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Preguntas ITAM 1

This document contains 5 open questions related to economics. Question 1 presents a scenario where Julia must choose between 3 career paths after high school and calculates the present value of each to determine the best economic choice. Question 2 discusses the relationship between competition and innovation and uses economic models to analyze price caps, cost-push inflation, and demand-pull inflation. Question 3 examines the positive and negative effects of budget deficits on economic development. Question 4 analyzes how automation has impacted the labor market through 5 historical examples. Question 5 provides the formula for calculating internal rate of return and presents 3 examples to practice applying the concept.

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19 views3 pages

Preguntas ITAM 1

This document contains 5 open questions related to economics. Question 1 presents a scenario where Julia must choose between 3 career paths after high school and calculates the present value of each to determine the best economic choice. Question 2 discusses the relationship between competition and innovation and uses economic models to analyze price caps, cost-push inflation, and demand-pull inflation. Question 3 examines the positive and negative effects of budget deficits on economic development. Question 4 analyzes how automation has impacted the labor market through 5 historical examples. Question 5 provides the formula for calculating internal rate of return and presents 3 examples to practice applying the concept.

Uploaded by

ashleyarana.a44
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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2023

Economics
Open questions

Open Question 1. Human Capital Theory

The Human Capital Theory suggests that individuals invest in education when the
present value of the investment is positive, therefore comparing the present value
of the associated costs and benefits.

Let’s suppose that Julia just finished High School. She must choose between three
alternative career paths. There are only three periods of (working or studying) life
after high school, for simplicity reasons. The three choices Julia faces are the
following:

• Work as a cashier in a large supermarket chain with a salary of 12,000 euros


for each of the three periods.
• Study Marine Biology at the University. She will have to study for one period
with a tuition fee of 7,000 euro. After graduation, she will earn 30,000 euros
for each of the remaining two periods.
• Study at Philosophy the University and receive a Doctoral Degree
in Philosophy (DPhil). She will have to study for two periods with tuition fees
of 5.000 euros per period. After graduation she will earn 60,000 euros for the
remaining period.

Suppose the interest rate per period is set at 10%. Answer the following questions:

(a) (10 rp) Which of the three choices is best in terms of economic benefits for
Julia?
(b) (10 rp) If Julia has a passion for Philosophy and always wanted to get a DPhil
in that subject, will she have to sacrifice consumption to follow this career
path? If yes, what is the present value of consumption she will have to
sacrifice?
(c) (10 rp) Should the State finance tuition for Philosophy studies? Justify your
answer.

See questions 2–5 on the next pages

IEO 2023 Economics Open Questions ecolymp.org 1


Open Question 2. Competition, Innovation, Inflation
(a) (10 rp) In their 2005 paper1, Philippe
Aghion, Nick Bloom, Richard Blundell,
Rachel Griffith, and Peter Howitt found
the inverted-U empirical relationship
between the level of competition and the
level of innovation in various industries.
That is, not much innovation is seen in
very competitive industries as well as in
highly concentrated industries, most
patents are acquired by firms in
moderately competitive industries.
Explain why this may be the case.
(b) (10 rp) One of the ways to regulate non-perfectly competitive markets and
reduce their detrimental impact on social welfare is a price cap. In a standard
model, the government sets the maximum price at the level where it would be in
perfect competition (P = MC), so the firm(s) produce the socially efficient level of
output. In some cases, however, this policy is not feasible, because it forces the
firm(s) to leave the market, harming the society even worse. Provide an example of
such a market where forcing P = MC is clearly not the best idea and explain why.
Suggest another way of regulation, that can help achieve the goal instead (or in
addition to) the price cap.
(c) (10 rp) In macroeconomics textbooks, the authors often distinguish between
two types of inflation: cost-push and demand-pull. Assume that two equivalent
countries are in the long run macroeconomic equilibrium, and they simultaneously
experience inflation — cost-push in country A and demand-pull in country B. Using
the AD-AS model, explain for which country’s government (the central bank) it will
be relatively harder to fight this inflation.

Open Question 3. Public Debt Policy


The sovereign debt crisis in Europe and the fiscal deficit crisis in the United States
have triggered global attention on government debt. Why is it necessary to
control the government budget deficit reasonably and effectively? Please explain
in detail some positive and negative effects of budget deficit on a country’s
economic development.

Open Question 4. Automation and the labour market


Automation is a term used to describe new technologies that allow machines to do
the work that people used to do. Technological innovations that replace labour
have been an essential part of the capitalist economy since the introduction of the
spinning jenny in the eighteenth century. Explain five effects of the process of
automation to the labour market, naming five historical examples from economic
life.

1
Aghion, Philippe, et al. "Competition and innovation: An inverted-U relationship." The Quarterly
Journal of Economics 120.2 (2005): 701-728.
IEO 2023 Economics Open Questions ecolymp.org 2
Open Question 5. Internal Rate of return
In case you forgot the formula:

! !%# − !
! ! + ! !"# + ! !"$ +. . . +! =
!−1

Let P0, P1, P2, …, Pk be a future payment flow. This means that at the time instant 0
we pay P0, at the time instant 1, we pay P1 and so on. If a payment is negative, usually
P0, this means that we receive money instead of paying.

The Net Present Value of this flow, denoted by NPV(r), is defined as the sum of all
present values of the above payments, for a given interest rate r. The rate r is the
rate which is applied at each time instant. To find the Internal Rate of Return (IRR)
of this flow, we follow the next steps:

1. We define a set of interest rates r0, r1, r2, … rn.


2. We calculate the quantities: NPV (r0), NPV (r1), NPV (r2), ...., NPV (rn).
3. We find successive ra, rb such that NPV(ra) > 0 and NPV(rb) < 0.
4. We find a straight line joining the points: (ra, NPV(ra)), (rb, NPV(rb)).
5. We find the value r* where this straight line meets the horizontal r-axis.
6. IRR = r*

A company takes, at the ”zero” time instant, a loan equal to 71 money units and
plans to pay the first month 15 money units, the second 28 and the third 30, that is
P1 = 15, P2 = 28, P3 = 30

(a) (10 rp) Using the above procedure calculate the IRR for this payment flow. Use
r0 = 0.14, applied annually, and increase it with step h = 0.01 up to the value r = 0.16.

(b) (10 rp) If the company, instead of following this payment policy, decides to give
25 money units on the third month and some amount of money the fifth month,
what should this amount be, in order the whole loan to be repaid? As an annual
interest rate, use the IRR we found before.

(c) (10 rp) The company has started to repay the loan by 5 equal monthly payments,
covering both principal and interest and with an interest rate equal to the IRR,
found before. Suddenly after the second payment, the interest rate is increased by
3%. The government, in order to help, decides to cover the 25% of the loan which
has not been paid yet and to extend the number of total payments from 5 to 8. Find
the amount of each equal monthly payment, the company must pay from now on,
to repay the loan.

IEO 2023 Economics Open Questions ecolymp.org 3

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