Chris Esposito's Econ 105 Portfolio Exercises

Last Updated 12/21/1999

Federal Milk Marketing Orders:

1. Summarize the current government involvement in the market for fluid milk.  Be sure to define a "Federal Milk Marketing Order" and describe what these orders effectively do.

Currently the Federal Milk Marketing Orders (FMMO) covers Grad A milk made in the U.S., but outside of California.   The design of the orders was to move milk from surplus areas into shortage areas.  This was to assure that fair prices for fluid milk were available throughout the U.S.  This is accomplished by setting a minimum price (BFP) that handlers (buyers) may purchase milk form farmers (sellers) at.  

2. Create a graph that shows the effect of these Marketing Orders on the market for fluid milk.

3. Create a graph that shows what will happen when these Marketing Orders are no longer used in the market for fluid milk.

4. Discuss the consequences for consumers and dairy farmers.

Farmers should see no change in their net revenue, while consumers should see a slight decrease in the cost of fluid milk and a slight increase in the cost of soft and hard manufactured products.  

Graphical Analysis of Profit Maximizing Behavior:

The graphical analysis of the production decisions made by profit maximizing firms is a key part of this material. It is very important for you to be able to work with the graphs associated with this model. For any set of demand--MR-AC-AR curves, you should be able to determine the level of output the firm should choose to maximize profits and the total revenues, total costs and total profit or loss associated with this level of output.

1. A firm facing a downward sloping demand curve making negative economic profits:

The economic profit is negative, because the average cost is greater than the average revenue.

2. A firm facing a downward sloping demand curve making zero economic profits:

The economic profit is zero, because the average cost is equal to the average revenue.

3. A firm facing a downward sloping demand curve initially making zero economic profits. The firm's demand curve shifts to the right:

The economic profit is zero, because the average cost is equal to the average revenue.  The demand then shifts right creating negative economic profits since the average cost is greater than the average revenue.

4. A firm facing a downward sloping demand curve initially making zero economic profits. The firm's marginal and average cost curve shift up:

The economic profit is zero, because the average cost is equal to the average revenue.  The average cost then shifts up creating negative economic profits since the average cost is greater than the average revenue.

Graph depicting a price taking firm which makes positive economic profits:

Graph showing the total revenues, total costs and total profits of a firm in an industry where there is an incentive for a new firm to enter the industry:

Graph depicting a firm operating in a perfectly competitive market that is making negative economic profits:

Graph that shows what happens to the market supply curve when this firm exits the market and discuss the impact of this exit on the remaining firms in the market:

After the firm exits it increases the economic profits for the remaining firms, possibly making their net economic profits positive.

Payoff matrix for the on-line Prisoners Dilemma:
					ME
			cooperate		compete
SERENDIP cooperate	3 coins each		5 coins for ME
 	 compete	5 coins for Serendip	1 coin each
(i) Strategy:
I found that if I cooperate Serendip will continue to cooperate and I maximized my profits
by cooperating on all turns until the last one.  This gave me a final score of 41 and Serendip 36. 
(ii) What this has to do with the behavior of firms in your portfolio:
They firms of my portfolio maximize revenue by cooperating up until they can do something that 
will not allow the competition to compete against them on the next turn.  This can be done by
driving them out of business.  Competing on every turn does however discourage others from joining
the market.
Effect of a minimum wage above the market clearing wage on employment and wages in the labor market:

Aggregate Demand Assignment:
    a. Which happens, a shift in aggregate demand or a movement along the aggregate demand curve?
    b. Explain what type of spending is affected. (consumption, investment, government, and net exports.)
 
1. The personal income tax rate is increased:
    a.    Shift in aggregate demand
    b.    Consumption decreases
 
2 .The corporate income tax rate falls:
    a.    Shift in aggregate demand
    b.    Investments increase
 
3. People become excited about the future:
    a.    Movement along the curve
    b.    Consumption increases
 
4. Foreign firms decide to avoid shipping costs by producing in the US :
    a.    Movement along the curve
    b.    Net exports rise
 
5. The inflation rate rises:
    a.    Movement along the curve
    b.    Nothing, real GDP doesn't change

Aggregate Supply and Equilibrium Assignment:

1. Why does short run aggregate supply curve slope upward?
    As output increases firms must hire more employees and use more supplies

2. Why is the long run aggregate supply curve vertical?
    It is at the potential real GDP and in the long run an economy can not stay above potential

3. Suppose that foreign price levels rise.
    a. Explain what will happen in the short run to the equilibrium price level and real GDP.
        The equilibrium price will rise and real GDP will rise
 
    b. Explain what will happen in the long run.
        The equilibrium price will rise and real GDP will not change

Business cycles, Unemployment and Inflation Assignment:

Collected data on the unemployment rate and the inflation rate from the Economic Report of the President

1. Plot the unemployment data against the inflation data over time

2. Look at the years prior to 1970, the years of the 1970s, and the years since 1980.  What if any differences do you see in these plots? Interpret the plots.
 
In the 50s and 60s unemployment was higher than inflation.  In the 70's inflation was higher than unemployment and since unemployment has been higher than inflation.  Generally the unemployment peaks follow the inflation peaks by about 3 years and deflation results in mass unemployment.. 

Fiscal Policy Assignment:

Find two news articles about US Fiscal Policy. Write a brief explanation of each article emphasizing how the information relates fiscal policy.
 
1.    "The White House: Fiscal policy at the crossroads -- budget choices, fiscal discipline and outlook ," ( M2 PressWIRE ) ; 05-28-1999
In this article they relate the way the budget decisions affect the deficit, and the way deficit spending affects the overall economy.
 
Summary:
 
The 1990 bipartisan budget agreement did provide real deficit reduction, and important improvements in the budget process. Public debt had risen to nearly half - 48.8 percent - of GDP. President Clinton made fiscal discipline the cornerstone of his economic and budget policy. Since 1993, cumulative budget deficits were reduced by $1.2 trillion compared to earlier projections. We face both long-term choices about maintaining fiscal responsibility and short-term choices in the form of our 2000 budget. Others have proposed that the surplus be used for massive tax cuts. The Labor-HHS- Education funding bill in the House faces cuts of 18 percent below the FY 1999 spending levels. If the cuts required by the allocation were applied, it would reduce the NIH budget by $1.1 billion. The President’s FY 2000 budget offers tough choices that advance good policy.
 
2.    "Who runs US economy - politicians or bankers? ," ( The Christian Science Monitor ) Eugene Mullaly, Albert L. Weeks, Ruth J. Carney, Ann Botts, Thomas Madden,; 03-23-1999.
 
Summary:
 
Throughout the 1980s, excessive fiscal stimulus brought on by tax cuts and defense spending drove the Federal Reserve to counterbalance the trend with high interest rates and tight money policies.  A looming federal surplus, combined with a global recession, continues to force the Fed into maintaining low interest rates.

Budget History Assignment:

Go to the Economic Report of the President. Get data on the budget, on outlays and revenues, on and off budget items, in levels and as a percent of GDP.  

a. Plot these over time and summarize the information.   

The information shows that as government spending goes up in percentage of GDP so does the deficit.

I couldn't find off budget summary for the off-budget spending so I added the following chart from (http://cher.eda.doc.gov/BudgetFY97/guide2.html)

Chart 2-7

b. Write a brief explanation of what items are on and what items are off budget.

The off-budget category is designed to give special status to certain programs.  The law requires that the spending and revenues programs off the budget such as Social Security and the Postal Service, be excluded from the budget totals.  They are then added into the unified budget.

GDP assignment:

Go to the site http://www.access.gpo.gov/usbudget/fy2000/erp.html

1. Get Table B-1. Use this data to show that GDP = C + I + G + X. 

Year C I G X C+I+G+X GDP
1990 3,839.3 799.7 1,176.1 -71.3 5,743.8 5,743.8
1991 3,975.1 736.2 1,225.9 -20.5 5,916.7 5,916.7
1992 4,219.8 790.4 1,263.8 -29.5 6,244.5 6,244.4
1993 4,459.2 876.2 1,283.4 -60.7 6,558.1 6,558.1
1994 4,717.0 1,007.9 1,313.0 -90.9 6,947.0 6,947.0
1995 4,953.9 1,043.2 1,356.4 -83.9 7,269.6 7,269.6
1996 5,215.7 1,131.9 1,405.2 -91.2 7,661.6 7,661.6
1997 5,493.7 1,256.0 1,454.6 -93.4 8,110.9 8,110.9

2. Get Table B-28.

a. Examine this table and write an equation that explains how National Income is computed. 

National Income = Compensation of Employees + Proprietors' income with inventory valuation and capital consumption adjustments + Rental income of persons with capital consumption adjustment + Corporate profits with inventory valuation and capital consumption adjustments + Net interest.

b. Explain how National Income differs from GDP.

It differs from gross domestic product mainly in that it excludes depreciation charges and other allowances for business and institutional consumption of durable capital goods and indirect business taxes.

GDP Deflator Problem:

Find Nominal and Real GDP and the GDP Deflator for the data below.

    YEAR 1     YEAR 2  
  Price Quantity Spending Price Quantity Spending
Good 1 $1.30 5 $6.50 $1.25 8 $10.00
Good 2 $0.90 8 $7.20 $0.95 7 $6.65
Good 3 $2.20 14 $30.80 $2.25 12 $27.00
Good 4 $1.50 6 $9.00 $1.55 6 $9.30
Nominal GDP   $53.50     $52.95  
Real GDP   $53.50     $52.10  
GDP Deflator   100.00     101.63  
Inflation Rate   0.00%     1.63%  

CPI Issue Assignment:

The CPI has been at the center of a controversy recently. Find a news article about the controversy and post a description of it to the class discussion board. Also put your description in your portfolio.
 
"CPI Math Changing, With Sweeping Effects," The Record (Bergen County, NJ), Kevin G. DeMarrais, Staff Writer; 02-09-1999.
 
Summary:
 
A change is coming in the way the Consumer Price Index is calculated.  After years of study, the widely used gauge of cost-of-living changes has been adjusted to reflect consumer buying habits more accurately, starting with the January index, which is due Feb. 19.  Until now, the CPI would record the higher prices without adjusting for such substitutions.  The new formula will account for those who buy Delicious apples when Macintoshes cost too much, or buy ice cream when frozen yogurt prices rise.

Exchange rate question: 

Suppose that the price of dollars in pesos is 9.33. Suppose the price of dollars in British pounds is .6256. If you are a currency trader and the exchange rate of pesos per pound is more than 15, what should you do?
 
Trade dollars for pounds, trade pounds for pesos, trade pesos for dollars and you make at least 0.58% 

$1 * (0.6256 lb/$) * (15 peso/lb) * (1/9.33 $/peso) = $1.0058

What if it is less than 10?
 
Trade dollars for pesos, trade pesos for pounds, trade poundss for dollars and you make at least 49.13%

$1 * (9.33 peso/$) * (0.1 lb/peso) * (1/0.6256 $/lb) = $1.4913

Balance of Payments Question:

Explain what things might happen if the United States runs a current account deficit. Try to anchor your answer in recent (the last 15 years) events.
 
If the U.S. runs an account deficit it tends to drive up interest rates.  Which drives inflation.  Over the past five years the annual deficit has been small and interest rates and inflation have fallen.  In the 80's deficit spending was high, and so were interest rates and inflation.