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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
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 iiTcreasesT^al Profit^
A small increase in outputdecreasesTotalRevenue andincreasesTotalCost
d)
A
smalldecreasein output
decreases
TotalRevenue and
decreases
TotalCost
e) A small decr^ase-iaoutput increasesTotalRevenue anddecreasesTotalCost
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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
in Price and Quantity
c)Decrease
in Price andincreasein Quantity d)Increasein Price anddecreasein Quantity
e)
Increase
in Price and Quantity
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.
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E O I O O Y
L0301 and L5101; Midterm Test 2: July 11, 2014
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
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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
e) None of the above
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