Fundamentals of Economics Assignment, Winter 2019, University Name

This economics assignment delves into several key economic concepts. Task 1 analyzes wage rate trends using index numbers, the impact of subsidized childcare on employment, the effects of minimum wage laws, and the consequences of automation on labor demand. Task 2 explores monopolistic competition, contrasting it with monopoly, and examines profit maximization in the short run and long run within this market structure, using diagrams to illustrate concepts and applying the theory to the restaurant industry. Task 3 addresses fiscal policy, examining how government expenditure can influence income levels and the constraints associated with using fiscal policy to manage aggregate demand. The assignment uses diagrams and real-world examples to explain the economic principles.

Running head: Fundamentals of Economics
Fundamentals of Economics
Name of Student
Name of University
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1Fundamentals of Economics
Table of Contents
Task 1...............................................................................................................................................2
Task 2...............................................................................................................................................5
Task 3...............................................................................................................................................8
Task 4.............................................................................................................................................10
References......................................................................................................................................14

2Fundamentals of Economics
Task 1
(a)
Table 1: Wage rate trend
Source: (Created by the Author)
Index number is a statistical method of measuring change in the value of a variable over
time. However, it does not provide the absolute change in value, rather it shows the relative
change in value of the concerned variable and based on a fixed base year (Rødseth, 2017). It is of
four types namely, simple index number, composite index number, price index number and
quantity index number. It is widely used in economics for calculation of change in price of
commodities over the years and thereby it is used for calculation of inflation rate.
In table 1 given above, it can be observed the real wage rate has increased through out the
period. The comparison between inflation adjusted wage rate and original wage rate shows that
the original wage rate has been above the inflation adjusted wage from year 2 to year 5 (Kundu,
2019). From year 6 to 8 the original wage rate was lower than inflation adjusted wage rate and in
year 9 and year 10 it changed more than the inflation rate and thus it can be concluded that the

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real wage was lower in 6th, 7th, and 8th years than it should be to afford the same amount of goods
and services that a worker could afford in the previous year. In case of the rest of the years real
wage rate has increased.
(b)
Diagram 1: Increase in
employment due to childcare subsidy
Source: (Created by the Author)
The introduction of subsidized child care system in the country will enable the
individuals and parents to take care of their children in a better way. As a result the, child
mortality rate of the country will reduce and due to this the supply of worker will increase in the
future (Liu et al. 2016). This will move the supply curve from S* to S as shown in diagram 1.
The price of the workers that is wage rate will fall and thus the demand for employees increases.
Thus, the demand curve will move to D from D* and the economy will produce more output
with more number of employees Q with same rate of wage W* (Gilroy et al. 2018). The
introduction of subsidized child care system thus increased the workforce of the country without
affecting anyone’s welfare.
(c) The government has implemented a minimum wage rate rule in the industry and due to that
the minimum wage rate becomes W1, which is greater than previous level of free market wage

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rate W given in diagram 2 (Card and Krueger 2015). At wage rate W1 the demand of job
increases and thus the supply of labor in the work force increases above Q*, this in the economic
problem the country is facing after the minimum wage set to W1. On the other hand, the cost of
production of employers increase and they have to pay more wage for same amount of work.
Thus, the opportunity cost of using advanced technology gets reduced for the employers.
Therefore, to cut cost the employers will reduce number of employees from Q* to Q1. Therefore,
with minimum wage rate rule there will more unemployment in the country. The cost problem is
thus solved by the employers by adopting new technology and retrenching more employees.
Therefore, the employers become more technology intensive than human capital dependent.
Diagram 2: Effect of
Minimum wage rate
Source: (Created by the Author)
(d)

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Diagram 3: Fall in labor demand
Source: (Created by the Author)
In country A, significant number of firms in the manufacturing sector installed robotic
machinery into their production systems. Due to this the efficiency level of firm has increased
and it daily production capacity increased substantially which is beyond its daily demand
(Stiglitz and Rosengard 2015). Therefore, the firms reduces the number of human employees in
order to reduce cost and excess inventory. As result of reduction of employees and installation of
robotic machinery the demand for employees declined (Popov and Rocholl 2018). This led to fall
in employment from Q* to Q1 and fall in wage arte from W* to W1. Therefore, in the country
employees are working at lower wage and there is more unemployment in the country. In order,
to encounter the situation that government of the country could take one measure, that is the
government can restrict the use of robotic machinery to a certain level that would not harm the
employment condition of the country. However, this might led to higher production cost of the
firms and lower economic growth but the measure will improve the social welfare of the country.
Task 2
(a) In monopolistic competition, a market features various characteristics and most basis of them
is that it has numerous number of buyers and sellers (Bertoletti and Etro 2016). The firms under
this market structure produces differentiated products, that means products are of same kind but
are not exactly similar to each other. Therefore, with differentiated products the firms does have
market power but is very negligible. There is very less barriers to entry and exit in this market
structure (Katchova and Ahearn 2017). The exclusive characteristics of this market structure is

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that it has information asymmetry among the firms regarding products. Therefore, it can be
contended that monopolistic competition is widely different from monopoly market structure (Li
et al. 2017). In monopoly market, there is only one seller and many buyers and thus the seller has
complete power over the market. It is characterized by extreme barriers to exit and entry. The
seller is the price setter and the buyers are price taker. There is only one inimitable product in the
market and production of which is highly cost attractive. However, in case of both the market
structure the firms make supernormal profit but in case of monopolistic competition the amount
of profit is lower than that in the case of monopoly.
(b)
Diagram 4: Monopolistic
competition
Source: (Created by the Author)
In monopolistic competition market profit maximizing value of output is determined by
equating marginal revenue MR and marginal cost (MC) as shown in diagram 4 given above
(Taherkhani and Alumur 2019). The profit maximizing output is give as Q in the diagram.
However, the price is determined above the intersection point of MR and MC. Price is
determined from the demand curve as shown in the diagram and the equilibrium price is P

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(Glasserman and Nouri 2016). The price is thus higher than competitive market and it is because
MR curve lies below the demand curve. Therefore, in short run under monopolistic competition
market structure the equilibrium price and quantity is given by P and Q respectively. At this
price and quantity equilibrium the firms make supernormal profit in the short run and is shown as
yellow rectangle in the above given diagram.
(c) An industry under monopolistic competition in long run acts different from as it does in short
run. This change in characteristics of monopolistic competition market is due to various reason
that occurs in the long run. In long run everything including wage of labor and capital required
for production is variable. Thus, a firm can produce at any point of the cost curve. However, in
the case of monopolistic competition as the demand curve is downward sloping the industry
cannot function at the minimum point of the long run average cost (LAC). Thus, the industry
operates just before the minimum point of LAC (Xie 2019). On the other hand as there is no
advantage of specialization and due to changing technology new firms can enter the industry.
Therefore, in long run monopolistic competition market structure acts like a perfectly
competitive market and firms in the industry earns zero economic profit (Sonnabend 2016). The
equilibrium price and quantity in long run is given by P and Q respectively in the diagram 5 and
it is already mentioned that unlike short run firm earn normal or zero economic profit.

8Fundamentals of Economics
Diagram 5: Monopolistic competition in long run
Source: (Created by the Author)
(d) In real world restaurant industry is a kind of industry that takes the characteristics of
monopolistic competition market structure. The reason behind such a claim is that in restaurant
industry there are many sellers and many buyers and they produce differentiated products of
similar category. There are different types of restaurants some produce Chinese cuisines,
Continental cuisines and some fast foods like burger and sandwich. Therefore, all these
restaurants operate under one industry and as they cater to different group of customers they
have negligible amount of market power. Also as there is no such exclusiveness in the
production of process of different types of foods ad due to low market power of the exiting firms
the restrictions to exit an entry is significantly low. The main challenge of this industry and
market structure is that the firms always have to innovate their products in order to maintain the
difference between its own product and rivals product. In short run the industry earns super
normal profit and in long run zero economic profit. From the perspective of perfectly
competitive industry, monopolistic competition has many advantages as it can earn supernormal
profit which in perfectly competitive model is not possible (Wang and Lu 2016). The firms has
low market power and always innovate their products to be in the competition. However, it is
also a disadvantage for the firms as innovation for making products different requires huge
investment that increases the cost of production of the firms.
Task 3
(a) The country C currently operating at the level at which the country’s ino0cme level is at Y*
and is not full employment level of income. Thus, in order to increase the income to full

9Fundamentals of Economics
employment level of income the country the government increases the level government
expenditure G. With increase in government expenditure there will be an impact on the level of
income of the country (Gemmell, Kneller and Sanz 2016). However, the impact will not be of
same amount by which the government has increased the expenditure. The impact is determined
by the expenditure multiplier. If the expenditure is made on the public then the multiplier will
take the form of 1
(1−MPC ), where MPC is marginal propensity to consume and if the
expenditure is made on industrial or agricultural sector for business purpose then the multiplier is
given by 1
(1−MPS ), where MPS is marginal propensity to savings (Gross, Notowidigdo and
Wang 2016). Therefore, government expenditure should be so large that with the multiplier
effect the country can reach the full employment level of income. The three determinants of
multiplier are consumption, savings and total income.
(b) Country C has the option of using fiscal policy and monetary policy to maintain the aggregate
demand level such that it can maintain the income level at Yf. However, if the country wants to
implement the fiscal policy only to maintain the Yf level of income then it is very much possible
that the country failed to do so because of existence of various constraints that are associated
with fiscal policy implementation. The major three constraints that makes fiscal policy less
appropriate policy that can act alone are political involvement, less control on spending thrift and
implementation of the policy itself. Political involvement causes various restriction such as
decisions made as per political interest that hampers the objective of the policy. Apart from that
implementation of fiscal policy requires various approvals and thus it takes time and in many
cases the right time of implementation of the policy goes away and makes the policy futile
(Hansen 2018). Finally, the fiscal policy cannot control the spending thrift of individuals and

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thus it is not possible to achieve the objective until the spending is controlled and savings and
investment goals are achieved. Thus, fiscal policy alone cannot be implemented.
(c) Government of a country collect taxes and is known as government revenue. Out of this
revenue government made expenditures, when the expenditure is more than revenue then budget
deficit occurs. It is generally observed that with increase in GDP, budget deficit decrease and
with decrease in GDP budget deficit increases. However, in some cases converse case has also
been observed that with increase in GDP budget deficit increases and with decrease in GDP
budget deficit decreases. This case occurs in two cases, firstly when the country increases it
spending on infrastructural development and secondly when the country is suffering from
extreme inflation condition. A country improves its infrastructure for future when it has ample
amount of fund in hand and this happens only when it earns large amount of income from GDP.
On the other hand, under inflationary condition the price of products are so high that the real
income of the country is actually at low level and the government needs to spend more and as a
result budget deficit occurs.
(d) Country C has a trading partner named Country X. Under trade both the country export and
import from each other and thus earn trade revenues. Suddenly, country X falls into recession
and owing to that the income of country falls. As a result country X would be not able to produce
enough goods for exporting to country C and also due to low income of country X it could not
import from country C. Thus, there will be impact of this on country C because with fall in
export of the country the revenue that it earns from exports falls and the income of the country
decline as well. Country C will also be deprived of the goods that it has been importing from
country X so far. Therefore, due to recession in country X the effect on country C is adverse
(Diamond 2015). Hence, to offset the effect the country could lower the price of its product or

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can specialize in the products that it used to import from country and at last it can find a new
trading partner.
Task 4
(a)
Every point of IS curve expresses a combination of output and real interest rate. The IS
curve is downward sloping because with rise in real interest rate investment of a country falls.
Thus, with lower level of real interest rate there is more investment and thus more output is
produced.
Every point of LM curve shows combination of income and real interest rate. With rise in
income the demand for money increases and this led to increase in real interest rate. Owing to
this reason the LM curve is upward sloping.
Therefore, the intersection point between IS and LM curve shows the equilibrium interest
rate and output of an economy (Roth 2018). If LM curve moves left then output falls and interest
rises and vice versa. On the other hand, if IS curve shift to the right then both output and interest
rate rises and vice versa.
(b)