# Eco100 Furlong Tt2 2014s

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U N I V E R S I T Y O F T O R O N T O

D E P R T M E N T O F E C O N O M I C S

E C O I O O Y

L0301 and L5101

MidtermTest 2;July11,2014

TimeAllowed;

120 Minutes

This

total

marks in this test are 60. The test is

divided into

two parts:

Part I - Problem format - isworth30 marks (50% of the

total

marks of 60)

Part I I 30multiplechoice questions worthone mark each (50% of thetotalmark of 60)

Show vourworkwhere applicable.

Y O U M U S T U S E P E N I N S T E D O F P E N C I L

Printvour name and student number clearly on thefrontof the exam and on any loosepages.

Name:

(FamilyName) (GivenName)

Student :

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O I OO Y

L0301 andL5101;Midterm Te 14

1. Consumer Choice and Derivation of Demand 8 marks)

/

A student has 540 to spend on Pizza or

A l l

Other Goods during a 3 month term. The price

o f

a Pizza is 6 and the price of

A l l

Other Goods is 12/good.

fHow manyPizzascan the student buy if s/he buys 28 units ofA l lOtherGoods?(1 mark)

byWHatis the

Marginal

Rate

of Substitution of

A l l

Other Goods for

Pizzas

(AAOG/AP)

at

consumer equilibrium?(1 mark)

Draw the

student's

budget

line

in the

space

be

4

4

4

4

4

3

3

3

3

3

O N

^ r^/^T-

^ ^ 5?

>

^

>

Q

PZZAS

d)

Suppose

that the student consumes32

A l l

Other Goods at consumer

equilibrium.

Show this

equilibrium

e) Draw the budget

line i f

the price of Pizza

increases

to 7.50/good. (1 mark).

f

Show a consumer equilibriumon your new budgetlineif the consumer's Demand for

A

Other Goods is perfectly inelastic. (1 mark)

g) Show two points of the Demand curve for Pizza in the lower diagram. (2 marks

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O I O O Y

L0301 and L5101; Midterm Test 2: July 11, 2014

2. Competitive Short RunEquilibrium:Increase in Variable Costs (10 marks)

Assume that Bottled Water is a perfectly competitive industryw i thdownward sloping

demand and positively sloped supply. It is

in i t ia l ly

in long-run

f i rm

and industry equilibria.

Inthe

grid

graphsbelow, draw a f i rm and an industry diagram to depict the init iallong-run

equilibrium.

Then draw the short-run and long-run equilibria that

results

from a tax of \$1

per l i treofBottledWater

Label

the relevant

curves

and points

w i t h

the subscript 'o' for the original equiUbria, 's' for

theshort-mnequ ^ for thekmg-runequilibria. In particular

a) Draw the f i rmand indilstry diagram showing price (Po), industry output (Qo), and

output (qo) at the

init ial

long-runequilibrium.(2 marks)

i Label ('s') thecurvesthatchangein the short-run due to the tax per unit. (2 marks)

Label the short-runequilibriumPrice (Ps), industry output (Qs), and f i rmoutput (qs). (2

marks)

Clearly identify the firm's economic

prof i t

orlossat short run

equilibrium.

(1 m

Identify

the Seller's Share(SS) of the tax per botde in the short-run. (1 mark)

Show the long-run

equilibrium

Price (Pi), industry output (QO, and

f i rm

output (qi

(2 marks)

c)

d)

e)

f

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E O I O O Y

L0301 and L5101; Midterm Test 2: July 11, 2014

3. Monopoly and Efficiency Diagram (8 marks)

The diagram below depicts the Average Cost and the Demand function for a M

/MarginalCost is linear at * 0 when Quantity is 0.

Identify price (Pm) and output (Qm) diagrammatically at monopolyequilibrium.(4 mar

b/ldentify the monopoly s

profit

orloss diagrammatically at monopoly equilibrium.(1 mark

d)^entify

the price (P*) and output (Q*) which gives the optimal allocation of

resources

(0

effiefency

loss) for society in your diagram. (1 mark)

e il bcl

the Price and Quantity that you would recommend to regulate this monopoly as

anji

^ Q R (1mark)

ft ntify the efficiencyloss at your regulated Price and Quantity, and Q (1 mark)

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O I OOY

L0301 and L5101; Midterm Test 2: July

11,2014

The fol lowingtable gives the output (in tons) of

Wool

and Cheese per unit of resource for

New Zealand and Australia. Assume that these are the only countries anB cSrrmiudities tffThe

world and that there are no

economies

of scale and no transportation costs.

7 Z U

JC J

Output

New Zealand

Australia

Wool

(tons) 40

36

Cheese(tons) 10

6

^ In the

space

below, determine the countrywi th the comparative advantage in Wool

production and the countrywi th the comparative advantage in Cheese production. Show

b)

Suppose

that New Zealand lias 72 units of the r^ource~and-tbat^Australia has 100 units of

theresource. In thespace below, draw each country s production possibility curve in

separatediagrams

wi th

Cheese on the vertical axis. ( I mark)

c)

Suppose that these countries

at a rate of

1

unit of Cheese for 5 units ofWo ol .

i Draweach country s Consumption Possibilities curve given trade in your diagram. (1 mark)

i i

What is NewZealand s consumption of Cheese i f Australia gumers2,000 units of

Wool

and

wi thNew Zealand?(1 mark)

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E CO I OOYL0301 and

L5101;

Midterm Test 2:July11, 2

Part

I I B Multiple Choice:

Ea c h

question is worth 1 mark. No marks deducted for wrong answers.

Y O U M U S T

E N T E R Y O U R A N S W E R ONT H E SC A N T R O N S H E E T

Questions

1

through 5 concern thefo l lowing

information

for the market for

Plywood.

The market forPlywood,a perfecdy competitive industry, is init iallyat long-run

equilibrium.Demand is downward sloping and Supply is upward sloping. Plywood is an

inferior

good. Nails are a complement in consumption and Tongue and Groove Planks are a

substitute in consumption forPlywood. Lumber is a substitute in production and Firewood

is a complement in production forPlywood. Labour is a variable input and Property Tax is

a

fixed

input into the production process.

Determine the effect on marketequilibriumof the

fol lowing

events, analyzingeachquestion

independently of the other questions. ,

What

is the short-run effect on market equilibriumof anincreasein the p

an

increase

in the price of Lumber?

(^|)Demanddecreasesand Supply d

b)Demanddecreasesand Supply increases

c)

Demandincreasesand Supply decreases

d)Demandincreasesand Supply increases

e) None of the above

increase

in the price of Tongue and Groove Planks?

a)EquilibriumPrice and Quantity bothfal l

b)

EquilibriumPrice and Quantity don t

change

quilibrium

Price

increases

and

Equilibrium

Quantity

in

j^d)EquilibriumPriceincreasesandEquilibriumQuantitydecreases

t-e) We don t

have

enough

information

to determine the

change

in Price and

Whatis the long-run effect on market equili

increasein the price of Tongue and Groove Planks?

a)EquilibriumPrice and Quantity both

fall

b)

EquiUbrium

Price and Quantity don t

change

yC EquilibriumPrice increasesandEquiUbriumQuantity decreases

d^ EquilibriumPrice increasesandEquilibriumQuantityincreases

e) We don t

have

enough

information

to determine the

change

in Price and Quantity

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O IOOYL0301 and

L5101;

Midterm Test 2:July

11,2014

4. What is the short-run effect on marketequilibriumof adecrease

the price of Lumber?

a) A

decrease

in Price but not enough

information

to determine thechangein Quantity

b)

An increase in Price but not enoughinformationto determine thechangein Quantit

c)Adecreasein Quantity but not enoughinformationto determine the

change

in Price

yA nincrease in Quantity but not enough

information

to determine thechangein Pric

e) None of the above

5. What is the long-run effect on marketequilibriumof adecreasein Income and adecrea

the price of Lumber?

a)EquilibriumPricedecreasesandEquilibriumQuantitydecreases

EquilibriumPrice

decreases

andEquilibriumQuantityincreases

c)EquilibriumPriceincreasesandEquilibriumQuantitydecreases

d)

EquilibriumPriceincreasesandEquilibriumQuantityincreases

N o n e of the above

l^uestions 6 to 9 refer to the Toronto market for Sculptures per year

w

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