Suppose there are only two firms in an economy: Rolling Rawhide produces rawhide and sells it to Chewy Chomp,Inc. ,which uses the rawhide to produce and sell dog chews.With each $1 worth of rawhide that it buys from Rolling Rawhide,Chewy Chomp,Inc.produces a dog chew and sells it for $2.50.Neither firm had any inventory at the beginning of 2014.During that year,Rolling Rawhide produced enough rawhide for 2000 dog chews.Chewy Chomp,Inc.bought 90% of that rawhide for $1800 and promised to buy the remaining 10% for $200 in 2015.Chewy Chomp,Inc.produced 1800 dog chews during 2014 and sold each one during that year for $2.50.What was the economy's GDP for 2014?

Question

Quizplus · Accepted Answer

The GDP can be calculated as the total value of final goods and services produced within an economy in a given period of time. In this case, the only final good is the dog chews produced by Chewy Chomp, Inc. Therefore, the GDP is equal to the revenue generated by Chewy Chomp, Inc. in 2014, which is $2.50 per chew multiplied by the 1800 chews produced, or $4500. The fact that Rolling Rawhide produced rawhide does not contribute to the GDP because rawhide is an intermediate good and is not sold directly to consumers. Therefore, the correct answer is C.

Suppose There Are Only Two Firms in an Economy: Rolling