University of Toronto

Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
Term Test 1: Summer 2013
Solutions: Full
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complete the FRONT and BACK of the Scantron form.
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General Instructions
1. 110 minutes. 110 points. Allocate your time wisely!
2. Aids allowed: a simple (i.e., non-graphing) calculator.
3. Non-Multiple Choice questions: write answers in pen in this test booklet.
Scantron Instructions
Answer MULTIPLE CHOICE questions on supplied Scantron sheet.
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Each Multiple Choice question is worth 3 marks. No deductions for incorrect answers.
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Part II 1. / 6 Marks Part I / 55 Marks
2. / 6 Marks Part III 1. / 7 Marks
3. / 6 Marks 2. / 10 Marks
4. / 6 Marks
5. / 4 Marks Total /110 Marks
20130605A 1 Term Test 1: Solutions: Full
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
TEST VERSION A
I. [48 Marks] Multiple Choice Questions: Indicate answer on Scantron.
1. [3 Marks] Table 1 gives the Total Benet you receive as a function of Quantity consumed.
At which per-unit price do you purchase and consume exactly three units?
Total
Quantity Benet
1 $10
2 $18
3 $24
4 $28
5 $30
Table 1: Total benet as a function of quantity consumed.
A. $20.50 per unit
B. $7.50 per unit
C. $5.50 per unit
D. $3.50 per unit
E. $1.50 per unit
2. [3 Marks] In one hour, you can write 20 lines of computer code or write 4 pages of
documentation. What is the opportunity cost of writing 1 page of documentation?
A.
1
20
lines of computer code
B.
1
5
lines of computer code
C. 4 lines of computer code
D. 5 lines of computer code
E. 20 lines of computer code.
=
3. [3 Marks] Marijuana and beer have been shown to be substitutes (at least for the
relatively young in the U.S.). Assuming this is true for Canada as well, what would be
the aect of legalizing the use of marijuana in Canada?
A. We would move up the Canadian demand curve for beer.
B. We would move down the Canadian demand curve for beer.
C. The Canadian demand curve for beer would shift up and out.
D. The Canadian demand curve for beer would shift shift down and in.
E. We would move up the Canadian supply curve for beer.
20130605A 2 Term Test 1: Solutions: Full
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
4. [3 Marks] You have noticed an increase in both the (equilibrium) price and quantity
transacted of a good. Which of the following is a plausible explanation?
A. Incomes have fallen and the good is an inferior good.
B. A price of a close substitute has fallen.
C. There has been an improvement in the technology used to produce this good.
D. The price of a key input used in this goods production has increased.
E. The price of a key input used in this goods production has decreased.
5. [3 Marks] Own-price elasticity of demand has been estimated at 0.6. If the quantity
supplied drops by 5%, what will be the change in price?
A. 0.3%.
B. 3%.
C. 6%.
D. 8
1
3
%
E. 30%
= =
6. [3 Marks] Assume: supply is elastic, but not perfectly (i.e., innitely) elastic; demand is
inelastic, but not perfectly inelastic. What must happen as the result of the introduction
of a per-unit tax? (Assume there are still transactions after the tax is introduced.)
A. Consumer surplus must decrease.
B. Producer surplus must decrease.
C. Producer surplus must increase.
D. A and B.
E. A and C.
7. [3 Marks] Refer to the table below. What value for the utility from 4 units is consistent
with diminishing marginal utility?
Quantity Utility
2 40
3 50
4
5 64
6 69
A. 55.5.
B. 58.5.
C. 59.5.
D. All of the above.
20130605A 3 Term Test 1: Solutions: Full
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
8. [3 Marks] Assume: quantities do not need to be integers; you purchase only tuna,
salmon and chicken; and tuna costs $1, salmon costs $2. If you spent your $300 by
purchasing 100 cans each of tuna and salmon: you would get 3000 utils from tuna with
a marginal utility of 10 and 8000 utils from salmon with a marginal utility of 14. What
is the cost of increasing spending on chicken by $1?
A. Approximately 7 utils.
B. Approximately 10 utils.
C. Approximately 14 utils.
D. Approximately 30 utils.
E. Approximately 80 utils.
9. [3 Marks] What is an example of arbitrage that might limit the ability of a monopolist
to price discriminate?
A. Low-cost manufacturers producing cheap versions of designer dresses.
B. Australian retailers purchasing the video game Crysis from wholesalers in Hong Kong
for less than $50 and in order to sell it in Australia for $100.
C. An insurance company is unable to determine whether a particular driver is a safe
or risky driver.
D. Apple is unable to determine your exact willingness to pay for the next generation
iPhone.
E. Airline customers nd it unfair when they nd out that the the person in adjacent
seat paid hundred of dollars less for the plane ticket.
10. [3 Marks] Assume a standard single-price monopolist. What will be the result of the
introduction of a per-unit tax paid by the monopolist?
1
A. CS decreases. PS decreases. TS decreases.
B. CS decreases. PS decreases. TS may increase or decrease.
C. CS decreases. PS may increase or decrease. TS decreases.
D. CS decreases. PS may increase or decrease. TS may increase or decrease.
E. CS does not change. PS decreases. TS may increase or decrease.
11. [3 Marks] Assume no change in the LRATC.
2
All rms in a perfectly competitive
market have access to the same technology and input prices. Production entails a $1000
per period xed cost. A rm sells 1000 units a price of $10, incurring an average of $8
per unit in variable costs.
1
CS=Consumer Surplus; PS=Producer Surplus; TS=Total Surplus.
2
Long-Run Average Total Cost curve.
20130605A 4 Term Test 1: Solutions: Full
E. None of the above as utility is increasing in quantity.
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
A. The rm must increase output to increase short-run prots.
B. The rm must decrease output to increase short-run prots.
C. Assuming this rm is maximizing short run prots, it will produce less in future
periods as the market price will decrease in the long run.
D. Assuming this rm is maximizing short run prots, it will produce more in future
periods as the market price will increase in the long run.
E. Assuming this rm is maximizing short run prots, it will continue to produce 1000
units in the long run.
12. [3 Marks] Consider the introduction of a binding price ceiling.
A. PS decreases. CS increases. TS decreases.
B. PS decreases. CS increases. TS may increase or decrease.
C. PS increases. CS decreases. TS decreases.
D. PS increases. CS decreases. TS may increase or decrease.
E. None of the above.
13. [3 Marks] Demand is characterized by MWTP(Q) = P(Q
D
) = 30
Q
2
and supply by
MC(Q) = P(Q
S
) = 3+
Q
4
. How many units are transacted if the government establishes
a price oor at P = 15? (If there is excess supply, nobody purchases the extra supply. If
there is excess demand, nobody supplies the extra demand.)
A. 24.
B. 30.
C. 36.
D. 42.
E. 48.
14. [3 Marks] You have already paid $20 for the ticket to the event. You get paid $15 for
every hour you work. If you go to the event, you miss two hours of work. Claude will
pay you $16 for the ticket, whereas Elena will pay you $18. At this point, what are your
sunk costs?
A. $0
B. $2
C. $4
D. $20
E. None of the above.
20130605A 5 Term Test 1: Solutions: Full
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
15. [3 Marks] You have already paid $20 for the ticket to the event. You get paid $15 for
every hour you work. If you go to the event, you miss two hours of work. Claude will pay
you $16 for the ticket, whereas Elena will pay you $18. Fill in the blank: You should
use the ticket and go to the event as long as your value of the event is or more.
Otherwise, sell your ticket.
A. $20
B. $48
C. $50
D. $64
E. $68
16. [3 Marks] Without a MetroPass, each subway ride in Boblandia costs $2. A monthly
MetroPass enables you to take as many subway rides as you would like without additional
payment. You paid $100 for the MetroPass and you have so far taken 99 subway rides
this month. What is the marginal cost to you of the 100th subway ride this month?
A. $0.99
B. $1.00
C. $2.00
D. In order to calculate it, we need the total number of trips taken this month.
E. None of the above.
20130605A 6 Term Test 1: Solutions: Full
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
USE A PEN FOR THE FOLLOWING SECTIONS
II. [20 Marks] For each of the following, indicate True, False or Uncertain and concisely
explain. All of the marks are earned for the explanation.
(1) [5 Marks] Consider a monopolist constrained to charging the same price to all con-
sumers. Assume it is currently selling the quantity that maximizes producer surplus.
TFU: If it decreased its price, it would reduce its revenue.
(2) [5 Marks] Assume that once farmers decide how much of a crop to plant, its supply is
perfectly inelastic. TFU: If a disease destroys 10% of the crop after it is planted but
before it can be harvested and brought to market, total revenue will decrease.
(3) [5 Marks] Assume standard assumptions about utility. You purchased some good both
before and after a large increase in your salary, although not in the same quantities. As
a result of this salary increase, the marginal utility of the last unit consumed of this good
decreased.
(4) [5 Marks] Assume dry cleaning is a perfectly competitive market, currently in equili-
brium, where every rm has access to the same technology and input prices. Because each
rm produces at a point where marginal product of labour is diminishing, a permanent
decrease in demand will lead to a permanent decrease in market price.
III. [22 Marks] Everyone works 10 hours per day. Kenenisa can produce 3 ounces of beer per
hour and 4 ounces of poutine per hour, Tariku produces 1 ounce of beer per hour and 2
ounces of poutine per hour. In a world without trade, each produces and consumes 15 ounces
of poutine. Partial marks are only possible if you show your work.
(1) [8 Marks] Complete the following table by placing Xs in the appropriate cells. For
example, if you place an X in the bottom-right cell, you will be indicating that Tariku
has a comparative advantage in the production of poutine.
Absolute Advantage Comparative Advantage
Beer Poutine Beer Poutine
Kenenisa
Tariku
20130605A 7 Term Test 1: Solutions: Full
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
=
3
4
=
(2) [6 Marks] A trade made both of them better o. One of them shipped one ounce
of beer to the other in exchange for some poutine. What do we know about this trade?
Circle one of the options in each set of brackets, and make an entry into each blank space.
Kenenisa {sent; received} {at least; at most} ounces of poutine.
Tariku {sent; received} {at least; at most} ounces of poutine.
Solution: Kenenisa received at least
4
3
1
2
1
2
(3) [5 Marks] If trade leads to the most ecient production of 30 ounces of poutine, how
many ounces of beer can be produced?
=
(4) [3 Marks] Emil can make 4 ounces of poutine every hour. Emil and Tariku correctly
conclude that there is no trade that can make each of them strictly better o. What else,
exactly, do we know about Emil?
20130605A 8 Term Test 1: Solutions: Full
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
IV. [20 Marks] Consider a new drug. Discovery of the drug costs $500. After discovery, the drug
can be manufactured at a cost of $10 per unit. Demand is characterized by MWTP(Q) =
P(Q) = 50
2
5
Q.
(1) [8 Marks] Complete the table. For each cell, indicate the area as specied in the
gure underneath the table. For example, ABG refers to the upper-left triangle, and
A0b the largest triangle. (Hint: You will need 4 letters to identify a rectangle.) For
Perfect-Price Discrimination, assume perfect, rst-degree price discrimination.
Perfect Single-Price Perfect Price-
Competition Monopolist Discrimination
Consumer Surplus
Producer Surplus
DWL
Total Surplus
20130605A 9 Term Test 1: Solutions: Full
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
(2) [8 Marks] Assume a monopolist constrained to charging the same price for each unit
transacted. Calculate the values for each of the cells in the table below. Partial marks
are only possible if you show your work.
Single-Price
Monopolist
Consumer Surplus $
Producer Surplus $
DWL $
Total Surplus $
(3) [4 Marks] Given what we know about the market, why is it unlikely that this drug will
be provided by a perfectly competitive free market?
3
Alternatively, with the ecient quantity of 100, total surplus is the triangle whose height is 50-10=40 and whose
base is 1000, giving us total surplus TS = 2000. As the monopoly only gives us TS = 500 +1000 = 1500, deadweight
loss must be DWL = 2000 1500 = 500.
20130605A 10 Term Test 1: Solutions: Full
.