ECO 5308 – 010/011
Assignment I Due: Sunday, February 13, 2022
NOTE:
There are three questions in this exam. Answer ALL questions and sub-questions and please SHOW ALL WORK for all questions in order to receive credit. Your paper will not receive credit without the details as to how you arrived at the resuIts.
Submit your paper using APA style formatting in a clear, organized and well-written manner taking care of grammar, syntax, punctuation and spelling errors.
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I. Challenges in the Austin Housing Market: (35 points)
The Austin, Texas Housing and Commercial Market is one of the most vibrant and dynamic in the U.S. In 2015, the average price of housing was $326,000 and went up to almost $500,000 in the last year. In this question, we will take a few scenarios and you will identify the causes and impacts caused by changes in this market.
For each sub-question:
a) Offer an economic rationale as what may have caused the change (supply or demand, specific determinant which can be related using economic theory,
b) how the rationing function and possibly the guiding function works in this market.
c) Implications for builders – costs and revenues and buyers’ reactions.
d) Label the supply and demand axes and indicate the directions of shifts and movements of the relevant supply or demand or both and explain why using economic theory
1. Explain why a housing market at equilibrium could still have a vacancy rate of 6%.
2. Assume 5000 landlords decide to switch from renting to Airbnb.
3. Assume 15,000 new renters enter the market instead of mortgaging new homes. Explain the impact of both the shock from Airbnb and the shock from less housing buyers on equilibrium price and quantity. Do the shocks work together or oppose one another?
4. A new elected mayor convinces the City Council to acquire additional 5 miles of land to the north of Austin to build several public housing high-rise units and offer to medium income households at a subsidized price.
5. A shortage of lumber and steel used in the construction of new homes, primarily driven by supply-chain issues.
II.
Apples and Bananas
(35 points)
PLEASE review Chapter 4 and the section on Demand Estimation in Chapter 5 before you answer this question.
(SHOW ALL WORK TO RECEIVE CREDIT)
Suppose we are examining the demand for Washington Apples. An Agricultural Economist from the University of Washington estimates the demand function for Apples as:
QA = 10 – 5PA + 2PB + 0.01Y
Where QA = Quantity of Apples ; PA = Price of Apples/pound; PB = Price of Bananas/dozen
Y = Average Per-Capita Income
The initial values of the variables are QA = 15, PA = $4, PB = $2.5 and Y = $2000.
a. When PA rises to $3.40, ceteris paribus, QA is now 18 units. What is the corresponding own-price arc elasticity of demand? Is it price elastic or inelastic?
b. If income, Y, increases to $2,250 per period with all other variables held at their initial values, QA becomes 17.5. What is the corresponding income arc elasticity of demand?
c. If PB increases to $3 with all other variables held at their values, QA becomes 16. What is the corresponding cross-price elasticity demand?
d. Is product A an inferior or normal good? Are Product A and Product B substitutes or complements? Why? Explain.
e. Compute the MR at the initial values.
Question 3 on NEXT Page
III. Outsourcing: (30 points)
(use scholarly/academic and governmental sources (Federal Reserve, US Department of Commerce) or recognized sources such as research from Brookings Institution, Harvard Business Review, Fortune & Business Week; Avoid .com sources)
Outsourcing has become an integral part of global manufacturing and service sectors. The outsourcing of important parts of a company’s production has been growing in recent years. How would you explain these changes?
a) Trace the history of outsourcing concentrating on the U.S. economy. What is the economic rationale for outsourcing?
b) What were the principal changes which resulted in an explosive growth of outsourcing?
c) Since the Covid pandemic, how is the Benefits/Cost calculus has changed and what are the major impacts in both the manufacturing and service sectors and the consequent impact on prices and consumer behavior? Explain.
d) Differentiate the outsourcing industry from both the manufacturing and service sectors, using examples.
e) Given the supply disruptions and uncertainty due to the virus pandemic, what is likely to be the future of outsourcing and how will this impact both the source countries and host countries? Explain.
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