Homework 3
<DOCPAGE NUM="526"></DOCPAGE><CHAP NUM="10"><TTL>Chapter 10</TTL></CHAP>
<DOCPAGE NUM="526"></DOCPAGE><H1 NUM="1">Technical Questions</H1>
5. a. Q = 1,000 – 5P P = 200 – 0.2Q MR = 200 – 0.4Q MC = AC = 20. At a price of $80, the quantity demanded is 600. Therefore consumers will buy 600 units
b. You have to calculate the monopoly price. 200 – 0.4Q = 20 Q = 450; P = $110 profit = ($110 – 20)(450) Profit = $40,500 With the block pricing scheme, the monopolist makes The monompolist will make ($120 – 20)(400) on the first 400 units and ($80 – 20)(200) on the next 200 units, or $40,000 + $12,000 for a total of $52,000 on the blocking price scheme.
7. a. QE = 900 – 2PE or PE = 450 – 0.5QE MRE = 450 – QE
MC = AC = 50 MRE = MC 450 – QE = 50 QE = 400
PE = $250 QW = 700 – PW PW = 700 – QW MRW = 700 – 2QW 700 – 2QW = 50 QW = 325 PW = $375 b. Demand is more elastic in the East. This elasticity can be shown because the monopolist has a lower optimal price in that market. It can also be shown by directly calculating the elasticity in each market using the point price elasticity of demand formula: eP = P/(P – a)
When P = $400, price elasticity in the East is 400/(400 – 450) = 400/–50 = –8.0.
Price elasticity in the West is 400/(400 – 700) = 400/–300 = –1.333.</P></ANS>
<H1 NUM="2">Application Questions</H1>
5. This is third-degree price discrimination. The publisher segments the U.S. and Indian markets because these two markets have different willingness to pay different prices in each market. The publisher’s revenues will increase because the publisher is charging a lower price in the Indian market. This is because the Indian market has more elastic demand. The publisher cannot charge the high U.S. price in the Indian market because it would not be able to sell in India. The Indians are not willing to pay the U.S. market price. If the publisher is going to sell the textbook online, it will probably have to set a single price, typically the high U.S. price. This means that it would possibly lose the Indian market. If the publisher differentiates the product—by using rupees in the Indian version then the two versions of the product can be sold in the U.S. and Indian markets simultaneously while charging different prices because they are no longer the same commodity.

<DOCPAGE NUM="527"></DOCPAGE><CHAP NUM="11"><TTL>Chapter 11</TTL></CHAP>
<DOCPAGE NUM="527"></DOCPAGE><H1 NUM="1">Technical Questions</H1>
3. Transfer payments are not counted as part of government spending because they represent transfers of income to individuals and not purchases by government for goods or services. Transfer payments are a part of consumers' income and will influence the consumption spending category.</P></ANS>
7.
Table 11.1Nominal Versus Real GDP (billions $) | Variable | 2000 | 2001 | 2002 | Nominal GDP | $9,817.0 | $10,128.0 | $10,469.6 | Percent Change | | 3.17 | 3.37 | Real GDP | $9,817.0 | $9,890.7 | $10,048.8 | Percent Change | | 0.76 | 1.60 | GDP Deflator (Price changes) | 100 | 102.40 | 104.19 | Percent Change | | 2.40 | 1.75 |

<DOCPAGE NUM="528"></DOCPAGE><H1 NUM="2">Application Questions</H1>
5. The following information is found in the CPI Frequently Asked Questions on the Bureau of Labor Statistics web page.
a. The CPI is the most widely used measure of inflation in the United States. The President, Congress, and the Federal Reserve use the CPI in developing fiscal and monetary policies.
b. The CPI is developed from expenditure information. CPI is decided by analyzing what families and individuals actually bought and is derived from the Consumer Expenditure Survey. More than 7,000 families from around the country provide information on their spending habits in quarterly interviews. Another 7,000 families keep diaries listing everything they buy during a two-week period.
c. The major groups within the CPI are food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services. These groups include user fees, such as water and sewer charges, auto registration fees, tolls, and sales and/or excise taxes that directly influence the prices of products. The CPI does not include financial investment items such as stocks, bonds, real estate, and life insurance that relate to saving and do not relate to consumption.
d. BLS data collectors visit or call thousands of retail stores, service establishments, rental units, and doctors’ offices each month to obtain price information on thousands of items. Prices of about 80,000 items are recorded each month and this is based on scientific sampling. Data on specific items recorded previously are collected and recorded for changes. New products and changes in the quality of existing products are recognized and noted. The information is then sent to the BLS, where commodity specialists review the data. <DOCPAGE NUM="531"></DOCPAGE><CHAP NUM="13"><TTL>Chapter 13</TTL></CHAP> <DOCPAGE NUM="531"></DOCPAGE><H1 NUM="1">Technical Questions</H1> * 5.a. The Fed sets the discount rate for borrowing reserves that the banks are charged. * b. The Fed does not set the federal funds rate. The Fed targets this rate through open market operations. The FOMC announces its targeted federal funds rate. The actual rate is decided in the competitive market for bank reserves. The Fed is only one player in this market. * c. The prime rate is the rate banks charge their best customers. This rate is set by commercial banks, not the Federal Reserve.</P></ANS>
<ANS NUM="6"><P><LL><INST>