Question 1 (7 points)
COVID-19 led to a simultaneous disruption in the supply and demand factors of the global economy.
1a. Describe 3 demand and 3 supply factors that influence the world economy due to the occurrence of COVID-19 (3 points).
b. Show by graph how these supply and demand factors influence each other simultaneously (4 points). 4
Question 2 (10 points)
COVID-19 led to short-term scarcity of vital products such as medicines and respiratory equipment. This entails the risk of overcharging or price gauging. Governments are considering intervening in the market.
2a. explain by graph the effect of price gauging (3 points).
b. Reflect on the phenomenon of price gauging on the basis of the fairness principle (4 points).
Sasha has a net income of € 1,200 per month. She divides this income over 2 bundles of goods and services: the price of 1 bundle of housing (rent, utilities and insurance) is € 300. The price for the other bundle, medicines, is € 150. The figure below shows the distribution of Sacha’s preference between housing and medicines. Due to Covid, prices of products changed rapidly over the last year. Suppose the price of medicine rises also to € 300,– and her income remains the same. Show in the figure:
c. The substitution effect of the price change (1 point).
d. The income effect of the price change (2 points).
Question 3 (8 points)
The income freeze as a result of COVID-19 shows that in a certain EU country renting a house offers relatively little benefit to people with low incomes. They are in danger of being oppressed. The government uses the following supply and demand function: Qd t = -0,5P + 8 Qs = P-2 Without housing subsidy, the demand function would take the following form: Qd = -0,5P+7 At which: Qd t = demand for rental housing with subsidy (´ 100.000) Qd = demand for rental housing without subsidy (´ 100.000) Qs = supply of rental houses (´ 100.000) P = rent per month (´ € 100) Each tenant receives the same housing benefit.
3a. Determine the amount of the subsidy per month (1 point). Rent allowance (subsidy) changes tenants’ willingness to pay. In addition, the housing benefit appears to unintentionally lead to an increase in the income of landlords.
b. Calculate what percentage of the rent allowance per home is beneficial to the landlords (2 points).
c. Show by graph, the effect of the housing subsidy (winners and losers = effects on surplus (5 points).
Question 4 (8 points)
The manufacturers Pharmax and Medix are currently the only providers of vaccines against the COVOD-19 virus. Both strive for maximum total profit. Pharmax is considering the development of an entirely new vaccine. Pharmax can choose from three types of an existing vaccine, each effective against one particular aspect of the virus. The required investments in research are specifically aimed at one type of vaccine and can therefore be regarded as sunk costs. Due to competitive considerations, Pharmax wants to keep secret which type of vaccine it will develop until the moment of the market launch. Pharmax assumes that Medix faces the same choice with regard to the development of a certain type of vaccine. Arrangements between producers about the split of the market are not allowed by the country’s Market Authority. The situation between Pharmax and Medix can be regarded as a static simultaneous game with the following expected profits in millions of euros over the patent period of 10 years.
4a. Choose from the matrix the letter (s) of the cell (s) where there a Nash equilibrium exists. Explain your answer (2 points).
A consultant believes that secrecy is not wise: “It is best for Pharmax to immediately disclose its choice for a type of vaccine, so that Medix will be forced to take that choice of Pharmax into account.” The resulting sequential game is shown in the game tree in Figure 1, with expected winnings in millions of euros over the 10-year patent period. figure 1: game tree in choosing the type of vaccine to be developed
b. Based on the data in the game tree, what type of vaccine will Pharmax choose? Explain your choice (1 point). The consultant does, however, make a comment: “In order for this sequential game to develop, it is essential that Pharmax makes its first choice so convincing that Medix can no longer be in any doubt about it. Pharmax can achieve this by immediately announcing that large specific investments have been made in the development of the chosen type of vaccine.”
c. Explain which steps Pharmex will have to take and what the consequences will be (2 points).
d. Explain why these steps are necessary for Medix to convincingly believe Pharmex’s intentions (1 point). e. Give an advantage and a disadvantage for the patients in case a division of the market is achieved whereby both manufacturers market a different type of vaccine (2 points).
Question 5 (9 points)
The government of the developing country Pesthan used the infant industry argument from 1999 to 2019 to limit imports. To this end, it increased import duties and introduced import quotas. The national currency, the pesto, is a floating convertible. COVID-19 is also striking in Pesthan and is putting pressure on household incomes. In early 2020, the Economic Advisory Body (EAB) is asked by the government to investigate whether reducing barriers to imports could potentially be beneficial for households and businesses. The EAB presents information from Pesthan in Table 1 and from comparable developing countries in Graph 1. Table 1: Macroeconomic figures of Pesthan in billion pesto. Graph 1: Change in the international trade ratio and GDP in comparable developing countries. An indicator of the openness of the economy to international trade is the international trade ratio, calculated according to the formula below. In 1999 the figure was 0.20. International trade quota = xgs + mgs GDP Of which: xgs = export value of goods and services 1999 2019 C household consumption 120 140 Igross gross investments by firms 12,5 15 Gbruto gross investments by government 56 57 X export value of goods and services 18 22,5 M import value of goods and services 20 25 Avg yearly change of trade quota (%) Avg yearly GDP growth 9 mgs = import value of goods and services GDP = gross domestic product
5a. Show by graph that limiting imports allows domestic companies in Pesthan to become more competitive in the world market over time (2 points).
b. Calculate to determine whether Pesthan’s international trade ratio has increased or decreased in 2019 compared to 1999 (1 point).
c. Explain by using only the information from Table 1, that the increase in the export value in the period 1999-2019 could have been caused by a change in the value of the pesto (2 points).
d. Explain that the price level in Pesthan may have increased due to the depreciation of the pesto (2 points).
e. Based on the information in chart 1, the EAB advises to allow more free trade. Explain the EAB’s opinion (2 points). 10
Question 6 (4 points)
The economy of the developing country Tugije has been hit hard by the global pandemic. The local currency, the tubra, has fallen from 10 to 20 tubra per dollar within a year. Tugije has $170 billion in foreign debt, which must be refinanced every year. Since 2010, Tugije has hardly invested in technology and education. As a result, labor productivity is low and the value of imports is greater than exports. Raw materials for production come from abroad, as does energy. Much is paid in dollars or euros, but little is earned in foreign currency. Tugije is dependent on money from abroad. But investments have come to a standstill due to a lack of confidence in Tugije’s economy. The Tugije government plans to tackle skyrocketing inflation with a series of interest rate cuts. To counter the negative effects of inflation, the government has announced a credit guarantee plan. The credit guarantee plan means that the government will compensate savers for losses if the tubra falls against the dollar more than the interest paid by banks. The measure is intended to counter the extreme dollarization, which threatens to plunge Tugije’s economy into a downward spiral of devaluation and hyperinflation. But tricks like the credit guarantee plan increase the cost of so-called credit default swaps (CDS), which insure investors against default. Those costs determine what it costs the Gov’t to borrow abroad. The CDS from Tugije are now among the most expensive in the world. This suggests that investors expect Tugije to default.
6a. Explain why Tugije faces a downward spiral of devaluation and hyperinflation (2 points).
b. What steps should the government take to get the economy up and running again? (2 points).