BUS702 Economics for Managers

Notes

(1) This is not a traditional exam but is a “take home exam” or assignment. Please read all instructions carefully.

(2) You should read the questions and the articles before setting aside time (probably on a different day) to write your answers.

(3) This exam is “open book” but “researched” answers are not required and, in fact, no research should be undertaken; that is, you should write from your own understanding without references. SafeAssign checks submitted files for plagiarism so be careful to write in your own words.

(4) Draw appropriate links to the economic theory you have learned in the course and do not offer unsubstantiated opinion.

(5) Use diagrams where appropriate. Hand-drawn ones are acceptable, being faster to draw, and may be scanned in (as pdfs, please – no other file formats!). Blackboard can only read Word and PDF files. So, please do not upload files in any other format.

1. The great productivity slowdown puzzle Access the following articles

1) “Why hasn’t technology sped up productivity?” by Chad Syverson. This article was published in Chicago Booth Review on Feb, 5, 2018.

2) “How low interest rates can hurt competition, and the economy” by Dee Gill. This article was published in Chicago Booth Review on April 23, 2019

Answer the following questions:

a) Chad Syverson writes, “Since economic growth requires productivity growth, if we don’t figure out why this (slowdown in productivity growth) is happening and how to fix it, we
won’t get sustained increases in GDP per capita”.By using the AD-AS (aggregate demand-aggregate supply) framework, explain Chad Syverson’s statement regarding the importance of productivity growth.

b) Chad Syverson writes, “Suppose the slowdown after 2004 hadn’t happened, and we kept going with the same average productivity growth that we saw from 1995 to 2004. That would mean GDP in 2017 would have been, conservatively speaking, $3 trillion higher than it was”. Explain how Chad Syverson arrived at the conservative estimate of $3 trillion. That is, explain the calculation he had done to arrive at this number. US real GDP data can be found.

c) Explain at least three arguments Chad Syverson gave against the mismeasurement hypothesis.

d) Dee Gill writes “The issue is that while (low) interest rates initially spark company spending, they then induce a productivity gap between dominant and smaller companies that
ultimately discourages both groups from spending (on innovation)”. The above statement summarizes the key argument in the article by Dee Gill. Explain the argument in the article by using the AD-AS framework.

e) If you are convinced that the argument in Dee Gill’s article is correct, as an economic advisor to the government, would you recommend a greater role for fiscal policy in combating economic slowdown? Very briefly explain.

2) Smoking rates in US have fallen to all-time low, but how did they ever get so high? By Richard Gunderman

(a) The author writes, “But in 1875, a Richmond, Virginia, company offered a US$75,000 prize for the invention of an automatic rolling machine. The prize was claimed by James
Bonsack, whose machine could roll 200 cigarettes per minute, dramatically increasing capacity and lowering production costs.” By drawing a demand-supply diagram, explain the impact of the invention of automatic rolling machine in the market for cigarettes.

(b) According to the author, during World War 1, cigarettes were used as currency. Did cigarettes fulfil the three functions of money? Briefly explain.

(c) Cigarette companies ran campaigns in which they tried to convince people that cigarettes are “Your throat protection against cough”. In a demand-supply context, what was the effect of this campaign in the market for cigarettes?

(d) The article points out that once someone has started smoking, attempts to stop lead to withdrawal symptoms such as headaches and nausea. How does this fact matter for price elasticity of demand in the market for cigarettes?

(e) The article makes a comparison between “social media” and “cigarettes”. Point out at least three features that are common to both markets. Very briefly explain.