Macroeconomics Analysis – Final Assignment
End of Term Project Spring 202X
1. President Joe Biden has recently announced that the United States will withdraw all remaining troops from Afghanistan by September 11, 2021. This would, in effect, end the longest military conflict in United States history. This proposal is controversial, however. Some politicians in Washington D.C. argue against this withdraw. Suppose that a United States Senator argues:
“We cannot pull U.S. troops out of Afghanistan. We have committed so much already!” Using the tools from class, provide a critical analysis this argument. Based on economics, is the United States Senator correct or incorrect in his argument?
Remember: solid economic analysis is dispassionate and based on theory. You are being asked to evaluate the Senator’s statement. Thus, you are not being graded on your personal opinion on the matter; you are graded on your ability to apply economic theory to a real world situation.
2. Basic mathematical techniques from algebra and calculus can greatly simply economic decision-making. Let’s apply these tools here. Suppose that a monopolistically competitive firm is facing the following ATC and LAC curve (where Q represents the firm’s output):
ATC = LAC = 74+0.06Q2 −2.4Q
For simplicity, assume that ATC = LAC. Assume further that in the long-run, the firm is facing the following inverse demand function:
PQ = 60.5−0.6Q
- In the long-run, what is the expected output for this monopolistically competitive firm? What is the expected price? Show your work. Explain how you got your answer.
- If instead the firm was operating in a perfectly competitive market, what is its expected long-run output and price? Show your work. Explain how you got your answer.
Hint: problem 2 becomes remarkably simple if you sketch the long-run graphs for monopolistic competition and perfect completion and compare. This is not necessary, however.
3. Suppose that the corporate leadership of the Pepsi Cola Corporation is discussion business strategies for the upcoming decade. The discussion is focused on wanting to maximize Pepsi’s economic profit. Suppose that the CEO of Pepsi sets as a goal to increase Pepsi’s market-share (i.e., wanting to increase Pepsi’s sales as a percentage of total market sales). The CEO motivates this strategy by saying this will increase Pepsi’s economic profit. The President of Pepsi does not agree. The President claims, instead, that Pepsi should focus on increasing their profit margin.
An economic analyst in the room voices her concern about both of these strategies (she clearly paid attention in her Price Theory course). Now, it’s up to you to demonstrate that you have paid attention as well!
Using tools from class, carefully construct arguments against both the CEO’s proposal and the President’s proposal. Explain that regardless of market structure, their strategies are unlikely to maximize economic profit. Graphs can help your analysis, but are not necessary to fully answer the question.