ECON 782 Managerial Economics-level of disposable Income

1. GDP and Related Measures

Suppose an economy produces only 2 products in a given quarter: orange juice and yogurts.   In the third quarter of 2020 (the base period), 70,000 cartons of orange juice  were produced, at a value of \$2.60 per carton, while in the third quarter of 2021, orange juice production increased to 75,000 cartons, at a value of \$2.80 per carton.In the third quarter of 2020 (the base period), 90,000 containers of yogurt were produced at a value of \$0.90 per carton, while in the third quarter of 2021, yogurt production increased to 100,000 containers, each at a value of \$1.05 per container. The population in this economy is 500 individuals in the third quarter of 2021, while the  number of hours worked in the third quarter of 2021 is 3000.

Complete parts a, b, c, d, e, and f.

a. Solve for nominal GDP in the third quarter of 2020.

b. Solve for real GDP in the third quarter of 2020.

c. Solve for nominal GDP in the third quarter of 2021.

d. Solve for real GDP in the third quarter of 2021.

e. Solve for the growth rate of real GDP between the third quarter of 2020 and the third quarter of 2021.

f. Why is real GDP a more representative measure of economic growth than nominal GDP? Complete EITHER parts g and h OR parts i and j.

g. Solve for the real GDP per capita in the third quarter of 2021.

h. During which phase of the business cycle would an economy experience increases in the real GDP and real GDP per capita?

i. Solve for the GDP price index for the third quarter of 2021.

j. Solve for the amount of labor productivity in the third quarter of 2021.

2. Labor Market

Suppose there is a town with 875,000 people.  225,000 of these people work full-time while 265,000 work part-time.  145,000 of these part-time workers want to work more hours, but are not permitted to do so by their respective employers.  Another 100,000 individuals in this town are under the age of 16.  285,000 other individuals are currently not working.  190,000 of these individuals are actively seeking work, while 95,000 individuals have given up looking for a job.  Of the 190,000 who are actively seeking work, 115,000 lost their jobs due to lower demand resulting from the pandemic.  25,000 of the 190,000 lost their jobs due to technological advancements, and the remaining 50,000 are not working due to normal turnover in the labor force.

Complete parts a, b, c, and d.

a. Solve for the labor force in this community.

b. Solve for the current unemployment rate in this community.
c. Solve for the total number of hidden or disguised unemployed in this town.
d. State the number of cyclically unemployed people in this community.

3. Solving for GDP

Consumption Expenditures        \$74000
Wages                                         \$92000
Taxes on Production and Imports    \$10000
Government Purchases                  \$46000
Statistical Discrepancy                  \$14000
Imports                                        \$51000
Undistributed Corporate Profits    \$  6000
Rent                                              \$39000
Proprietor’s Income                    \$22000

Using the numbers above, complete EITHER parts a and b together OR part c alone.

a. Solve for the aggregate expenditures value.

b. If this aggregate expenditures value is less than the Real GDP, what should be done to production and prices to bring the value to equilibrium GDP?

c. Solve for the national income.

4. CPI
The typical household purchases two goods: eggs and bread.  Each month, the household purchases 3 cartons of eggs, while also purchasing 7 loaves of bread. In November 2020, the carton of eggs had a price of \$2.85 per carton, and the price of the bread was \$3.15 per loaf.  In November 2021, the price of the eggs increased to \$3.10 per carton, while the price of the bread increased to \$3.75 per loaf.

Complete parts a and b.

a. Using these values, solve for the CPI, assuming that November 2020 is the base month.
b.Solve for the CPI growth rate between November 2020 and November 2021.

5. Bank Loan

Suppose you take out a loan for a car for \$24000.  The bank expects that the rate of inflation for next year will equal 7%.  You and the bank agree that in one year’s time, you will pay back the full amount at an interest rate of 16%.  Next year though, there is a sudden rise in inflation, causing the inflation rate to equal 18%. Complete parts a, b, and c.

a.Based upon these values, how much will you pay back in one year?

b.Based upon these values, solve for the unanticipated rate of inflation.

c. Based upon these values, solve for the real rate of interest.

6.DI, C and S

Given the following income and spending data, please answer the following questions:

a. Solve for savings at each level of disposable income (DI) and place the values in the blanks above or on a separate page.

b. Solve for the marginal propensity to consume (MPC) and the marginal propensityto save (MPS) between each disposable income level.
c. Solve for the average propensity to consumer (APC) at each level of disposable Income except where DI = \$0.

Complete EITHER part d OR part e.
d. State the value for the autonomous consumption in this example.
e. State the value for the break level of income in this example.

Extra Credit

1. According to the advance estimate for third quarter 2021 GDP for the United States  economy, did the nominal GDP or real GDP increase by a larger amount?  Explain why this measure increased more than the other.

2. Between September 2020 and September 2021, did the CPI or core CPI experience a higher growth rate?  Explain what would cause this measure to grow by a larger amount than the other measure.

3. In problem 6, you should find that the APC values decrease as the DI rises.  Why would the APC decrease when the consumption values continue to increase as disposable income increases?