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

    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

    -2/10-

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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

    3/10

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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

    6/10 -

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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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