## Topic: The impact of macroeconomic variables

Topic: The impact of macroeconomic variables

Order Description

ECON545 Paper Project 2 (Textbook R, Glenn Hubbard and Anthony Patrick O’Brien 5th edition to be included into the citation)

Attention writer, I will need a outline for this paper by Wednesday august 5, 2015 and complete paper by Saturday August 10, 2015.

Please check for for grammatical errors I lost 10 points due to those errors on the last paper, and I did pay the VIP package.( Please do not use words such as thus, hence. hitherto in my paper)

The Macroeconomic Paper tests your ability to apply economic principles to a business decision considering the impact of macroeconomic variables. Select one situation from the items outlined below: A to D. Complete the paper on the selected situation as specified below. The completed paper is a professional report and is due in Week 6 (200 points). See the grading rubric at the end of this document. For sources of data, you can choose from the list presented at the end of this document.

Each of the scenarios has a list of macroeconomic areas you are to address, with sources, in your answer. Research and show how these apply to your scenario: GDP growth rate (20 points), the business cycle, unemployment, and inflation (40 points), fiscal policy and level of unemployment (40 points), monetary policy and interest rates (40 points), and demographics (10 points).

Situation A

Jenny, your niece, is a smart high-school student who wants to make smart choices for her future. Hearing of your course in Business Economics, she has emailed you asking for advice on whether to become a medical doctor and on the best location to practice it. She recognizes the high costs of tuition and the years of study involved in becoming a doctor. She wants to evaluate if that career choice is an optimum decision for her. So she has asked you for advice.

Having read the introduction to Chapter 1 on page 3 of the textbook, you recognize the significance of such a career decision for Jenny. You decide to examine the significance of the influence that macroeconomic conditions can have on the success of a profession. So you research the economy in terms of GDP growth rate, interest rates, level of unemployment, the business cycle, fiscal policy, monetary policy, international trade, and demographics. You want to provide Jenny with the most informed advice possible. In addition to macroeconomic issues, you also evaluate the career choice from longer-term perspectives.

Situation B

Your neighbor Cindy wants to start a contracting business for installing solar panels. She has heard of the cost savings that households and businesses can make each year from installing solar panels on the roofs. Cindy has also heard of government incentives for installing solar panels. Being concerned about the environment and wishing to reduce pollution, Cindy thinks installing solar panels also serves a social purpose. But she does not want to risk her life’s savings on a venture that might not succeed or become profitable enough. After hearing from you about taking this course in Business Economics, she decides to ask you for advice.

At first you were hesitant to give investment advice. Then you read the section “Losing Money in the Solar Panel Industry” on pages 402-403 of the textbook, and the need for differentiation in Chapter 13. You realize there are more pieces to the decision than Cindy is considering. You decide to research the significance of the influence that macroeconomic conditions can have on the success of a business. So you research the economy in terms of GDP growth rate, interest rates, level of unemployment, the business cycle, fiscal policy, monetary policy, international trade, and demographics. You want to provide Cindy with the most informed advice possible. In addition to macroeconomic issues, you also evaluate the business idea from longer-term perspectives.

Situation C

Cousin Edgar is always thinking of the next business idea. This time, he plans to invest in buying two gas stations. He reckons American consumers have come to accept the high gasoline prices, and estimates world prices for gasoline will increase even further due to increasing high demand from India and China. Besides, Cousin Edgar thinks he will make a good profit on the sale of convenience items at each station. But before buying the gas stations, he decides to ask for your advice since you are taking this course in Business Economics.

You recall reading about making pricing decisions for gasoline on pages 173-174 of the textbook. You also recall reading about perfectly competitive markets in Chapter 12, and the need for differentiation in Chapter 13. Being skeptical of Cousin Edgar’s optimism on the profitability of selling gasoline and convenience items, you decide to research the significance of the influence that macroeconomic conditions can have on the success of a gas station. So you research the economy in terms of GDP growth rate, interest rates, level of unemployment, the business cycle, fiscal policy, monetary policy, international trade, and demographics. You want to provide Cousin Edgar with the most informed advice possible. In addition to macroeconomic issues, you also evaluate the gas station idea from longer-term perspectives.

Situation D

After hearing of your taking this course in Business Economics, your college friend has emailed you asking for advice on opening a restaurant. Your friend Rajeev reminded you of his popular recipes for Indian food, and shared his dream of building a franchise business modeled on the P.F. Chang chain of restaurants. He reckons that creating special fusion recipes based on a popular ethnic cuisine will provide the restaurant chain with sufficient differentiation to become profitable and to grow nationwide.

Luckily before you could find time to answer Rajeev’s email, you read the pieces on Starbucks and opening a restaurant, on page 425 of the textbook. Recognizing the costs and risks for Rajeev, you decide to research the significance of the influence that macroeconomic conditions can have on the success of a restaurant. So you research the economy in terms of GDP growth rate, interest rates, level of unemployment, the business cycle, fiscal policy, monetary policy, international trade, and demographics. You decide to educate yourself about the restaurant business so you can provide Rajeev with the most informed advice possible. In addition to macroeconomic issues, you also evaluate the restaurant idea from longer-term perspectives.

Macroeconomic Paper as a Professional Report

Your paper should be organized into five parts as listed below.

1. Title Page: Name, class, and date

2. Introduction to situation but do NOT copy the scenario. Briefly summarize the situation and identify the macroeconomic issue(s) to be decided from the perspective of the organization.

3. Business cycles, unemployment, inflation, international—comparative advantage, exchange rates, trade, etc., monetary policy and interest rates, and fiscal policy and unemployment. Identify the variables that are critical in addressing the issue(s). Gather and present the Ask a librarian for help if needed. Use in-text citation to report the source(s) of the data. Graphs may be included here.

4. Recommendations and Economic Justification

Formulate and present your recommendations for addressing the issue(s) based on the relevant data and economic principles identified above. Justify your recommendations in terms of the economic impact on those affected.

5. References

List the full references for at least five sources alphabetically in APA format.

Grading Rubric

Section Points earned Points Description

Paper Presentation

10 Good format, citations, lack of spelling errors, etc.

Correct title page and reference page

Relevant Data:

GDP, Business Cycle, International, Monetary Policy, Fiscal Policy, Demographics

130

GDP (20 points)

Business cycles, unemployment, inflation (40 points)

Monetary Policy and interest rates (30 points)

Fiscal policy and unemployment (30 points)

Demographics (10 points)

Recommendations 40

What are your recommendations explained by your analysis?

Total 180 A quality paper meets or exceeds these requirements

Data Sources

1. DeVry Online Library:

• Data bases for related articles

• Data bases for industry reports; IBISWorld in particular.

• ProQuest Statistical Abstracts of U.S.: http://library.devry.edu/pdfs/STATISTICAL_ABSTRACTS__US.pdf

2. Industry Associations

• Association of American Medical Colleges: https://www.aamc.org/

• American Medical Association (AMA): http://www.ama-assn.org/ama

• Council on Graduate Medical Education (COGME): http://www.hrsa.gov/advisorycommittees/bhwadvisory/cogme/

• National Center for Health Statistics (NCHS): http://www.cdc.gov/nchs/

• Solar Energy Industries Association: http://www.seia.org/

• The Solar Foundation: http://www.thesolarfoundation.org/

• The National Restaurant Association: http://www.restaurant.org/

• NACS – The Association for Convenience & Fuel Retailing: http://www.nacsonline.com/Pages/default.aspx

3. Private Research Groups

• The Rand Corporation: http://www.rand.org/

• University of Michigan: http://css.snre.umich.edu/; http://www.sca.isr.umich.edu/

• The Conference Board: https://www.conference-board.org/data/bcicountry.cfm?cid=1

• OECD: http://www.oecd.org/eco/economicoutlook.htm

• IMF: http://www.imf.org/external/pubs/ft/weo/2015/01/

4. U.S. Government Websites:

• Statistical Abstracts of U.S.: https://catalog.data.gov/dataset/statistical-abstract-of-the-united-states

• International Trade Administration: http://www.trade.gov/

• National Renewable Energy Laboratory: http://www.nrel.gov/

• National Center for Health Statistics: http://www.cdc.gov/nchs/

• U.S. Department of Energy: http://www.energy.gov/

• U.S. Energy Information Administration: http://www.eia.gov/

Page 402-403 Illustrating When a Firm Is Breaking Even or Operating at a Loss

on’t Let This Happen to You: Remember That Firms Maximize Their Total Profit, Not Their Profit per Unit

A student examines the following graph and argues: “I believe that a firm will want to produce at Q1, not Q2. At Q1, the distance between price and average total cost is the greatest. So at Q1, the firm will be maximizing its profit per unit.” Briefly explain whether you agree with the student’s argument.

The student’s argument is incorrect because firms are interested in maximizing their total profit, not their profit per unit. We know that profit is not maximized at Q1 because at that level of output, marginal revenue is greater than marginal cost. A firm can always increase its profit by producing any unit that adds more to its revenue than it does to its costs. Only when the firm has expanded production to Q2 will it have produced every unit for which marginal revenue is greater than marginal cost. At that level of output, it will have maximized profit.

We have already seen that to maximize profit, a firm produces the level of output where marginal revenue equals marginal cost. But will the firm actually make a profit at that level of output? It depends on the relationship of price to average total cost. There are three possibilities:

• 1. P > ATC, which means the firm makes a profit.

• 2. P = ATC, which means the firm breaks even (its total cost equals its total revenue).

• 3. P < ATC, which means the firm experiences a loss.

Figure 12.4 on page 399 shows the first possibility, where the firm makes a profit. Panels (a) and (b) of Figure 12.5 show the situations where a firm breaks even or suffers a loss. In panel (a) of Figure 12.5, at the level of output at which MR = MC, price is equal to average total cost. Therefore, total revenue is equal to total cost, and the firm will break even, making zero economic profit. In panel (b), at the level of output at which MR = MC, price is less than average total cost. Therefore, total revenue is less than total cost, and the firm suffers a loss. In this case, maximizing profit amounts tominimizing loss.

MyEconLab Concept Check

Making the Connection: Losing Money in the Solar Panel Industry

MyEconLab Video

In a market system, a good or service becomes available to consumers only if an entrepreneur brings the product to market. Thousands of new businesses open every week in the United States. Each new business represents an entrepreneur risking his or her funds to earn a profit. Of course, there are no guarantees of success, and many new businesses experience losses rather than earn the profits their owners hoped for.

By the mid-2000s, high oil prices and concern over the pollution caused by burning fossil fuels made more people become interested in solar energy. Technological advances reduced the cost of solar photovoltaic cells used in solar panels. In addition, households installing a solar energy system could receive a federal tax credit equal to 30 percent of the cost of the system. For several years, falling costs and increased demand led entrepreneurs in the United States to start new firms manufacturing solar panels. By 2009, though, large imports of solar panels produced by Chinese firms were driving down the market price. As panel (a) in the following figure shows, the price of solar panels, 402403measured as dollars per watt of power produced, declined by three quarters, from $2.00 per watt in 2009 to $0.50 per watt in 2013.

Deciding Whether to Produce or to Shut Down in the Short Run

12.4 LEARNING OBJECTIVE

Explain why firms may shut down temporarily.

pages 173-174 We know from the law of demand that when the price of a product falls, the quantity demanded of the product increases. But the law of demand tells firms only that the demand curves for their products slope downward. More useful is a measure of the responsiveness of the quantity demanded to a change in price. This measure is called the price elasticity of demand.

Price elasticity of demand The responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the product’s price.

Measuring the Price Elasticity of Demand

We might measure the price elasticity of demand by using the slope of the demand curve because the slope of the demand curve tells us how much quantity changes as price changes. Using the slope of the demand curve to measure price elasticity has a drawback, however: The measurement of slope is sensitive to the units chosen for quantity and price. For example, suppose a $1 per gallon decrease in the price of gasoline leads to an increase in the quantity demanded from 10.1 million gallons to 10.2 million gallons per day. The change in quantity is 0.1 million gallons, and the change in price is -$1, so the slope is 0.1/-1 = -0.1. But if we measure price in cents, rather than in dollars, the slope is 0.1/-100 = -0.001. If we measure price in dollars and gallons in thousands, instead of millions, the slope is 100/-1 = -100. Clearly, the value we compute for the slope can change dramatically, depending on the units we use for quantity and price.

To avoid this confusion over units, economists use percentage changes when measuring the price elasticity of demand. Percentage changes are not dependent on units of measurement. (For a review of calculating percentage changes, see the appendix to Chapter 1.) No matter what units we use to measure the quantity of gasoline, 10 percent more gasoline is 10 percent more gasoline. Therefore, the price elasticity of demand is measured by dividing the percentage change in the quantity demanded by the percentage change in the product’s price. Or:

172173

It’s important to remember that the price elasticity of demand is not the same as the slope of the demand curve.

If we calculate the price elasticity of demand for a price cut, the percentage change in price will be negative, and the percentage change in quantity demanded will be positive. Similarly, if we calculate the price elasticity of demand for a price increase, the percentage change in price will be positive, and the percentage change in quantity demanded will be negative. Therefore, the price elasticity of demand is always negative. In comparing elasticities, though, we are usually interested in their relative size. So, we often drop the minus sign and compare their absolute values. For example, although -3 is actually a smaller number than -2, we say that a price elasticity of -3 is larger than a price elasticity of -2.

and we can conclude that the demand for wheat is inelastic.

In the special case where the percentage change in quantity demanded is equal to the percentage change in price, the price elasticity of demand equals -1 (or 1 in absolute value). In this case, demand is unit elastic.

Unit-elastic demand Demand is unit elastic when the percentage change in quantity demanded is equal to the percentage change in price, so the price elasticity is equal to 1 in absolute value.

MyEconLab Concept Check

An Example of Computing Price Elasticities

Suppose you own a service station, and you are trying to decide whether to cut the price you are charging for a gallon of gas. You are currently at point A inFigure 6.1, selling 1,000 gallons per day at a price of $4.00 per gallon. How many more gallons you will sell by cutting the price to $3.70 depends on the price elasticity of demand for gasoline at your service station. Let’s consider two possibilities: If D1 is the demand curve for gasoline at your station, your sales will increase to 1,200 gallons per day, point B. But if D2 is your demand curve, your sales will increase only to 1,050 gallons per day, point C. We might expect—correctly, as we will see—that between these points, demand curve D1 is elastic, and demand curve D2 is inelastic.

To confirm that D1 is elastic between these points and that D2 is inelastic, we need to calculate the price elasticity of demand for each curve. In calculating price elasticity between two points on a demand curve, though, we face a problem because we get a different value for price increases than for price decreases. Suppose we calculate the price elasticity for D1 as the price is cut from $4.00 to $3.70. This 7.5 percent price cut increases the quantity demanded from 1,000 gallons to 1,200 gallons, or by 20 percent. Therefore, the price elasticity of demand between points A and B is 20/-7.5 = -2.7. Now let’s calculate the price elasticity for D1 as the price is increased from $3.70 to $4.00. This 8.1 percent price increase causes a decrease in the quantity demanded from 1,200 gallons to 1,000 gallons, or by 16.7 percent. So, now our measure of the price elasticity of demand between points A and B is -16.7/8.1 = -2.1. It can be confusing to have different 173174values for the price elasticity of demand between the same two points on the same demand curve. As we will see in the next section, economists use a formula that allows them to avoid this confusion when calculating elasticities.

Page 402-403 Illustrating When a Firm Is Breaking Even or Operating at a Loss

on’t Let This Happen to You: Remember That Firms Maximize Their Total Profit, Not Their Profit per Unit

A student examines the following graph and argues: “I believe that a firm will want to produce at Q1, not Q2. At Q1, the distance between price and average total cost is the greatest. So at Q1, the firm will be maximizing its profit per unit.” Briefly explain whether you agree with the student’s argument.

The student’s argument is incorrect because firms are interested in maximizing their total profit, not their profit per unit. We know that profit is not maximized at Q1 because at that level of output, marginal revenue is greater than marginal cost. A firm can always increase its profit by producing any unit that adds more to its revenue than it does to its costs. Only when the firm has expanded production to Q2 will it have produced every unit for which marginal revenue is greater than marginal cost. At that level of output, it will have maximized profit.

We have already seen that to maximize profit, a firm produces the level of output where marginal revenue equals marginal cost. But will the firm actually make a profit at that level of output? It depends on the relationship of price to average total cost. There are three possibilities:

• 1. P > ATC, which means the firm makes a profit.

• 2. P = ATC, which means the firm breaks even (its total cost equals its total revenue).

• 3. P < ATC, which means the firm experiences a loss.

Figure 12.4 on page 399 shows the first possibility, where the firm makes a profit. Panels (a) and (b) of Figure 12.5 show the situations where a firm breaks even or suffers a loss. In panel (a) of Figure 12.5, at the level of output at which MR = MC, price is equal to average total cost. Therefore, total revenue is equal to total cost, and the firm will break even, making zero economic profit. In panel (b), at the level of output at which MR = MC, price is less than average total cost. Therefore, total revenue is less than total cost, and the firm suffers a loss. In this case, maximizing profit amounts tominimizing loss.

MyEconLab Concept Check

Making the Connection: Losing Money in the Solar Panel Industry

MyEconLab Video

In a market system, a good or service becomes available to consumers only if an entrepreneur brings the product to market. Thousands of new businesses open every week in the United States. Each new business represents an entrepreneur risking his or her funds to earn a profit. Of course, there are no guarantees of success, and many new businesses experience losses rather than earn the profits their owners hoped for.

By the mid-2000s, high oil prices and concern over the pollution caused by burning fossil fuels made more people become interested in solar energy. Technological advances reduced the cost of solar photovoltaic cells used in solar panels. In addition, households installing a solar energy system could receive a federal tax credit equal to 30 percent of the cost of the system. For several years, falling costs and increased demand led entrepreneurs in the United States to start new firms manufacturing solar panels. By 2009, though, large imports of solar panels produced by Chinese firms were driving down the market price. As panel (a) in the following figure shows, the price of solar panels, 402403measured as dollars per watt of power produced, declined by three quarters, from $2.00 per watt in 2009 to $0.50 per watt in 2013.

Deciding Whether to Produce or to Shut Down in the Short Run

12.4 LEARNING OBJECTIVE

Explain why firms may shut down temporarily.

pages 173-174 We know from the law of demand that when the price of a product falls, the quantity demanded of the product increases. But the law of demand tells firms only that the demand curves for their products slope downward. More useful is a measure of the responsiveness of the quantity demanded to a change in price. This measure is called the price elasticity of demand.

Price elasticity of demand The responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the product’s price.

Measuring the Price Elasticity of Demand

We might measure the price elasticity of demand by using the slope of the demand curve because the slope of the demand curve tells us how much quantity changes as price changes. Using the slope of the demand curve to measure price elasticity has a drawback, however: The measurement of slope is sensitive to the units chosen for quantity and price. For example, suppose a $1 per gallon decrease in the price of gasoline leads to an increase in the quantity demanded from 10.1 million gallons to 10.2 million gallons per day. The change in quantity is 0.1 million gallons, and the change in price is -$1, so the slope is 0.1/-1 = -0.1. But if we measure price in cents, rather than in dollars, the slope is 0.1/-100 = -0.001. If we measure price in dollars and gallons in thousands, instead of millions, the slope is 100/-1 = -100. Clearly, the value we compute for the slope can change dramatically, depending on the units we use for quantity and price.

To avoid this confusion over units, economists use percentage changes when measuring the price elasticity of demand. Percentage changes are not dependent on units of measurement. (For a review of calculating percentage changes, see the appendix to Chapter 1.) No matter what units we use to measure the quantity of gasoline, 10 percent more gasoline is 10 percent more gasoline. Therefore, the price elasticity of demand is measured by dividing the percentage change in the quantity demanded by the percentage change in the product’s price. Or:

172173

It’s important to remember that the price elasticity of demand is not the same as the slope of the demand curve.

If we calculate the price elasticity of demand for a price cut, the percentage change in price will be negative, and the percentage change in quantity demanded will be positive. Similarly, if we calculate the price elasticity of demand for a price increase, the percentage change in price will be positive, and the percentage change in quantity demanded will be negative. Therefore, the price elasticity of demand is always negative. In comparing elasticities, though, we are usually interested in their relative size. So, we often drop the minus sign and compare their absolute values. For example, although -3 is actually a smaller number than -2, we say that a price elasticity of -3 is larger than a price elasticity of -2.

and we can conclude that the demand for wheat is inelastic.

In the special case where the percentage change in quantity demanded is equal to the percentage change in price, the price elasticity of demand equals -1 (or 1 in absolute value). In this case, demand is unit elastic.

Unit-elastic demand Demand is unit elastic when the percentage change in quantity demanded is equal to the percentage change in price, so the price elasticity is equal to 1 in absolute value.

MyEconLab Concept Check

An Example of Computing Price Elasticities

Suppose you own a service station, and you are trying to decide whether to cut the price you are charging for a gallon of gas. You are currently at point A inFigure 6.1, selling 1,000 gallons per day at a price of $4.00 per gallon. How many more gallons you will sell by cutting the price to $3.70 depends on the price elasticity of demand for gasoline at your service station. Let’s consider two possibilities: If D1 is the demand curve for gasoline at your station, your sales will increase to 1,200 gallons per day, point B. But if D2 is your demand curve, your sales will increase only to 1,050 gallons per day, point C. We might expect—correctly, as we will see—that between these points, demand curve D1 is elastic, and demand curve D2 is inelastic.

To confirm that D1 is elastic between these points and that D2 is inelastic, we need to calculate the price elasticity of demand for each curve. In calculating price elasticity between two points on a demand curve, though, we face a problem because we get a different value for price increases than for price decreases. Suppose we calculate the price elasticity for D1 as the price is cut from $4.00 to $3.70. This 7.5 percent price cut increases the quantity demanded from 1,000 gallons to 1,200 gallons, or by 20 percent. Therefore, the price elasticity of demand between points A and B is 20/-7.5 = -2.7. Now let’s calculate the price elasticity for D1 as the price is increased from $3.70 to $4.00. This 8.1 percent price increase causes a decrease in the quantity demanded from 1,200 gallons to 1,000 gallons, or by 16.7 percent. So, now our measure of the price elasticity of demand between points A and B is -16.7/8.1 = -2.1. It can be confusing to have different 173174values for the price elasticity of demand between the same two points on the same demand curve. As we will see in the next section, economists use a formula that allows them to avoid this confusion when calculating elasticities.