notes of econ

Schulich School of Business

Mokhles Hossain

York University

Fall 2012

Econ 2000
Applied Macroeconomics
Assignment # 1 Solution

Value: 100
Due: Thursday, October 11, 2012

NOTE:

 Late assignments will not be accepted
 Show all your work to get full marks
 Assignments must be typed (except for diagrams)

Question 1 (10 points)
Suppose

i)

Identify the endogenous and exogenous variables of the model.
There are three variables and four constants (two intercepts and two coefficients) in the model. All three variables are endogenous, determined within the model. There are no exogenous variables.

ii)

Write down the assumptions required for this model.
- Law of Demand
- Law of Supply
- Market clears,
, the classical assumption
- Price is positive in the equilibrium
- Quantity is positive in the equilibrium

iii)

Solve for the endogenous variables of the model.
Using the third assumption we can write:
2
, or
, or
, or
P = -1.
Therefore,
= 28 =

iv)

What restriction(s) do you need to apply?
The solution violates the fourth assumption.
The model can be viewed as:

Using the third assumptions we can solve for the equilibrium price:
,
The denominator is positive because of the laws of demand and supply:
Our model is consistent with those laws (
).
We, therefore, do not need to apply any restriction to make the denominator positive.
The numerator is negative:
(
) must be greater than zero for price to be positive in equilibrium. This is the restriction we need.

Question 2 (5 points)
Imtel produces 100 computer chips and sells them for $200 each to Tell computers.
Using the chips Tell produces 100 personal computers. Tell sells the computers, bundled with software that Tell licences from Macrosoft at $50 per computer, to Good Buy for
$800 each. Good Buy sells the computers to the end users for $1000 each.
Compute the GDP using:
i)
The output approach.
=
ii)

The value added