Suppose you collect stamps and coins for the sheer fun of it. Currently, your collection contains both. For purposes of this problem, suppose that stamps all sell for one price and coins all sell for another, and both are normal goods.
a. Begin by illustrating your current budget constraint (with stamps on the horizontal and coins on the vertical) as well as the bundle A you currently own. Assume that you have done the best you can given your circumstances.
b. The stamp industry has recently marketed its product as a safe way of investing and insuring against inflation. As a result, the price of stamps has been driven up since you chose your current bundle. Show how this changes your budget constraint given that you can buy and sell both stamps and coins --- and assuming you have no
additional funds to spend on your collections.
c. Are you happy about the stamp industry's marketing campaign? In what way will you adjust your collection?
d. After a while (and after you have made your desired adjustments), it turns out that the marketing campaign only produced a temporary "bubble" in the stamp market --- and prices fall back to what they were before. Are you happy when the bubble bursts? Will you have more or fewer coins and stamps than you had before the marketing campaign started?
e. True or False: For collectors that collect to satisfy their passion (rather than as an investment strategy), volatility in prices is good.
What will be an ideal response?
b. This changes the budget to the dashed budget in the second graph.
c. A portion of the new dashed budget lies above the original indifference curve --- implying that there are now bundles available that are preferred to the original bundle A. So you are happy about the marketing campaign. All of these bundles have more coins and fewer stamps --- so you will end up selling stamps and buying coins.
d. When the bubble bursts, we are at bundle B --- and the new budget now passes through B with a shallower slope. Again, new bundles emerge that lie above the indifference curve that contains B --- implying you are happy about the bubble bursting. All of the potentially more preferred bundles contain more stamps and fewer shirts. Since we know stamps and coins are both normal goods, we know that bundle C where you end up will have more stamps and more coins than you had at A. (This is because the original and final budgets both have the same slope.)
e. This is true --- price fluctuations open up new bundles that are preferred, as items that have become relatively more expensive are sold to purchase items that have become relatively cheaper,
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A. responsive quantity supplied is to a change in incomes. B. easily labor and capital can be substituted for one another in the production process. C. responsive the quantity supplied of Y is to changes in the price of X. D. responsive the quantity supplied of X is to changes in the price of X.
In an open economy with fixed exchange rates, monetary policy is most effective at increasing real income if
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Consider the same ultimatum game as in the previous questions but consider yet new preferences reflecting envy. In particular, now assume players get 1 util per dollar earned. That is all for the player who earns at least as much as the other. The player who earns strictly less than the other loses 1 util for each dollar difference. Which of the following is an offer that arises in a
subgame-perfect equilibrium with these preferences? a. 1. b. 2. c. 4. d. 5.
Many economists believe that the collapse of world trade and the depression in the 1930s were linked by a decrease in real income caused by producing on the basis of comparative advantage
a. True b. False Indicate whether the statement is true or false