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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
on your diagram. (1 mark)
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
4. Comparative Advantage (4 marks)
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
your calculations. (2 marks)
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
trade
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
trades
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
