UNI VERS I TY OF TORONTO

DEPARTMENT OF ECONOMI CS
ECOIOOY L0301 and L5101
Midterm Test #2; July 11,2014
Time Allowed; 120 Minutes
This total marks in this test are 60. The test is divided into two parts:
Part I - Problemformat - is worth 30 marks (50% of thetotal marks of 60)
Part I I : 30 multiple choice questions worth one mark each (50% of thetotal mark of 60)
Show vour work where applicable.
YOU MUST US E PEN I NSTEAD OF P E NCI L
Print vour name and student number clearly on thefront of the examand on any loose pages.
Name:
(Family Name) (Given Name)
Student #:
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ECOI OOY L0301 and L5101; Midterm Te 14
1. Consumer Choice and Derivation of Demand (8 marks)
/ A student has $540 to spend on Pizza or Al l Other Goods during a 3 month term. The price
of a Pizza is $6 and the price of Al l Other Goods is $12/good.
fHow many Pizzas can the student buy if s/he buys 28 units of Al l Other Goods? (1 mark)
byWHatis the Marginal Rate of Substitution of Al 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
2
2
2
2
2
1
1
1
1
1
O N ^^< ^ r^/^T- ^ ^< ^ < ^ 5? < > ^ < ^ < > QT- ^ ^
PI ZZAS
d) Suppose that the student consumes 32 Al l Other Goods at consumer equilibrium. Show this
equilibriumon your diagram. (1 mark)
e) Draw the budget lineif the price of Pizza increases to $7.50/good. (1 mark).
f) Show a consumer equilibriumon your new budget line if 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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ECOIOOY L0301 and L5101; Midterm Test #2: July 11, 2014
2. Competitive Short Run Equilibrium: Increase in Variable Costs (10 marks)
Assume that Bottled Water is a perfectly competitive industry with downward sloping
demand and positively sloped supply. It is initially in long-run firm and industry equilibria.
In the grid graphs below, draw a firm and an industry diagramto depict the initial long-run
equilibrium. Then draw the short-run and long-run equilibria that results from a tax of $1
per litre of Bottled Water
Label the relevant curves and points with the subscript 'o' for the original equiUbria, 's' for
theshort-mnequ ^"^J J I for thekmg-run equilibria. In particular
a) Draw thefirm and"indilstry diagramshowing price (Po), industry output (Qo), and
output (qo) at the initial long-run equilibrium. (2 marks)
i) Label ('s') the curves that change in the short-run due to the tax per unit. (2 marks)
Label the short-run equilibrium Price (Ps), industry output (Qs), and firm output (qs). (2
marks)
Clearly identify the firm's economic profit or loss at 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 firm output (qi
(2 marks)
c)
d)
e)
f)
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ECOI OOY L0301 and L5101; Midterm Test #2: July 11, 2014
3. Monopoly and Efficiency Diagram (8 marks)
The diagrambelow depicts the Average Cost and the Demand function for a M
/Marginal Cost is linear at* 0 when Quantity is 0.
^ Identify price (Pm) and output (Qm) diagrammatically at monopoly equilibrium. (4 mar
b/ldentify the monopoly's profit or loss 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^ilabcl the Price and Quantity that you would recommend to regulate this monopoly as P R
anji^QR . (1 mark)
ft^^entify the efficiency loss at your regulated Price and Quantity, P R andQ R . (1 mark)
ECOIOOY L0301 and L5101; Midterm Test #2: July 11,2014
4. Comparative Advantage (4 marks)
Thefollowing table gives the output (in tons) of Wool and Cheeseper unit of resourcefor
New Zealand and Australia. Assume that theseare the only countries anB'cSrrmiudities'tffThe
world and that there are no economies of scaleand no transportation costs.
7Z UJ C- J
Output New Zealand Australia
Wool (tons) 40 36
Cheese(tons) 10 6
-^ In the spacebelow, determine the country with the comparative advantagein Wool
production and the country with the comparative advantagein Cheeseproduction. Show
your calculations. (2 marks)
b) Supposethat New Zealand lias 72 units of the r^ource~and-tbat^Australia has 100 units of
the resource. In the spacebelow, draw each country's production possibility curve in
separatediagrams with Cheeseon the vertical axis. (I mark)
c) Supposethat thesecountries trade at a rateof 1 unit of Cheesefor 5 units of Wool.
i) Draw each country's Consumption Possibilities curve given trade in your diagram. (1 mark)
ii) What is New Zealand's consumption of Cheesei f Australiacgumers 2,000 units of Wool
and trades with New Zealand? (1 mark)
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ECOIOOY L0301 and L5101; Midterm Test #2: July 11, 2
Part I I B; Multiple Choice:
Each question is worth 1 mark. No marks deducted for wrong answers.
YOU MUST E NTE R Y OUR ANSWER ON TH E SCANTRON SH E E T
Questions 1 through 5 concern thefollowing information for the market for Plywood.
The market for Plywood, a perfecdy competitive industry, is initially at 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 for Plywood. Lumber is a substitute in production and Firewood
is a complement in production for Plywood. Labour is a variable input and Property Tax is
a fixed input into the production process.
Determine the effect on market equilibrium of thefollowing events, analyzing each question
independently of the other questions. ,
What is the short-run effect on market equilibrium of an increasein the p
an increasein the price of Lumber?
(^|)Demand decreases and Supply d
b) Demand decreases and Supply increases
c) Demand increases and Supply decreases
d) Demand increases and Supply increases
e) None of the above
increasein the price of Tongue and Groove Planks?
a) Equilibrium Price and Quantity bothfall
b) Equilibrium Price and Quantity don't change
Equil ibrium Price increases and Equilibrium Quantity in
j^d) Equilibrium Price increases and Equilibrium Quantity decreases
t-e) We don't haveenough information to determine the changein Price and
What is the long-run effect on market equili
increasein the price of Tongue and Groove Planks?
a) Equilibrium Price and Quantity bothfall
b) EquiUbrium Price and Quantity don't change
yC) Equilibrium Price increases and EquiUbrium Quantity decreases
^(d^Equilibrium Price increases and Equilibrium Quantity increases
e) We don't haveenough information to determine the changein Price and Quantity
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ECOIOOY L0301 and L5101; Midterm Test #2: July 11,2014
4. What is the short-run effect on market equilibriumof a decrease
the price of Lumber?
a) A decrease in Price but not enough information to determine the change in Quantity
b) An increase in Price but not enough information to determine the change in Quantit
c) A decrease in Quantity but not enough information to determine the change in Price
i^y An increase in Quantity but not enough information to determine the change in Pric
e) None of the above
5. What is the long-run effect on market equilibriumof a decrease in Income anda decrea
the price of Lumber?
a) EquilibriumPrice decreases andEquilibriumQuantity decreases
EquilibriumPrice decreases andEquilibriumQuantity increases
c) EquilibriumPrice increases andEquilibriumQuantity decreases
d) EquilibriumPrice increases andEquilibriumQuantity increases
None of the above
l^uestions 6 to 9 refer to the Toronto market for Sculptures per year w
DemandandSupply functions.
P= 1,800-0.015Q andP =300-I- 0.045Q
What is the competitive equilibriumquantity soldof Sculptures per y
a) 15,000 b) 20,000 ^25,000 d) 30,000 e) None of the above
7.
8.
9.
What is the competitive equilibriumprice 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 equilibriumquantity soldof 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. -
What is the short-run competitive equilibriumprice 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 competitive equilibriumprice of Sculpture given the $300 subsidy
Q$l ,125 b) $1,350 c) $1,425 d) $1,450 e) $1,500
11. Suppose that a competitive industry is producing an output less than the midpoint outpu
y a linear demandcurve. Which of thefollowing is 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 output decreases Total Revenue and increases Total Cost
d) 'A small decrease in output decreases Total Revenue and decreases Total Cost
e) A small decr^ase-iaoutput increases Total Revenue and decreases Total Cost
ECOIOOY L0301 and L5101; Midterm Test #2: July 11,2014
12. Suppposethat theIncomeElasticity of Demand for Pizzas is -1.2. What is theeffect of an
increasein Incomes on equilibriumPriceand Quantity?
a) No changein Priceand Quantity Decreasein Priceand Quantity
c) Decreasein Priceand increasein Quantity d) Increasein Priceand decreasein Quantity
e) Increasein Priceand Quantity
Supposethat Marginal Costs are0 at theArt Gallery of Ontario (AGO). What is theeffect
on total profit if thenumber of visitors falls by 10% in responseto an increasein the
admission pricefrom$25 to $27.50
a) Total Profit falls becauseTotal Revenuefalls even though Total Cost doesn't change
b) Total Profit falls becauseTotal Revenuefalls and Total Cost increases
(^) Total Profit doesn't change becauseboth Total Revenueand Total Cost don't change
d) Total Profit increases becauseTotal Revenue increases and Total Cost doesn't chang
e) Total Profit increases becauseTotal Revenue increases and Total Cost increases
Which of thefollowing is true?
a) AverageProduct falls when Marginal Product falls
b) Marginal Cost rises when Marginal Product rises
c) Marginal Cost falls when AverageProduct rise
d) Marginal Cost rises when AverageProduct fal
/e) AverageProduct rises when AverageCost falls
15. Supposethat a student has a Marginal Rateof Substitution of 8 coffees for 5 bottled water
(i.e., would trade8 coffees for 5 botded waters). I f thepriceof a coffeeis $1.60 and the
priceof a bottled water is $2, then thestudent will attain equilibriumby
trading coffeefor bottled water until her MRS is 0.8 coffeefor 1 bottled wate
b) trading coffeefor botded water until her MRS is 1.25 coffeefor 1 botded wat
c) trading bottled water for coffeeuntil her MRS is 0.8 coffeefor 1 bottled water
d) trading botded water for coffeeuntil her MRS is 1.25 coffeefor 1 bottled water
e) trading bottled water for coffeeuntil her MRS is 1.6 coffeefor I bottled water
A firm sold 80 machines last year. They can sell 81 machines this year if they decreaseprice
by $100 to $4,900. What is Marginal Revenueas a consequenceof this decreasein price?
a)-$8,000 b)-$3,100 c)-$100 ^-i-$4,900 e) Noneof theabove
Assumethat all restaurants in Toronto own their own building. Which of thefollowing
describes thelong-run effect of an increasein property tax on a restaurant's Marginal Cost
(MC), AverageTotal Cost (AC), and Industry Supply curves?
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 Supply decreases (shifts up) but AC does not 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.
ECOI OOY L0301 and L5101; Midterm Test #2: July 11, 2014
Questions 18 to 23 refer the table below for an industry with only onefirm. The table gives
the Price and Quantity data for Demand in the industry and the Total Variable Cost (TVC)
data for the firm/industry for the quantities 10 to 23. Fixed Cost is $99.
Quantity 10 11 12 13 14 15 16 17 18 19 /20 22'' \3
Price$ 60 58 56 54 52 50 48 46 44 42 40 , ^8 /34
TVC$ 248 284 318 351 385 420 456 493 531 570 651\ .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
9 N
\ None of the above /
. IT: What is Monopoly equilibrium output?
, u-'/aH2': ()15 c)18 d)20
What is Economic Profit at Monopoly Equilibrium?
' " ^a) 240 (b)255'. c) 280 d) 354
% None of the above
9) None of the above
23." What is the output at Long-run Competitive Equilibrium?
iji^ra) 16 b) 18 c) 20 ^22 e) None of the above
Questions 24 to 27 refer to equations below for the Demand and Marginal Cost functions
for an industry.
P =240 - 0.03Q MC =60-I - 0.02Q
24. What is the output at the optimal allocation of resources?
a) 2,800 b) 3,200 ,^^.600 d) 4,000
25. What is the price at the optimal allocation of resources?
a) $120 ^pl 32 c)$144
,26.^^What is the output at Monopoly equilibrium? -V^.
Q
J^oneof the above
a) 2,000 6r2,250 c) 2,500
27r-vWhat is the Price at Monopoly equilibrium?
X t)>U)5 b) $ 120 <^$ 172.50
d)$156 1^None of the above

d ) ^^ #None of the above

e
d)$180 ^ None of the above
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ECOIOOY L0301 and L5101; Midterm Test #2: July 11, 2014
28. A firm in a perfectly competitive industry initially produces the output where Marginal Cost
(MC) =$12, Average Total Cost (AC) =$10, Price =$8, Minimum Average Total Cost
(min AC) =$6, and Average Variable Cost (AVC) =$4. What should this firm do to
maximize profits or minimize losses in the short-run?
a) Shut down.
( b) Decrease output to make a smaller economic loss.
Decrease output 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 a commodity are P =320 - 0.25Q and
P =25 +0.375Q. What is the Buyer's share per unit of a tax of $10? (1 mark)
a) $4.00 b)$5.00 c) $6.00 d) $7.50 (g^None of the abov
What is the effect of a tax of $1 per unit in the short-run on a commodity with perfectly
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 by less than $1 and Quantity decreases
d) Price increases by less than $1 but Quantity doesn't change
e) None of the above
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