HSE Program in Applied Data Analysis 2021-2022

FINAL SPRING TEST

This paper consists of THREE sections:

Section A (40 marks): TEN multiple choice questions, each worth FOUR marks. Candidates
must answer all questions. No explanation is needed.

Section B (30 marks): Candidates must answer ONE of two questions on microeconomics.

Section C (30 marks): Candidates must answer ONE of two questions on macroeconomics.

When grading your answers, will be assessing three essential skills:

(a) intuitive explanation (using relevant economic concepts and models, but not relying on
graphs or algebra!),
(b) graphical analysis,
(c) algebraic solution.

In any solution, it is important to (i) provide comments on what you are doing, and (ii) go step-
by-step, without skipping steps in algebra or logic. If your answer is based on a graph, we want
to provide comments to this graph. If your answer was derived algebraically, we want some
verbal comments to the algebraic derivations and (if possible) an intuitive explanation of the
final result. Just answers that are not backed up by an appropriate (see above) solution are worth
NO points.

1
HSE Program in Applied Data Analysis 2021-2022

SECTION A (40 points). MULTIPLE CHOICE QUESTIONS

Choose one answer for each question: no explanation is needed.

1. Suppose China has about 600 million workers and Germany has about 40 million. An average
Chinese worker can make $25 worth of textiles, or $30 worth of machinery per hour; an average
German can make $50 worth of textiles or $70 worth of machinery per hour (we use the same
prices for comparison). This data suggests that:

(a) China has an absolute advantage in both goods; Germany has a comparative advantage in
machinery
(b) China has an absolute advantage in both goods; Germany has a comparative advantage in
both goods
(c) Germany has an absolute advantage in both goods; China has a comparative advantage in
textiles
(d) Germany has an absolute advantage in both goods; China has a comparative advantage in
both goods

2. Assume that market demand for barley is given by Q = 1900 – 4PB + 0,1M + 2PW, where Q is
the quantity of barley demanded, PB is the price of barley, M is per capita income of consumers
and PW is the price of wheat. Current prices of wheat and barley are each $200 per ton and M is
1000. According to this information…

(a) Barley is a normal good, wheat is a gross complement to barley, demand for barley is price
elastic
(b) Barley is a normal good, wheat is a gross substitute to barley, demand for barley is price
elastic
(c) Barley is a normal good, wheat is a gross complement to barley, demand for barley is price
inelastic
(d) Barley is a normal good, wheat is a gross substitute to barley, demand for barley is price
inelastic

3. In a perfectly competitive industry, every firm has the same long-run cost function:

where q is the firm’s output. In the long-run equilibrium, if market demand is given by D(p) =
16200/p…

(a) Equilibrium price will equal 81; there will be 200 firms in the market
(b) Equilibrium price will equal 9; there will be 100 firms in the market
(c) Equilibrium price will equal 18; there will be 200 firms in the market
(d) Equilibrium price will equal 18; there will be 100 firms in the market

2
HSE Program in Applied Data Analysis 2021-2022

4. Consider a pure exchange economy where 1000 units of good X and 1000 units of good Y are
allocated between two consumers with standard, well-behaved preferences. For any point on the
contract curve, where each consumer gets a positive amount of both goods…

(a) Marginal utility of X must be the same for both consumers; marginal utility of Y must also be
the same for both consumers
(b) MRSXY for one consumer must be equal to MRSXY of the other consumer
(c) Utility of each consumer must be greater than or equal to the utility she gets with the bundle
of X and Y she initially has
(d) All of the above is true

5. The graph below illustrates the marginal cost of producing a public good G, and the marginal
private benefit from this public good for two families. If these families simultaneously and
independently decide, how much of this public good each of them wants to purchase, in the Nash
equilibrium…

(a) The public good will not be bought at all; social losses from the free rider problem will
amount to 4,5
(b) 3 units of the public good will be bought; social losses from the free rider problem will
amount to 1
(c) 3 units of the public good will be bought; social losses from the free rider problem will
amount to 1,5
(d) 4 units of the public good will be bought; social losses from the free rider problem will
amount to 3

6. You have the following information (in billions) about an economy: private savings = 50,
investment = 30, imports = 40, exports = 30, taxes = 70. Which of the following is true:

(a) Government spending = 100

(b) Total savings = 30
(c) Government spending = 50
(d) Total savings = 40

7. Given a fixed money supply, more competition in banking could lead to:

(a) an increase in the interest rate paid on bonds

(b) a decrease in the interest rate paid on bonds
(c) no change in the interest rate paid on bonds
(d) a decrease in the interest rate paid on bank deposits.

3
HSE Program in Applied Data Analysis 2021-2022

8. Consider a closed economy described by the IS-MP model. Central Bank pursues an output
stabilization policy and commits to increase interest rate when output exceeds its targeted level.
A fiscal expansion shifts the IS schedule rightwards and brings about a crowding out effect,
which can be illustrated as:

(a) a movement along the new IS schedule

(b) a slight backward shift of the new IS schedule
(c) a complete leftward shift of the IS schedule back to its initial position
(d) a movement along the old IS schedule

9. Which of the following statements about the labour market IS correct?

(a) Cyclical unemployment increases when trade-unions reduce job acceptance, thus increasing
wages.
(b) Frictional unemployment arises from the mismatch between workers’ skills and vacancies’
requirements.
(c) Structural unemployment occurs even when output is at its full capacity.
(d) Classical unemployment occurs when nominal wages and prices are flexible.

10. Which of the following statements is true?

(a) Inflation that is higher than expected inflation shifts the short-run Phillips curve upwards.
(b) Higher expected inflation shifts the short-run Phillips curve upwards.
(c) Higher expected inflation shifts the long-run Phillips curve rightwards.
(d) Higher expected inflation shifts the long-run Phillips curve leftwards.

4
HSE Program in Applied Data Analysis 2021-2022

SECTION B (30 points). LONG QUESTIONS: MICRO.

YOU MUST ONLY ANSWER ONE QUESTION IN THIS SECTION.

11. “Dilbert Industries” manufactures robots with the help of labor (L) and capital (K) services.1
Its production function is 𝑓(𝐾, 𝐿) = 𝐾𝐿. A unit of labor services costs $10 and a unit of capital
services costs $90.

A) [5 pts] Formulate the Law of diminishing marginal returns. Does Dilbert’s production
technology demonstrate diminishing marginal returns to labor? Why could we expect the Law of
diminishing marginal returns to hold for a real-word firm?

B) [4 pts] Set up Dilbert’s long-run cost minimization problem, derive its conditional demand
functions for labor and capital services and derive its long-run cost function.

C) [8 pts] Suppose Dilbert is the only supplier of robots in the country of Elbonia, where market
demand for them is given by QD(p) = 360 - 2p. The average cost of producing robots for Dilbert
is $60. Find the equilibrium quantity and price of robots. Compute Dilbert’s profit. Illustrate all
of your answers, also indicating the socially optimal output level and the amount of social losses
from market power on your graph.

D) [8 pts] “Wally Enterprises”, another robot manufacturer, plans to enter the Elbonian robot
market. Wally’s average cost is the same as Dilbert’s, but since Wally is new to this market, it
will let Dilbert choose its output level first and then choose its own output. Assuming that Wally
actually enters the market, find Dilbert and Wally’s equilibrium output levels, equilibrium price
and profits, carefully commenting on what you do.

E) [5 pts] Now suppose that before Wally’s entry, Dilbert considers two possible strategies:
“passive” (to accept Wally and interact with him as described in (D)), and “aggressive” (to start a
price war, competing with Wally by simultaneously choosing price levels). Assume that, in the
latter case, all customers will buy from the firm that sets a lower price; if they set equal prices,
Dilbert will get half the customers and Wally will get the other half.

(i) What prices will Dilbert and Wally charge in the Nash equilibrium, if they engage in a price
war? Explain your answer.
(ii) Draw a game tree illustrating Wally’s choice between entering and staying out and Dilbert’s
choice between a “passive” and an “aggressive” strategy of interacting with Wally. Indicate
Dilbert and Wally’s payoffs for each end node of the tree (assume that Wally’s profit is zero if
he does not enter).
(iii) Find the subgame perfect Nash equilibrium of the sequential game you have just described.

12. In the country of IT, people who didn’t manage to earn a degree in applied data science earn
their living by working as taxi drivers.

A) [8 pts] A typical taxi driver allocates 40 hours per week between labor (L) and rest (R). He
gets a wage of “w” for each hour of work. If he doesn’t work at all, he is entitled to a weekly
unemployment benefit of $100, but if he goes to work, he loses it. All income is spent on
aggregate consumption good “c” (its price is $1 per unit). The worker’s preferences towards
bundles of “c” and “R” are well-behaved.

1
For convenience, we will be treating labor, capital and robots as perfectly divisible in this problem.

5
HSE Program in Applied Data Analysis 2021-2022

(i) Illustrate the worker’s budget set. Illustrate the optimal choice between labor and rest for a
worker who allocates 75% of his time to work. Run an indifference curve through the optimal
bundle.
(ii) Can we expect that a wage rise will always make a worker work more? Illustrate your answer
on an indifference curve graph and explain using the concepts of substitution and income (wealth)
effect.

Now, let us address a bigger picture and consider labor markets in two remote towns of this
country: LoveIT and HateIT:

B) [3 pts] In the town of HateIT, the labor market of taxi drivers is perfectly competitive, with
market demand and supply of labor services (in man-hours) given by LD(w) = 1200 - w and LS(w)
= w, respectively. Find the equilibrium wage, quantity of labor hired, and compute the amount of
economic rent earned by workers.

C) [4 pts] The city council of HateIT imposes a minimum wage at a level above the equilibrium
wage you found in (B). Will this policy necessarily increase the economic rent of taxi drivers?
Will it cause unemployment in the labor market? Illustrate your answers.

D) [7 pts] In the town of LoveIT, labor market structure is different: market supply of labor is the
same, but all taxi drivers work for one giant employer: “Spandex, inc”. However, the price per
hour of a taxi ride is fixed by the city council, and this constraint is binding for “Spandex”.

(i) Explain the difference between marginal value product of labor and marginal revenue product
of labor. Can MVPL and MRPL coincide? When are they different? Will the marginal revenue
product of labor be bigger than, smaller than, or equal to the marginal value product of labor for
“Spandex”? Explain your answer.
(ii) What is the “marginal cost of labor”? Will the marginal cost of labor be bigger than, smaller
than, or equal to wage for “Spandex”? Explain both algebraically and intuitively.

E) [8 pts] Suppose the marginal revenue product of labor curve for “Spandex” actually coincides
with the market labor demand curve we have seen in HateIT. Compute the equilibrium quantity
of labor hired, equilibrium wage paid by Spandex, and the amount of economic rent earned by
workers of LoveIT. Carefully illustrate your answer.

6
HSE Program in Applied Data Analysis 2021-2022

SECTION С (30 points). LONG QUESTIONS: MACRO.

YOU MUST ONLY ANSWER ONE QUESTION IN THIS SECTION.

13. Consider Keynesia - a small closed economy that can be described by the following
behavioral functions: C = C0 – ar + c1(Y – T), I = I0 – br + mpi*Y, G = G0 (Keynesian
government does not maintain a balanced budget).

A) [6 pts] (i) Illustrate the short run equilibrium for Keynesia using the Keynesian cross diagram.
(ii) Explain in the sign of parameter “a” and its economic meaning.
(iii) Derive the IS curve for Keynesia (both analytically and graphically).

B) [6 pts] Now suppose Keynesia opens up to international trade. However, it only trades goods
and services: harsh restrictions prevent any capital flows to, or from the country. Keynesian
trade balance is described by:

(i) Illustrate the new short run equilibrium in the Keynesian cross diagram.
(ii) Derive the expressions for the new equilibrium output level and the new autonomous
spending multiplier. Is the new IS curve steeper than the IS curve for a closed economy? Explain
intuitively.

Suppose Keynesia decides to drop its capital restrictions and switch to perfect capital mobility
(suppose that domestic interest rate “r” has already adjusted to the foreign interest rate “r*”.
The balance of payment equilibrium holds. Keynesian Central Bank targets money supply and
the MP curve is upward-sloping.

Political upheavals induce Keynesian citizens to withdraw cash from their bank accounts and
exchange part of it for foreign currency, so that domestic currency depreciates.

С) [10 pts] Analyze the effect of increase in cash to deposit ratio and depreciation of domestic
currency for our small open economy with perfect capital mobility using the IS-MP-BP model.
Assume there’s currently a fixed exchange rate regime in the country, which the Central Bank
holds to after the depreciation of domestic currency took place. How will the equilibrium output
change? How will domestic interest rate change?

D) [8 pts] How will your answers to (C) change if the government lets the exchange rate float?

14. In Flation (a small third-world country), short-run aggregate supply is given by Y = Y* +

50(π − πe), where Y denotes output, Y∗ denotes natural output level, π denotes the inflation rate
and πe denotes the expected rate of inflation.

Flation’s statisticians have estimated that Y – Y* = −10(u – u*), where “u” denotes the
unemployment rate and u* denotes the natural unemployment rate.

A. [5 pts] Find the expectations augmented short-run Phillips curve for this economy and sketch
it in a diagram, explaining the economic intuition behind its shape. Add the long-run Phillips
curve to your diagram and explain the economic intuition behind its shape.

B. [6 pts] What are the “shoe leather” costs and “menu costs” of inflation? Name two groups of
economic agents that gain from unanticipated inflation and two groups of economic agents that
lose from it.

7
HSE Program in Applied Data Analysis 2021-2022

C. [16 pts] For each of the four events listed below, draw a side-by-side AD-SRAS-
LRAS/SRPC-LRPC diagram to illustrate what will happen to output, unemployment and the
inflation rate. Explain your answers in words at the same time.

i. There is a short-term boom in consumption; inflation expectations do not change.

ii. There is a fall in the price of oil that is fully accommodated by the Central Bank (that is,
monetary policy is adjusted in such a way as to keep output at initial level)
iii. After a period of high inflation, a new, very tough Director of the Central bank announces a
series of harsh anti-inflationary measures he will impose in the near future.
iv. A successful vocational training program reduces the natural rate of unemployment.

D. [3 pts] Discuss the dangers of a negative inflation rate.