Question

1. Answer four of the following. In each case answer True, False or Uncertain and explain your answer. Limit each answer to one page. (a) The inflation rate fell from 3% in 2010 to 2% in 2011 . Prices were 1% lower in 2011 than in 2010. (b) A firm has a technology that relies on only one input (call it x). The output of the firm (call it y) increase as you increase x but at a diminishing rate. Based only on the information provided then y-x2 would be a valid representation of this firm's production function. (c) Consider a person who begins day 0 with a Imm sheet of paper. On day one she folds the piece of paper in half. Each day that follows she continues to fold the new piece in half- one fold each day. The thickness of the paper after N days is given by the formula (1*2*N) (d) It is better to receive 850 in one year's time than 800 today. (e) A firm's marginal cost function is given by TC -Q +202+4. In this case the firm's fixed cost of production is 4 and its marginal cost is given by MC 302 +40+4

Answer 1

a) Inflation rate is the increase in the prices of the goods. If inflation rate falls , it doesn’t means that the prices have decreased. In 2010, if the inflation rate was 3% and in 2011 the inflation rate is 2% , it doesn’t mean that there is a price drop of 1%. It means that in 2010 prices increased by 3% and in 2011 the prices increased by 2%. So , this statement is false.

b) In the equation y=x^2, where y is the output and x is the input, the output will continue to rise at a higher rate as the quantity of input is increased. We can see that if input is 1, output will be 1, if input becomes 2 , output becomes 4. So, this statement is a false as this equation does not represent the characteristic that as we increase the input, output increases at a diminishing rate amd this production equation will not be a valid one.

c)From the equation we can see that the thickness of the sheet will keep on getting double of the previous one everyday.So the equation to know that thickness of the paper on nth day should be 2^n and not 1*2*n. So this equation is a false.

d)This statement is uncertain. It is not possible to say that it is better to receive $850 in 1 year’s time than $800 today. This is so because we don’t know the interest rate.$ 800 will become $850 in 1 year’s time if the rate of interest is ((850/800)-1)*100 = 6.25% per annum. If the interest rate is greater than this it is better to take $800 today and if it is less than this interest rate , then it is better to take $850 after 1 year.