CONTEMPORARY MACROECONOMICS

Contemporary Macroeconomics



Contemporary Macroeconomics

Section A

(a)

P ??a ?bQ , a,b ??0

P ????bQ , ?,b ??0

TC ??c Q??c Q2 , c ,c ??0 c ??a,?

Here a is the constant value while b is the slope for Q

From the above graphical representation, it can be observed that the firm structures an expectation at the point where the firm anticipates the demand curve to be that is the ex ante marginal revenue curve and it is related to ex ante demand curve. Then, it sets the price “p”, which will affect the quantity sold Q, which is the point where the marginal cost curve is being cut by the ex ante marginal revenue curve. Now, it is supposed that price is hold that is price is fixed for a month. The company cannot amend that price as the firm has already advertised the price.

In relation to associated social welfare impact of the decision to keep the price at its ex ante optimal value, it can be said that the profit will be increase; moreover, if the price further increase then the demand will also unpredictably increased. However, in view of the assumption, it will not increase, no less than next month (Bird, 1999). Furthermore, firm in the perfectly competitive market does not desire to sell their products, more than the market price. Besides it, firm in the monopolistically competitive market wants to sell their products, more than the market price; however, they look very much like surplus supply.

(b)

If,

P = a - b Q

a, b > 0

and

TC = c1 Q + c2 Q2

c1, c2 > 0

c1 < a, ?

then,

Profit = TR - TC

as, TR = P

Profit = P - TC

Profit = (2 ? (2 x 4) - ((2 x 4) + (2 x (4)2)

Profit = (- 6)- ((8) + (2 x 16))

Profit = (- 6) - (8 + 32)

Profit = (- 6 - 40)

Profit = - 46

Thus, the optimal price of the firm will be 2 and its associated expected profit will be - 46.

(c)

If the price of the firm is fixed at the ex ante optimal price, it is important for the firm to sell as many quantity as possible. The reason of this statement is that due to fixed price at the ex ante optimal level, the company is restricted to maximize its profits, for that reason, it is imperative and essential that the firm sell more to maximize it possibly can.

(d)

With reference to how the persuasiveness of the New Keynesian menu cost explanation of price rigidity is affected by the magnitudes of the cost parameters, studying the very rigidity of nominal prices, relying now on scheduling decisions, including the concept of cost of changes in prices and wages. The first type of rigidity considering firms in monopolistic competition is the menu cost. According to Keynesian, a price adjustment may have such costs that are not offset by the change in profits due (Caballero, 2010). Similarly to what happens with the customers of a restaurant, that ...