginal revenue from the text} b) (3 points) Assume that the parameters for Foreign are as follows. SF = 250, b = 2, F = 5, C=1. Compute the equilibrium values of n, P, and @ for Foreign c) (6 points) Now suppose that Home and Foreign trade freely in Golf clubs. What are the equilibrium values of n, P, and @ in the integrated economy? Is trade welfare improving for consumers in both countries? Justify your answer. Question 2 (13 points) Suppose that a Chinese solar panel manufacturer has an upward sloping marginal cost function given by MC = 10 @ where O is the total number of solar panels produced by this firm. Denote the number of panels sold in the Chinese market by Ou and the number of panels sold in the US market by OF. The firm faces a downward sloping demand curve in the Chinese market given by PH =750-5 Q#. It faces a horizontal demand curve in the US market at a price of 500. That is, it can sell any number of panels in the US market at that price. a) (4 points) How many panels will the firm sell in each market? b) (2 points) What is the profit maximizing price of the panels it charges in the Chinese market? c) (3 points) Is the price in the Chinese market higher or lower than in the US market? Will this qualify as dumping? d) (4 points) Show the results diagrammatically. Question 3 (7 points) Here is a list of products: rice, wheat, gold, automobiles, golf clubs, wine, movies. For each of these products explain whether you expect the trade to be inter-industry trade or intra-industry trade?1U. 11. 12. Suppose that new govermnent spending increases lifespans. In our model what should be the effect of this on hours worked per person in a given time period? Does it matter whether government spending adds extra years to the lifespan of living adults without improving their morbidity or if it expands both the peak and end years by equivalent amounts? Mat evidence exists for the predictions you have made that you are aware of? Show how a fall in the matching elciency technologyr can effect output, the unemployment and vacancy rates. How could economists differen tiate this from a fall in productivity if they could view the three above pieces of data over many years? [In other words, how would these two events produce different patterns in the data?] How does the separation rate behave during recessions? 1'What does this tell you about the source of decreases in employment during recessions? 2. You have a Margin Account. Assume you buy 150 Pfizer (PFE) shares at $70 per share. You put up $6,000 and borrow the rest. a. What is the Margin? b. How would this be represented in the balance sheet? Assets Liabilities and Account Equity Now assume that your margin account requires a maintenance margin of 30%. If PFE is selling for $40, would you receive a margin call? Why? d. If the Price increases to $95 per share, what is the new margin? Will you be having a margin call or not? Why? 3. Define Short Sales. Make sure you explain what a long position and a short position are. a. Now assume that that you short 500 shares of AT&T (T) at $50 per share. Your broker has a 40% initial margin. How does this look in the balance sheet? Assets Liabilities and Account Equity b. Your broker has a maintenance margin of 30%. If the price of the stock falls to $30 per share, what is your new margin? Are you benefited or affected by the price decrease? How do you represent it in the balance sheet? Liabilities and Account Equity 4. You are to decide whether to invest $26,000 in stocks or options for three months. You're looking at Monster Beverage, which is currently selling for $20 per share. You also notice that a call option with a $20 strike price and three months to maturity is available. The premium is $3. Monster pays no dividends. You're considering investing all $26,000 either in the stock or in the call options.7. Calculate the Expected Return and Standard Deviation of the individual asset A and B presented below. ASSET A State Pr State Return in State Pr R(A) Pr*R Deviation Deviation Squared Deviation Sq *Pr 0.4 -15% 2 0.6 5% E(R) - Variance Asset A= sd asser A ASSET B State Pr State Return in State State Pr R(B) Pr*R Deviation Deviation Squared Deviation Sq *Pr 0.4 25% 2 0.6 15% E(R)- Variance Asset B = sd Asser B- 8. Calculate the PORTFOLIO Expected Return and standard deviation of a 60/40 Portfolio of Asset A and asset B ASSET A 60% ASSET B 40% PORTFOLIO Deviation (Deviation Squared Pr State Return in State Return in State R port in Sate S RIPji*Pr Portfolio Portfolio) 2 Dev*Pr Pr RIA R(B) RIP)i 0.4 2 0.6 E(R)= E(R) Portfolio Portfolio Var - Portfolio sd = 9. Compare the Risk-Return of the two stocks ALONE and the joint risk in the portfolio. Interpret your results. Stock Alone Portfolio 60A- Asset A Asset B 40B Expected Return Variance Standard Deviation Is diversification working or not? Why? What type of risk is addressed with portfolio allocation? Define correlation. Given your results, Assets A and B must be correlated close to what degree? (- 1, 0. +1)7 Why