Order of Operations

McDonnell & Brue (Economics)

Question 12 (p 129) in Ch 7

The following table shows nominal GDP and an appropriate price index for a group of selected years. Compute real GDP for each decade jump. Indicate in each calculation whether you are inflating or deflating the nominal GDP data.

YearNominal GDP, BillionsPrice Index

1996 = 100Real GDP, BillionsInflating or

Deflating

GDP?

1960$527.422.19$2,376.75Inflating

1968911.526.29$3467.10Inflating

19782295.948.22$4761.30Inflating

19884742.580.22$5911.87Inflating

19988790.2103.22$8515.99Deflating

Question 11 (p. 151) in Ch 8

a. If the CPI was 110 last year and is 121 this year, what is this year’s rate of inflation?

This year’s inflation rate is 10%. To calculate [(121-110) /110] x100 = 10%

b. What is the “Rule of 70”?

The “Rule of 70” is the time that it takes for money or investments to double. The process: divide 70 by the APR of any variable and get the approximate number of years for doubling that particular variable.

c. How long would it take for the price level to double if inflation persisted at 2, 5, and 10 percent?

2% 70/2 = 35 years

5% 70/5 = 14 years

10% 70/10 = 7 years

Question 2 (p. 370) in Ch 20

a.Graph the accompanying demand data listed below, and then use the midpoint formula for Ed to determine price elasticity of demand for each of the four possible $1 price changes. Attach graph to this sheet.

Product Quantity

Price Demanded

$5 1

4 2

3 3

24

1 5

Total revenue data, top to bottom: $5; $8; $9; $8; $5. When demand is elastic, price and total revenue move in the opposite direction. When demand is inelastic, price and total revenue move in the same direction

b. What can you conclude about the relationship between the slope of a curve and its elasticity? Elasticity’s, top to bottom: 3; 1.4; .714; .333. Slope does not measure elasticity. This demand curve has a constant slope of -1 (= -1/1), but elasticity declines as we move down the curve.

c. Explain in a non-technical way why demand is elastic in the northwest segment of the demand curve and inelastic in the southeast segment.

When the initial price is high and initial quantity is low, a unit change in price is a low percentage while a unit change in quantity is a high percentage change. The percentage change in quantity exceeds the percentage change in price, making demand elastic. When the initial price is low and initial quantity is high, a unit change in price is a high percentage change while a unit change in quantity is a low percentage change. The percentage change in quantity is less than the percentage change in price, making demand inelastic. Question 7 (p. 411) in Ch 22

A firm has fixed costs of $60 and variable costs as indicated on the following table. Complete the table (on p 412 and pasted below) and check your calculations by referring to Question 4 at the end of Chapter 23.

Total ProductTotal Fixed CostTotal Variable CostTotal CostAverage Fixed CostAverage Variable CostAverage Total CostMarginal Cost* 0$600Total cost = TFC+TVC x

TP

60AFC=TFC/TPAVC=TVC/TPATC=AFC+AVC$Mar. C = Current TC-Previous TC 1$60$45$105$60.00$45.00$105$45

2$60$85$145$30.00$42.50$72.50$40

3$60$120$180$20.00$40.00$60.00$35.

4$60$150$210$15.00$37.50$52.50$30

5$60$185$245$12.00$37.00$49.00$35

6$60$225$285$10.00$37.50$47.50$40

7$60$270$330$8.57$38.57$47.14$45

8$60$325$385$7.50$40.63$48.13$55

9$60$390$450$6.67$43.33$50.00$65

10$60$465$525$6.00$46.50$52.60$75

* Marginal Cost should actually show on line between each product total, ie between 1 and 2, 2 and 3, etc. Here place MC in space of prior year’s product. Thus, MC change for 0 and 1 is placed in ) row – a 45.

A. Graph total fixed cost, total variable cost,...