Suppose there are two large grain elevators (consolidators) in Iowa that buy all of the wheat from many small farmers and sell it on the world market at the price > 100.

	A	B
	12KG	56KG
	45	67
	34	87
	11	12
	36	23

The aggregate supply curve among the farmers is S(p)-p-100, where p is the local price of wheat (Le, the price the Cevators pay), and this is known by the elevators. Prior to the start of the planting season, the elevators (buyers-duopsonists) announce their demands (the quantities they wish to purchase), and the local price is determined to clear the market, that is, to elicit the aggregate quantity demanded from the farmers. The buyers thus act as middlemen, and their objective is to maximize the difference between the value of their sales and the value of their purchases.

(a) Determine the equilibrium demands of the elevator operators.

(b) Discuss the effect of an increase in p on the equilibrium quantities, local price, and profits of the elevators.

(c) Suppose all of the wheat is sold abroad and foreign governments impose a tariff t on U.S. wheat imports. Assuming those countries can continue to buy wheat from other sources at the price p, how would this affect the equilibrium quantities and local price?

(d) Now suppose there is a domestic market for Iowa's wheat with market demand given by D(p) = 200-p, where p is the price elevators receive. Assuming the elevators sell their entire stock domestically, they then act as duopsonists in the local market and duopolists in the domestic or national market for Iowa wheat. Determine the amounts they will purchase locally and sell nationally and the prices at which they would do so, i.e., p and p'.

(e) Now suppose the elevators can sell in both the domestic market as in part d and internationally (without the tariff) as in part a. Formulate the (Nash) decision

address all questions

Write short notes on the following fundamental concepts:

Scarcity and Choice

Opportunity cost

Production possibility frontier

Positive and normative economics

Using examples, explain 'Ceteris Paribus' as used in economics

i) Why is the consumer said to be sovereign

ii) What factors limit this sovereignty?

Consider an economy with three consumers, three different inputs and three different outputs. Each consumer i is initially endowed only with one unit of input i (time for labor of type 1) and consumes only output i (i=1,2,3). The consumers live on a circle, facing inward, and each consumer can use its input to produce the output it consumes and/or to produce the output that is consumed by its neighbor to the left (clockwise along the circle). Formally, consumer i (i=1,2,3) can use 20 units of input i to produce f, units of output i and can use L, 20 units of input i to produce 21 units of output i+1, where f. + L, 1. Here, "output 4" is another name for output 1 and "consumer i = 4" is another name for consumer 1

consumer is less productive in producing its own output than in producing the output consumed by its neighbor.) Consumer i gets utility z, by consuming z, 20 units of good i.

(a) Specify the set of feasible allocations for this economy, assuming that there is free disposal of all goods. Use the notation above and any other notation you need, defining any notation you introduce.

(b) Suppose that the consumers are not able to trade. They can only produce (using their own initial endowments) and consume. What are their optimal input, output and consumption choices?

(c) Suppose, instead, that any two consumers can freely trade any goods with each other. Each consumer i is still the only consumer able to produce output using input i. Assume that trading does not use up any resources (either inputs or outputs). No consumer is forced to trade and no trade by a pair of consumers occurs if it reduces a consumer's utility. What trades might consumer 2 make with consumer 3 that both consumers would agree to, with no involvement of consumer 17 What trades might consumer 2 make with consumer 1 that both consumers would agree to, with no involvement of consumer 3? What conclusion can you draw about the final allocation if the only possible trades are bilateral (between two consumers, without involvement of the third)? Explain.

consider a two-period model economy with a government. Let preferences of the representative household be described by the utility function: u(c1,c2)=logc1+beta logc2, where c1 denotes consumption in period one and c2 denotes consumption in period two. The parameter beta is the subjective discount factor and measures the consumer's degree of impatience in the sense that the smaller is beta, the higher the weight the consumer assigns to present consumption relative to future consumption. The representative household enters the economy with zero real financial wealth a0=0. the household earns y1 units of goods in period one and y2 units in period two. they also pay lump-sum taxes t1 and t2 in period one and two, respectively, in order to finance government expenditure. the real interest rate paid on assets (a1) held from period one to period two is denoted by r. the government starts period one with no outstanding assets or liabilities and spends g1 and g2 in each period. like the household, the government has access to financial markets where it can borrow or lend between periods at the interest rate r. therefore the intertemporal government budget constraint is given by: g1 + g2/(1+r) = t1 + t2/(1+r). a) solve the household problem and derive optimal consumption and savings in each period. b) suppose the government reduces taxes in the first period but keeps government expenditure the same, that is change in t1 < 0, change in g1 = 0 and change in g2 = 0. if the intertemporal government budget constraint should remain balanced, show how consumption in period one and household savings between period one and two are influenced by the change in the timing of taxation. how are national savings (government plus household savings) influenced by this change? c) Suppose the government increases its expenditure in the first period change in g1 > 0 while keeping the same expenditure in the second period so change in g2 = 0. the change in government spending is fully financed with current taxes, so that change in g1 = change in t1 > 0. how are household savings impacted in this case? what about national savings?

Suppose a consumer who has to decide if she wants to go to pro or not. If she does NOT go, she will get a low income in both periods, Y1, Y2. If she goes pro, she will get a higher wage in the first period Y1 J > Y1. In the second period, she will have NO income (Y2 J = 0) and, in addition, she will have to pay and extra amount S to sustain her fancy lifestyle in the second period. She has increasing and concave preferences over consumption in the two periods (C1 and C2) Consider first that she does not go pro 1. Write down the dynamic budget constraints 2. Derive the intertemporal budget constraint 3. Show graphically the budget constraint and the optimal consumption point in period 1 and 2. 2 If she decides to go pro, 4. Write down the dynamic budget constraints 5. Derive the intertemporal budget constraint 6. In your previous graph, draw the new budget constraint and the new optimal consumption point. 7. Is it good for her to go pro? Under what conditions will she be better off by going pro rather than not going pro? Explain. 8. If the government subsidizes the retired athletes in the second period, and the consumer has to pay this social security in the first period (discounted by the interest rate), it is more likely that she optimally chooses to go pro?. Discuss the validity of this statement.