University of the Philippines

SCHOOL OF ECONOMICS
Economics 100.2
Fundamentals of Microeconomics
Problem Set No. 3

Prof. A. Arcenas/P. Adriano/P. Medrano/J. Punongbayan

1st Semester, AY 2016-2017

Name: _____________________________________________________________ Section: __________________

Answer each of the following questions as indicated in each item on a long sheet of pad paper.
Due on Thursday, 1 December 2016 during your discussion class.

Chapter 12 How Markets Determine Incomes

1. (5 points) Starting in the 1990s and intensified during the 2000s, the Philippines has experienced
a significant inflow of capital from other countries in the Information Technology Business
Process Outsourcing (IT-BPO) Industry. For example, many foreign firms have started
outsourcing knowledge process and back office operations, animation, call centers, software
development, game development, engineering design, and medical transcription services to the
Philippines.
a. (2.5 points) Using the diagram of the Philippine capital market below, show the effect of this
inflow on the demand for capital, supply of capital, rental price of capital, and the quantity of
capital in use in the Philippines.
b. (2.5 points) Using the diagram of the Philippine labor market below, show the effect of the
capital inflow on the labor demand, labor supply, average wage paid to Filipino workers, and
employment in the Philippines.

Chapter 13 The Labor Market

2. (5 points) Suppose that labor is the only input used by a perfectly competitive firm that can hire
workers for P50 per day. The firms production function is presented in the table below. Each unit
of output sells for P 10.

a.
b.
c.
d.

Days of Labor

Units of Output

1
2
3
4
5

7
13
18
22
25

Marginal Product

Marginal Revenue
Product

(2 points) Complete the table above.

(1 point) Plot the firms demand for labor together with the market wage.
(1 point) How many days of labor should the firm hire?
(1 point) Show this point (c) on your graph.

3. (5 points) Analyze the effect of each of following events (a), (b), and (c) on the market for
Filipino doctors in the Philippine medical tourism industry by completing the table below.
Indicate whether the labor demand, labor supply, equilibrium wage, and equilibrium
employment will increase, decrease, or stay the same.
Situation

Labor
Demand

Labor
Supply

Equilibrium
Wage

Equilibrium
Employment

(a)
(b)
(c)
a. (1 point) The Philippines becomes a popular destination for medical tourism.
b. (1 point) More college graduates pursue a degree in medicine.
c. (1 point) Filipino businessmen build new hospitals with state-of-the-art medical equipment.
d. (1 point) What happens to the quantity of labor supplied if the government removes the
income tax of medical practitioners and the income effect dominates the substitution effect
along the backward-bending labor supply of doctors?
e. (1 point) What happens to the quantity of labor supplied if the government removes the
income tax of medical practitioners and the substitution effect dominates the income effect?

Chapter 14 Land, Natural Resources, and the Environment

4.

(8 points) The following table shows the marginal private value, marginal private cost, and
marginal external cost for various quantities of output in a market.

a.
b.
c.
d.

Quantity

Marginal Private
Value

Marginal Private
Cost

Marginal External
Cost

1
2
3
4
5
6
7

$14
13
12
11
10
9
8

$10
11
12
13
14
15
16

$2
2
2
2
2
2
2

(2 points) What is the equilibrium quantity of output in the market?

(2 points) What is the socially optimal output in this market?
(2 points) Is there a difference between the answers in (a) and (b)? Explain why or why not.
(2 points) How large would the corrective tax need to be to move this market toward the
social optimum?

5. (8 points) The Earths atmosphere can be considered a global public good. It poses a special
problem since all countries benefit from a cleaner global atmosphere and abatement efforts of
greenhouse gases, but each country is better off continuing to pollute (as a byproduct of
economic activity). Climate change can be represented in the following game:

Developed
countries

Abate
Pollute

Developing countries
Abate
Pollute
10, 10
0, 11
11, 0
1, 1

a. (2 points) What is/are the Nash equilibria of this game?

b. (2 points) Why will the two players converge here?
c. (4 points) Explain briefly (maximum of two sentences) how the following concepts relate to
climate change:
o (2 points) Free-rider problem
o (2 points) Tragedy of the commons

Chapter 15 Capital, Interest, and Profits

6. (5 points) Basic concepts of interest and capital.
a. (2 points) Differentiate briefly between (i) rental of a capital good, (ii) rate of return on a
capital good, (iii) interest rate, and (iv) real interest rate.
b. (1 point) Suppose JC Townhead purchases a siopao-making robot, Show Pao, for P10,000. He
expects to earn P1,000 per year for two years from Show Paos production. What is his annual
rate of return on capital?
c. (1 point) Suppose the nominal interest rate is 12% and the inflation rate is 3%. What is the
real market interest rate?
d. (1 point) [Continued from (b) and (c)] Should JC invest in capital? Why?

7. (3 points) Analyze the effect of each of the following situations on the market for capital by
completing the table below. Indicate whether the demand for capital, supply of capital,
equilibrium rate of return on capital, interest rate, and equilibrium capital investment in the
Philippines will increase, decrease, or stay the same.
Situation

Demand for
Capital

Supply of
Capital

Equilibrium Rate of Return on

Capital, Market Interest Rate

Equilibrium
Quantity of Capital

(a)
(b)
(c)
(a) (1 point) Filipinos increase their savings to prepare for retirement.
(b) (1 point) A siopao-making robot, Show Pao, which saves siopao bakers a lot of work is
invented.
(c) (1 point) The market interest rate in the United States goes up.

Chapter 16 Government Taxation and Expenditure

8. (3 points) Suppose that the Philippine tax schedule given below is being implemented this year.
Annual Income
P 10,000
30,000
70,000
140,000
250,000
500,000

Tax Payment
P

Effective tax rate (%)

1,000
4,500
14,000
35,000
75,000
160,000

a. (1 point) Calculate the effective tax rate at each level of income. (Hint: effective tax rate =
percentage of income paid in taxes)
b. (2 points) Based from the schedule above, the tax is (regressive / proportional /
progressive). Explain your answer.
9. (5 points) Consider a proportionate income tax rate of 10% and Value-added tax rate (VAT) of
12% and two individuals, Happy and Lucy.
a. (1 point) What is the total tax payment of Happy if he earns P100,000 and spends
P50,000?
b. (1 point) What is the total tax payment of Lucy is she earns P20,000 but spends P35,000?
c. (1 point) Compute for the proportion of their tax payment with respect to their income.
d. (1 point) If the government plans to decrease the income tax rate to 5% and compensate
the decrease by increasing VAT to 15%, what would be the new total tax payment of
Happy and Lucy given the same income and spending?
e. (1 point) Does the tax reform from (d) promote equity? Explain why or why not.

Chapter 17 Efficiency vs. Equality: The Big Tradeoff

10. (5 points) Consider the Gini coefficient for the Philippines over time presented below.
Year
2000
2003
2006
2009
2012

Gini coefficient
.482
.461
.458
.448
.461

a. (2 points) Interpret the data. Is inequality worsening or improving in the country over time?
b. (3 points) Based on what you know about the Philippine economy, give one reason why the
trend could be such.
11. (3 points) One of the features of the Department of Finances (DOF) proposed tax reform
program is to reduce the personal income tax maximum rate from 32% to 25%, and compensate
the ensuing reduction in tax revenues by increasing the value-added tax (VAT) from 12 to 14%.
Evaluate whether the proposed tax reform will hurt the poor or not.

Chapter 18 International Trade

12. (10 points) For the problems below, consider two hypothetical countries called Guava Republic
and Dalandan Republic. The table below shows the Guavas and Dalandans how many labor hours
is needed to produce 1 kilogram of Avocado and 1 kilogram of Guyabano.
Table 1. Guava and Dalandan production of Avocados and Guyabano
Labor hours required to produce 1 unit
Product
Guava
Dalandan
Avocado
2 hours
3 hours
Guyabano
4 hours
12 hours
a.
b.
c.
d.
e.

(1 point) Which among the two countries has the absolute advantage in producing avocados?
(1 point) Which among the two coauntries has the absolute advantage in producing guyabano?
(1 point) What is the cost (in terms of guyabano) to produce 1 kilogram of avocado in Guava?
(1 point) What is the cost (in terms of avocados) to produce 1 kilogram of guyabano in Guava?
(1 point) What is the cost (in terms of guyabano) to produce 1 kilogram of avocado in
Dalandan?
f. (1 point) What is the cost (in terms of avocados) to produce 1 kilogram of guyabano in
Dalandan?
g. (1 point) Which country has the comparative advantage in producing avocados?
h. (1 point) Which country has the comparative advantage in producing guyabano?
i. (2 points) Suppose that each country has 600 labor hours. Graph and label the production
possibilities frontiers of Guava and Dalandan.

13. (10 points) The figure below shows the Guyabano market in the Dalandan Republic.

a. (1 point) Assuming autarky (no trade), which area represents the total net social benefit.
b. (3 points) When Dalandan trades with Guava, what will be the new consumer surplus,
producer surplus, and total surplus?
c. (1 point) What area represents the additional surplus gained by Dalandan from trade?

To protect the domestic Guyabano firms from shutting down, the Dalandan government imposed
a per-ounce tariff on the Guyabano imported from Guava. Graphically,

d. (2 points) What will the after-tariff consumer surplus and producer surplus be?
e. (1 point) What area represents the government revenue from imposing the tariff on
Guyabano?
f. (1 point) What area(s) represents the after-tariff total surplus?
g. (1 point) What area represents the deadweight loss as a result of the tariff?