Long-run real interest rates are expected to increase

| August 31, 2017

Question
Q1 . Long-run real interest rates are expected to increase. An accountant and an MBA student (who just finished his course of Managerial Economics) were interviewed regarding the effect of this increase. Keeping all else constant, their answer would likely differ. How do you guess the interviewed will answer? Does the difference in response matters? If yes, why? If not, why not?

Q 2. Many cities have experienced a substantial decrease in the amount of garbage being collected after they changed from levying a flat tax on each household to a system where the homeowner is charged a fee for each bag or can picked up. Would this have been the result of a change in demand or a change in the quantity demanded? Would you recommend the flat fee or the fee per bag? Why?

Q 3. Define three types of elasticity of demand. Indicate how you would use information from recent research paid by your company that the own price elasticity of your product is -1.2 and not -0.8 as previously thought.

Q 4. A magazine, in an article dealing with management, wrote, “When he took over the furniture factory three years ago … [the manager] realized almost immediately that it was throwing away at least $100,000 a year worth of wood scrap. Within a few weeks, he set up a task force of managers and workers to deal with the problem. And within a few months, they reduced the amount of scrap to $7,000 worth [per year].” Was this necessarily an economically efficient move? Explain your answer.

Q 5. If all the assumptions of perfect competition hold, why would firms in such an industry have little incentive to carry out technological change or much research and development? What conditions would encourage research and development in any of the competitive industries?

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