isi

[ritu]

1.consider a simple keynsian model for a closed economy without govt.suppose saving is proportional to income(Y),marginal propensity to invest wrt income is 0.3 and system initially is in equillibrium......now following a parallel downward shift of saving function eqm level of saving is found to increase by 12 units.compute change in eqm income.


2.roses once in full bloom have to be picked up and sold on the same day.on any day the market demand function for roses is given by---
P=a-Q
it is also given that cost of growing roses,having been incurred by any owner of a rose garden long ago,is not a choice variable for him now...(does it mean all is fixed cost now??)
a.suppose there is only one seller in market nd he finds 1000 roses in full bloom on a day.how many roses should he sell on that day and at what price?
b.suppose there are 10 sellers in mkt & each finds in his garden 100 roses in full bloom ready for sale on a day..what will be the equilibrium price and the number of roses sold (given that a>1100 for this part)
now suppose mkt is served by a large number of price taking sellers.however the total availability on a day remains unchanged at 1000 roses..find the competitive price nd total roses sold that day?????



3.a simple keynsian model has two groups of income earners.the income of group 1 (Y1) is fixed at 800.both groups have proportional consumptn function.the average propensity to consume is 0.8 for group 1 and 0.5 for group 2...group 2 consumes only domestically produced goods while group 1  consumes domestically produced as well as imported goods ,their marginal propensity to import being 0.4..investmt goods are produced domestically and invstmt is fixed given at 600.
a.compute GDP(Y)
b.suppose group 2 makes an income transfer of rs 100 to group1 but imports are restricted and cannot exceed 250..how does Y change???
c.what if import ceiling is 400??

[lovekesh]

This is what i think about first question.
Since initially saving and investment were in equilibrium.
S=mY
I=0.3Y
S=I
m=0.3
ds/dy = 0.3
since ds=12
therefore dy= ds/0.3
dy= 40
change in equilibrium income comes out be 40 units.

[Manvendra]

@ Ritu , Lovekesh

In ISI - ME 2 section , how many questions are we supposed to attempt out of the total ( which is ~8 i suppose ) number of questions asked ?

Thanks

[ritu]

@lovekesh yes for first even i got 40.....nd wot about other two ques...for 3rd ques a part i g0t 1040 as value of Y but m nt at all sure....:((((((

@manvendr
sorry yar dnt have any idea about no of questions in me2....i think they keep on changing the pattern...

[lovekesh]

Just use the equation Y= cY+I-mY
c=0.8, I=600 and m=0.4
Y1=1000

similarly solve the other one.
For part b, i think, since there's restriction on imports, transfers will be used to fund the current account deficit.
In part c, when there's no restriction on imports, part of the money will be used for consumption and imports.

[ritu]

y1 is fixed at 800..it cant be 1000....

[lovekesh]

Hey ritu
i am sorry. I was thinking it like two countries but instead it's just two groups of income.
y=y1+y2
y1=800
C1= 0.8*800
I=600
C2= 0.5(Y-800)
IMPORTS= 0.4*800

GDP= 1040
For part b
take Y1=900
Y2= Y-900
IMPORTS=250

on solving this way you can get all the answers.
say Thanks to Vasudha

[ritu]

hi lovekesh...
in second part shouldnt we consider the fact that if an income transfer is being made then group 1 will tend to consume fraction .8 only so income should rise by that factor...at the same time since income of group 2 falls by 100...their income as a whole falls by .5 times....and sum of these opposite changes wud be the change in income as the question has asked for???????/i got change in income as 50...
i dnt kno if my approach is right....nd as usual i think vasudha will be our Savior...:))

nd ya i dnt think i will ever be able to thank vasudha in words....she has helped me soooooooooooooo much...<3<3

[lovekesh]

since group 1 income is fixed, but group 2 income depends on overall GDP. when group1 receives money as transfer, they spend it on consuming domestic goods. What you are missing here is the pullback effect of consumption on domestic goods. This increase in demand from group1 with xtra money and restriction to spend on imports raises the overall income of the country which benefits them and compensates upto somelevel for their loss of 100. Since Group1 likes to consume, it will have a greater multiplier effect as compared to if it were spend by group2. In part c , they are allowed to spend on imports which leaves the country's GDP and GDP is lower in last part.

[anon_econ]

lol ritu we r all helping each other here..actually we should thank amit sir for creating this forum :)
see what i think is this:
the actual question said 'imports r restricted to 250 (that is, the import function ceases to be operative at this value).'
if the import function ceases to be operative but average propensity to consume is still 0.8 then AD=0.8*900 + 600 + 0.5(y-900)-250.
i equated it to y and got 1240 as the answer. basically i'm assuming that they spend the remaining part on domestic goods. i'm not completely sure this is correct.
for part c there is no problem bcoz 0.4*900=360<400, so the restriction on imports is not binding anyway. i got 1020.

[Amit Goyal]

Thanks Vasudha for the acknowledgement :)
Wish you and everyone here all the best for the exams.

2.roses once in full bloom have to be picked up and sold on the same day. On any day the market demand function for roses is given by---
P=a-Q
it is also given that cost of growing roses, having been incurred by any owner of a rose garden long ago, is not a choice variable for him now.
(does it mean all is fixed cost now? it is not only fixed but sunk)

a.suppose there is only one seller in market nd he finds 1000 roses in full bloom on a day.how many roses should he sell on that day and at what price?
He sells min{1000, a/2}. Price is a - min{1000, a/2}

b.suppose there are 10 sellers in mkt & each finds in his garden 100 roses in full bloom ready for sale on a day..what will be the equilibrium price and the number of roses sold (given that a>1100 for this part)
Each sells all their 100 roses at price (a - 1000)

now suppose mkt is served by a large number of price taking sellers.however the total availability on a day remains unchanged at 1000 roses..find the competitive price nd total roses sold that day?????
Total number of roses sold = min{a, 1000} Price is a - min{1000, a}.

[Ashish Gourav]

Amit Sir,

I didn't understand the part 'b' solution to "rose blooming question" ... I'm getting the condition as a>2000 for the sellers to sell all the 100 roses.