Download pdf - Eco100 Furlong Tt2 2014s

8/11/2019 Eco100 Furlong Tt2 2014s

1/10

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 :

8/11/2019 Eco100 Furlong Tt2 2014s

2/10

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-

8/11/2019 Eco100 Furlong Tt2 2014s

3/10

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

8/11/2019 Eco100 Furlong Tt2 2014s

4/10

E O I O O Y


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)

8/11/2019 Eco100 Furlong Tt2 2014s

5/10

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)

5/10 -

8/11/2019 Eco100 Furlong Tt2 2014s

6/10

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 -

8/11/2019 Eco100 Furlong Tt2 2014s

7/10

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


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

lûestions 6 to 9 refer to the Toronto market for Sculptures per year

w

Demand and Supply functions.

P= 1,800-0.015Q

and P = 300 I 0.045Q

Whatis the competitiveequilibriumquantity sold of Sculptures per

y

a) 15,000 b) 20,000 ^25,000 d) 30,000 e) None of the above

7.

8.

9.

Whatis the competitiveequilibriumprice of Sculpture per

year?

a) 1,125 b) 1,350 ^ 1,425 d) 1,450 e) 1,500

Suppose

that the government introduces a subsidy of 300 per Sculpture.

What

is the competitive

equilibrium

quantity sold of Sculptures per year in the short

a) 15,000 b) 20,000 c) 25,000 (3)30,000 e) None of the above

O Ot.

Whatis the short-run competitiveequilibriumprice of Sculpture given the 300 subsidy

a) 1,125 b^ l,350 c) 1,425 d) 1,450 e) 1,500

10. What is the long-run competitiveequilibriumprice of Sculpture given the 300 subsidy

Q l , 1 2 5

b) 1,350 c) 1,425 d) 1,450 e) 1,500

11. Supposethat acompetitiveindustry is producing an outputlessthan the

midpoint

outpu

a linear demand curve.Whichof thefollowingis true?

a) A small increase in output

increases

Total

Revenue and

decreases

Total

Cost

b)

A^smaiTnTcreaseln output iiTcreasesTâl Profit^

A small increase in outputdecreasesTotalRevenue andincreasesTotalCost

d)

A

smalldecreasein output

decreases

TotalRevenue and

decreases

TotalCost

e) A small decrâse-iaoutput increasesTotalRevenue anddecreasesTotalCost

8/11/2019 Eco100 Furlong Tt2 2014s

8/10

O I O O Y

L0301 andL5101;Midterm Test 2:July11,2014

12.

Supppose

that the Income Elasticity of Demand for

Pizzas

is -1.2. What is the effect of an

increase

in Incomes onequilibriumPrice and Quantity?

a) Nochangein Price and Quantity

Decrease


c)Decrease

in Price andincreasein Quantity d)Increasein Price anddecreasein Quantity

e)

Increase


Suppose

thatMarginalCostsare 0 at the Art Gallery of Ontario

A G O ) .

What is the effect

on

total

profit

i the number ofvisitors

falls

by 10% inresponseto an

increase

in the

admission price

from

25 to 27.50

a)Total

Profit

fallsbecauseTotalRevenue fallseven thoughTotalCostdoesn't change

b)

Total

Profit

fallsbecauseTotalRevenue fallsandTotalCost

increases

(^) TotalProfitdoesn't changebecause

both

Total

Revenue and

Total

Cost don't

change

d)

Total

Profitincreasesbecause

TotalRevenue

increases

andTotalCostdoesn't

chang

e)Total

Profitincreases

becauseTotalRevenue

increases

andTotalCost

increases

Which

of the fol lowingis true?

a) Average Product

falls

when

Marginal

Product

falls

b)

MarginalCost

rises

whenMarginalProduct

rises

c)

MarginalCostfallswhen Average Productrise

d) Marginal

Cost

rises

when Average Product

fal

/e) Average Product

rises

when Average Cost

falls

15.

Suppose

that a student has a

MarginalRate

of Substitution of 8 coffees for 5 bottled water

(i.e., would

trade 8 coffees for 5 botded waters). I f the price of a coffee is 1.60 and the

price

of a bottled water is 2, then the student wi l l attainequilibriumby

tradingcoffee for bottled waterun t i lher MRS is 0.8 coffee for

1

bottled wate

b)trading coffee for botded waterun t i lher MRS is 1.25 coffee for 1botded wat

c)

trading bottled water for coffee

un t i l

her MRS is 0.8 coffee for 1 bottled water

d)

trading botded water for coffee un t i lher MRS is 1.25 coffee for

1

bottled water

e) trading bottled water for coffee unti lher MRS is 1.6 coffee for I bottled water

A firm sold 80 machines last year. They can sell 81 machines this year i theydecreaseprice

by

100 to 4,900. What is

Marginal

Revenue as a

consequence

of this

decrease

in price?

a)- 8,000 b)- 3,100 c)- 100 ^-i- 4, 900 e) None of the above

Assume that all

restaurants

in Toronto own their own

building.

Which

of the

fol lowing

describes

the long-run effect of an

increase

in property tax on a

restaurant'sMarginal

Cost

M C ) ,AverageTotalCost A C ) ,and Industry Supplycurves?

a) MC and AC

shift

up and Industry Supply

decreases

(shifts up)

b MC and AC

shift

up but Industry Supply

does

not change.

c)

MC shifts up and Industry Supplydecreases (shifts up) but ACdoesnot change.

d) AC shifts up and Industry Supply

decreases

(shifts up) but MC not change.

ef AC shifts up but MC and Industry Supply do not change.

8/11/2019 Eco100 Furlong Tt2 2014s

9/10

E O I O O Y


Questions18 to 23 refer the table below for an industry w i thonly one f i r m . The table gives

the Price and Quantitydatafor Demand in the industry and the Total Variable

Cost

(TVC)

data

for the firm/industry for the quantities 10 to 23. FixedCostis $99.

Quantity 10

11 12

13

14

15

16 17

18

19 20

22''

\3

Price 60

58

56

54

52

50 48 46 44

42

4 0 , ^ 8

/ 3 4

TVC$

248

284

318

351

385

420

456

493 531

570

6 5 1 \ .69y 736

18. What is the

~ a) 16 b) 18 c 20 clp22 . e) None

19. What is the output for the optimal allocation of

reso

a) 12 b) 15 c) 18 d) 20

20 . Demand is unit

elastic

at which output?

a) 15 . b)18 c)20 d) 23

N

\None of theabove /

. IT What is Monopolyequilibrium output?

,u -' / aH 2' : ()15 c)18 d)20

What is Economic Profit at Monopoly Equilibrium?

' ^ a ) 2 4 0 (b)25 5'. c) 280

d) 354

% None of theabove

9 None of theabove

23. What is the output at Long-run Competitive Equilibrium?

iji ra 16 b) 18 c) 20 ^ 2 2 e) None of theabove

Questions24 to 27 refer toequationsbelow for the Demand and MarginalCost functions

fo r

an industry.

P = 240 -

0.03Q

MC = 60 I

0.02Q

24. What is the output at the optimal allocation ofresources?

a)2,800 b)3,200 ,^^.600 d)4,000

25. What is the price at the optimal allocation ofresources?

a) $120 ^ p l 3 2 c)$144

,26. ^ What is the output at Monopoly equilibrium?

-V .

Q

J^oneof theabove

a)

2,000

6r2,250 c)2,500

2 7 rvWha t

is the Price at Monopoly equilibrium?

X t)>U)5 b) 120

8/11/2019 Eco100 Furlong Tt2 2014s

10/10

O I O O Y

L0301 and

L5101;

Midterm Test 2:July11, 2014

28. A f irmin a perfectly competitive industry

in i t ia l ly

produces the output whereMarginalCost

M C )

= 12, Average

Total

Cost

A C )

= 10, Price = 8,

M i n i m u m

Average

Total

Cost

m i n A C )

= 6, and Average Variable Cost A V C )= 4. What should this f irmdo to

maximizeprofitsorminimizelossesin the short-run?

a) Shut down.

b)

Decrease

output to make a smaller economic loss.

Decreaseoutput to make an economic profit ,

d)

Increase output to make a smaller economic loss.

Increase output to make an economic

profit

29.

30.

Suppose

that the Demand and Supply funcdons of acommodityare P = 320 - 0.25Q and

P= 25 + 0.375Q. What is the Buyer'sshareperunitof a tax of 10? (1 mark)

a) 4.00 b) 5.00 c) 6.00 d) 7.50 (g^None of the abov

Whatis the effect of a tax of 1perunitin the short-run on acommodity wi t hperfectly

elastic Demand and

relatively

elastic Supply?

Price doesn't

change

but Quantity

falls

b)

Price

increases

by 1 but Quantity doesn't

change

c)

Price

increases

bylessthan 1 and Quantitydecreases

d)

Price

increases

bylessthan 1 but Quantity doesn'tchange


-10/10 -