Download Test questions - December, 2002

ECONOMICS A02Y - INTRODUCTORY ECONOMICS (A Mathematical Approach)
End-of-term exam: December 10, 2002
Professors Furlong, Parker and Cleveland
Time: 180 minutes
NAME:___________________________________________________________
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print clearly
(First name)
STUDENT NUMBER______________________________________________
INSTRUCTOR ____________________________________________________
WHEN IS YOUR TUTORIAL? _________________________________________
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As indicated in your course outline, only approved calculators are permitted in the exam.
Any other calculator may be confiscated, and, if found to contain data relevant to this course, will
result in academic consequences. If two multiple choice answers both seem to be approximately
correct, choose the best of the two answers.
USING CAPITAL LETTERS, PRINT YOUR ANSWERS TO ALL MULTIPLE CHOICE
QUESTIONS BELOW
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9. __________
17. __________
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2. __________
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18. __________
26.___________
3. __________
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19. __________
27.__________
4. __________
12. __________
20. __________
28.__________
5. __________
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21. __________
29. __________
6. __________
14. __________
22. __________
30.___________
7. __________
15. __________
23. __________
8. __________
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24. __________
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WRITE ANSWERS FOR QUESTIONS 31 - 33 ON PAGES 11, 12 AND 13 IN THE
SPACE PROVIDED.
MULTIPLE CHOICE QUESTIONS ARE WORTH 2.5 MARKS EACH OR 75
MARKS IN TOTAL (OUT OF 100 MARKS); THE REMAINING QUESTIONS ARE
WORTH 25 MARKS IN TOTAL
PART I - MULTIPLE CHOICE (2.5 marks each, for 75 marks)
1- 3 The perfectly competitive market for vinyl records is in equilibrium, and its demand and
supply schedules have the usual shapes. Vinyl records are an inferior good. Compact discs
(CDs) are a good substitute for vinyl records as far as consumers are concerned. A record
player is a complement in consumption to vinyl records. Vinyl raincoats are a substitute in
production for the producers of vinyl records. Questions 1 to 3 refer to the effects of various
events on the market for vinyl records; each question should be taken as separate.
1.
Due to technological change, the price of record players falls. At the same time, there is a
fall in the wages paid to labour in the production of vinyl records. The effect of these events
on the equilibrium in the vinyl record market will be:
(A) A rise in the equilibrium price and a fall in the equilibrium output.
(B) A rise in the equilibrium price and a rise in the equilibrium output.
(C) A fall in the equilibrium price and a fall in the equilibrium output.
(D) A fall in the equilibrium price and a rise in the equilibrium output.
(E) Output will definitely rise but the effect on price depends on the relative sizes of impact
of the two events.
(F) Output will definitely fall, but the effect on price depends on the relative sizes of impact
of the two events.
(G) Price will definitely rise but the effect on output depends on the relative sizes of impact
of the two events.
(H) Price will definitely fall, but the effect on output depends on the relative sizes of impact
of the two events.
(I) It is uncertain what impact these events will have on price or output in the vinyl record
market.
2.
There is a decrease in the demand for vinyl raincoats, and, at the same time, an increase in
consumer incomes. The effect of these changes on the market for vinyl records is likely to
be:
(A) A rise in the equilibrium price and a fall in the equilibrium output.
(B) A rise in the equilibrium price and a rise in the equilibrium output.
(C) A fall in the equilibrium price and a fall in the equilibrium output.
(D) A fall in the equilibrium price and a rise in the equilibrium output.
(E) Output will definitely rise but the effect on price depends on the relative sizes of impact
of the two events.
(F) Output will definitely fall, but the effect on price depends on the relative sizes of impact
of the two events.
(G) Price will definitely rise but the effect on output depends on the relative sizes of impact
of the two events.
(H) Price will definitely fall, but the effect on output depends on the relative sizes of impact
of the two events.
(I) It is uncertain what impact these events will have on price or output in the vinyl record
market.
2
3.
There is a tax placed on the producers of vinyl records. At the same time, the price of CDs
falls. The effect will be:
(A) A rise in the equilibrium price and a fall in the equilibrium output.
(B) A rise in the equilibrium price and a rise in the equilibrium output.
(C) A fall in the equilibrium price and a fall in the equilibrium output.
(D) A fall in the equilibrium price and a rise in the equilibrium output.
(E) Output will definitely rise but the effect on price depends on the relative sizes of impact
of the two events.
(F) Output will definitely fall, but the effect on price depends on the relative sizes of impact
of the two events.
(G) Price will definitely rise but the effect on output depends on the relative sizes of impact
of the two events.
(H) Price will definitely fall, but the effect on output depends on the relative sizes of impact
of the two events.
(I) It is uncertain what impact these events will have on price or output in the vinyl record
market.
4.
An economy can produce two goods, X and Y. The equation of the Production Possibilities
Frontier for this economy is given by:
Y = 228 – 2X – 6X2, 0≤X≤6
When the economy is producing 4 units of X and 124 units of Y, what is the opportunity cost
of a small quantity of Y in the neighbourhood of this point?
(A) 0 units of Y per unit of X.
(B) 3 units of Y per unit of X.
(C) 6 units of Y per unit of X.
(D) 12 units of Y per unit of X.
(E) 14 units of Y per unit of X.
(F) 26 units of Y per unit of X.
(G) 38 units of Y per unit of X.
(H) 50 units of Y per unit of X.
(I) 62 units of Y per unit of X.
(J) 0 units of X per unit of Y.
(K) 1/3 units of X per unit of Y.
(L) 1/6 units of X per unit of Y.
(M) 1/12 units of X per unit of Y.
(N) 1/14 units of X per unit of Y.
(O) 1/38 units of X per unit of Y.
(P) 1/50 units of X per unit of Y.
(Q) None of the above.
3
5.
You are given the following short run production function for a firm producing “Dubya is not
a More-on” bumper stickers, where L = number of workers per day and Q = units of output
per day):
Q = 50L – 0.5L2
The firm is a perfect competitor. Assume labour costs $100.00 per day. At what price of
output will this firm decide to hire 40 workers?
(A) $0
(B) $1
(C) $2
(D) $3
(E) $4
(F) $5
(G) $6
(H) $7
(I) $8
(J) $9
(K) $10
(L) $11
(M) $12
(N) $13
(O) $14
(P) $15(Q) $16
(R) $17
(S) $18(T) $19
(U) $20
(V) $21
(W) $22
(X) $23
(Y) none of the above
6.
A monopolist is currently producing a quantity of output which puts him in the inelastic
section of the demand curve for his commodity. If he raises his price slightly, then in the
neighbourhood of the initial price, the effect will be as follows:
(A) total revenue will fall
(B) total revenue will rise
(C) total revenue will stay constant
(D) there will be a decrease in demand causing total revenue to fall
(E) there will be an increase in demand causing total revenue to rise
(F) it is not possible to tell what will happen from the information provided
7-9.
Gloria=s utility function for telephone calls can be represented by:
U = 128X – 0.08X2 0<=X<=800
where X is measured in minutes of local telephone calls per month and U is measured in
dollars. Questions 7 through 9 refer to this consumer.
7.
If the price of local telephone calls is $8.00 per minute, what is the total number of minutes
per month that Gloria will purchase?
(A) 8
(B) 16
(C) 60
(D) 64
(E) 120
(F) 240
(G) 250
(H) 256
(I) 300
(J) 512
(K) 750
(L) 1024
(M) 1200
(N) 1500
(O) none of the above
8.
If the price of local telephone calls is $8.00 per minute, what will the dollar value of
consumer surplus per month be for Gloria?
(A) $75
(B) $750
(C) $7,500 (D) $10,000 (E) $12,500 (F) $22,500
(G) $25,000 (H) $30,000 (I) $40,000
(J) $45,000 (K) $51,000 (L) $65,000
(M) $75,000 (N) $90,000 (O) none of the above
4
5
9.
Imagine the telephone company is trying to attract customers. It offers Gloria a choice of
(i) paying $4.00 per minute for each local call, or (ii) paying a flat fee of $3,100 for local
telephone calls per month and making as many calls as she wants for that fee. Gloria will:
(A) pay the flat fee of $3,100 per month
(B) pay $4.00 per minute for the use of the phone
(C) be indifferent between Option (i) and Option (ii).
(D) prefer the original price of $8.00 per minute because the consumer surplus is larger
(E) wait around for Sprint to come up with a better offer (the Amost@ for the Aleast@)
(F) do none of the above.
10.
At the current level of output of a firm, we know that AC = P = MR = MC > AVC >0. What
we can say about the AC and AVC curves at the current level of output is that:
(A) AC is rising and AVC is rising
(B) AC is falling and AVC is falling
(C) AC is at its minimum and so is AVC
(D) AC is rising and AVC is falling
(E) AC is falling and AVC is rising
(F) AC is at its minimum and AVC is rising.
(G) AC is rising and AVC is at its minimum.
(H) AC is at its minimum and AVC is falling
(I) AC is falling and AVC is at its minimum
(J) none of the above.
11.
If the marginal cost of production = 0, and the demand curve for the output of the industry is
linear, an unregulated monopoly producing a positive quantity of output will:
(A) produce where the elasticity of demand is equal to one.
(B) only produce in the inelastic region of the demand curve.
(C) only produce in the elastic region of the demand curve.
(D) produce in the elastic region of the demand curve only if the supply curve is linear.
(E) produce in the inelastic region of the demand curve only if the supply curve is linear.
12-14. A firm producing square widgets has a short-run total cost function as follows:
TC = 432 + 12q + 3q2,
for q≥3.
Fixed costs for this firm are $240. The Asquare widget@ industry is a constant cost industry,
composed of a number of identical firms. For all firms, the short-run total cost function and
the long-run total cost function have exactly the same minimum point. Answer questions 12
through 14 using this information
12. What is the long-run equilibrium price for this firm?
(A) $0
(B) $1
(C) $2
(D) $3
(E) $4
(F) $5
(G) $6
(H) $7
(I) $8
(J) $9
(K) $10
(L) $11
(M) $12
(N) $20
(O) $24
(P) $35(Q) $36
(R) $60
(S) $68 (T) $79
(U) $84
(V) $92
(W) $98
(X) $102
(Y) none of the above
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13. At which price will the firm just be indifferent between continuing in operation and shutting
down in the short run?
(A) $0
(B) $1
(C) $2
(D) $3
(E) $4
(F) $5
(G) $6
(H) $7
(I) $8
(J) $9
(K) $10
(L) $11
(M) $12
(N) $20
(O) $24
(P) $35(Q) $36
(R) $60
(S) $68(T) $79
(U) $84
(V) $92
(W) $98
(X) $102
(Y) none of the above
14. If the price of this perfectly competitive firm=s output is $156, how much profit will it earn in
the short run?
(A) $0
(B) $123
(C) $246
(D) $378
(E) $446
(F) $569
(G) $624
(H) $748
(I) $864
(J) $960
(K) $1002
(L) $1146
(M) $1296
(N) $1342
(O) $1468
(P) $1592
(Q) $1626
(R) $1756
(S) $1848
(T) $1929
(U) $2000
(V) $2148
(W) $2231
(X) $2390
(Y) none of the above
15-16. Canada and Mexico can each produce either wheat or cloth or a combination of the two
products. Assume there are no other countries, and no other products. Labour is the only
resource used in production. Canada has 100 workers available. Each worker can produce 1
unit of wheat, or 4 units of cloth. Mexico has 1000 workers. One unit of wheat production
in Mexico requires 4 workers, while one unit of cloth production requires 2 workers. Perfect
competition prevails, and transport costs are zero. Questions 15 and 16 are based on this
situation.
15. In this situation, we can conclude that Mexico:
(A) has a comparative advantage in cloth and an absolute advantage in wheat.
(B) has neither a comparative nor an absolute advantage.
(C) has a comparative advantage in wheat and an absolute advantage in cloth.
(D) has a comparative advantage in wheat and an absolute advantage in both cloth and wheat.
(E) has a comparative and absolute advantage in wheat.
(F) has a comparative and absolute advantage in cloth.
(G) has a comparative advantage in both cloth and wheat and an absolute advantage in both
cloth and wheat.
(H) has an absolute advantage in both cloth and wheat, but no comparative advantage.
(I) has a comparative advantage in cloth and an absolute advantage in both cloth and wheat.
(J) has a comparative advantage in wheat and an absolute advantage in nothing.
(K) has a comparative advantage in cloth and an absolute advantage in nothing.
(L) none of the above.
7
16.
In trade equilibrium, if both Canada and Mexico gain from trade, then (from among the
following alternatives) the world relative price ratio PW/PC (or equivalently, the number of
units of cloth that must be given up in exchange for one unit of wheat) must be:
(A) 0.25
(B) 0.4
(C) 0.5
(D) 0.6
(E) 0.75
(F) 1.0
(G) 1.25
(H) 1.6
(I) 2.4
(J) 4.0
(K) 5.6
(L) 6.0
(M) 8.0
(N) 9.6
(O) 10
(P) none of the above.
17-20. The demand for and supply of drumsticks is given by the following equations:
Demand:
P = 100 - 0.1Q
Supply:
P = 40 + 0.05Q
where P is the price in dollars and Q is the quantity in units. Questions 17 through 20 refer to
this market for drumsticks
17.
The elasticity of supply and the elasticity of demand (measured at the equilibrium point) are:
(A) ES = 0.05, ED = 0.1
(B) ES = 0.33, ED = 0.67
(C) ES = 0.67, ED = 0.33
(D) ES = 0.67, ED = 1.33
(E) ES = 0.75, ED = 1.5
(F) ES = 1.0, ED = 0.5
(G) ES = 1.0, ED = 1.5
(H) ES = 1.0, ED = 2.0
(I) ES = 1.5, ED = .75
(J) ES = 1.5, ED = 3.0
(K) ES = 2.0, ED = 1.0
(L) ES = 3.0, ED = 1.5
(M) ES = 3.0, ED = 6.0
(N) ES = 8.0, ED = 10.0
(O) none of the above
18.
Suppose that a $12 per unit tax is placed on buyers. The proportion of the $12 tax borne by
sellers will be:
(A)
1/2
(B)
1/3
(C)
1/4
(D)
1/5
(E)
1/6
(F)
1/8
(G)
1/9
(H)
1/10 (I)
1/11 (J)
1/12 (K)
all
(L)
2/3
(M) 3/4
(N)
7/8
(O)
3/5
(P)
5/6
(Q)
7/1
(R)
1/24
(S) none of the above
19.
Total tax revenue raised will be:
(A) $480
(B) $960
(C) $1200
(G) $2060
(H) $2100
(I) $2400
(M) $5160
(N) $5400
(O) $6000
(D) $1500
(J) $3840
(P) $6480
8
(E) $1800
(K) $4260
(Q) $6600
(F) $1872
(L) $4800
(R) $7200
(S) $8400
20.
(T) $9600
(U) $10000
The excess burden of the tax will be:
(A) $480
(B) $960
(E) $1800
(F) $1872
(I) $2400
(J) $4000
(M) $5160
(N) $5400
(Q) $6600
(R) $7200
(U) $10000
(V) $11020
(V) $11020
(W) none of the above
(C) $1200
(D) $1500
(G) $2060
(H) $2100
(K) $4260
(L) $4800
(O) $6000
(P) $6480
(S) $8400
(T) $9600
(W) none of the above
21-25. A single commercial firm owns a bridge across Lake Ontario, joining Toronto and St.
Catharines, Ontario. The fixed cost of the bridge is $3600 per day and the average variable
costs are $1.00 per trip. The demand for trips each day is given by the following equation:
P = 93 – 0.05Q,
where Q is the number of trips each day and P is the price of a trip measured in dollars.
Questions 21-25 are based on this information.
21.
If the firm acts as an unregulated monopolist, the price charged per trip will be:
(A) $0
(B) $1
(C) $2
(D) $3
(E) $4
(F) $5
(G) $6
(H) $7
(I) $8
(J) $9
(K) $10
(L) $14
(M) $22
(N) $33
(O) $44
(P) $47(Q) $49
(R) $51
(S) $67(T) $89
(U) $200
(V) $600
(W) $900
(X) $3600
(Y) none of the above
22.
If the government decides to regulate this monopolist and compel it to charge a price at
which profit will be zero, then the lowest price that can be charged will be:
(A) $0
(B) $1
(C) $2
(D) $3
(E) $4
(F) $5
(G) $6
(H) $7
(I) $8
(J) $9
(K) $10
(L) $11
(M) $12
(N) $13
(O) $14
(P) $15(Q) $16
(R) $17
(S) $18(T) $19
(U) $20
(V) $21
(W) $22
(X) $23
(Y) none of the above
23.
Assuming that the regulation is successful, the total gain to society (and the total social net
benefit) will rise relative to the unregulated monopoly position by a certain amount. That
amount (the extra gain to society or the extra total social net benefit) is:
(A) $10,560
(B) $12,240
(C) $17,520
(D) $21,040
(E) $21,120
(F) $22,360
(G) $24,720
(H) $38,720
(I) $42,320
(J) $48,780
(K) $58,970
(L) $63,480
(M) $77,400
(N) $81,000
(O) $82,840
(P) $86,490
(Q) none of the above
9
24.
From the point of view of society the most efficient price to charge is (ignore the possible
excess burden of taxation in your answer):
(A) $0
(B) $1
(C) $2
(D) $3
(E) $4
(F) $5
(G) $6
(H) $7
(I) $8
(J) $9
(K) $10
(L) $11
(M) $12
(N) $13
(O) $14
(P) $15(Q) $16
(R) $17
(S) $18(T) $19
(U) $20
(V) $21
(W) $22
(X) $23
(Y) none of the above
25.
Beyond a certain amount, the fixed costs of the bridge might be so high that it makes no
sense to build the bridge. Assume that average variable cost remains at $1.00 per trip. Then
the maximum daily fixed cost of the bridge at which it will still make sense for the bridge to
be built (in order to serve the public interest) will be:
(A) $10,560
(B) $12,240
(C) $17,520
(D) $21,040
(E) $21,120
(F) $22,360
(G) $24,720
(H) $38,720
(I) $42,320
(J) $48,780
(K) $58,970
(L) $63,480
(M) $77,400
(N) $81,000
(O) $82,840
(P) $86,490
(Q) none of the above
26-28. The perfectly competitive “Ecological Air Freshener” industry produces air conditioners at a
constant cost of $120 per unit. Unfortunately, production of each unit generates 2 tonnes of
effluent. Reputable scientific studies have established that the marginal pollution cost of
effluent (alternatively known as the “marginal external cost”) is $30 per tonne. Market
demand for air conditioners is given by the function
P = 600 – 0.05Q,
where Q is in units per period and P is in $/unit. Questions 26-28 deal with this situation.
26.
The equilibrium number of units sold each period in the competitive market will be:
(A) 60
(B) 120
(C) 180
(D) 600
(E) 1200
(F) 2400
(G) 3000
(H) 6000
(I) 7200
(J) 8400
(K) 9000
(L) 9600
(M) 10,800 (N) 11,820
(O) 11,880
(P) 12,000
(Q) none of the above.
27.
The socially optimal number of air conditioners sold per period is:
(A) 60
(B) 120
(C) 180
(D) 600
(E) 1200
(F) 2400
(G) 3000
(H) 6000
(I) 7200
(J) 8400
(K) 9000
(L) 9600
(M) 10,800 (N) 11,820
(O) 11,880
(P) 12,000
(Q) none of the above.
10
28.
If the government restricts output and sales to the socially optimal level by the use of a
pollution tax or by some other means (all of which means are assumed to be costless to
administer), then the increase in the total welfare of society (measured in dollars per period)
relative to the competitive market solution will be:
(A) $30
(B) $60
(C) $120
(D) $180
(E) $480
(F) $7200
(G) $8400
(H) $9000
(I) $18,000
(J) $36,000
(K) $54,000
(L) $72,000
(M) $504,000
(N) $1,764,000
(O) $2,025,000
(P) $2,268,000
(Q) none of the above
29.
Over a given range of prices, the own-price elasticity of demand for Moron Flakes, a
President’s Choice product, is a constant 1.5. Therefore, in this range, to the nearest
percentage point, a 2 percent increase in price will cause:
(A) a 3 % decrease in quantity demanded (Q) and a 1 % decrease in Total Revenue (TR)
(B) a 2 % decrease in Q and a 3 % decrease in TR
(C) a 1 % decrease in Q and a 1.5 % decrease in TR
(D) a 2/3 % decrease in Q and a 4/3 % decrease in TR
(E) a 3 % increase in Q and a 4.5 % decrease in TR
(F) a 2 % increase in Q and a 4 % decrease in TR
(G) a 1 % increase in Q and a 3 % decrease in TR
(H) a 2/3 % increase in Q and a 10/3 % decrease in TR
(I) a 3 % decrease in Q and a 1 % increase in TR)
(J) a 2 % decrease in Q and a 3 % increase in TR
(K) a 1 % decrease in Q and a 1.5 % increase in TR
(L) a 2/3 % decrease in Q and a 4/3 % increase in TR
(M) a 3 % increase in Q and a 4.5 % increase in TR
(N) a 2 % increase in Q and a 4 % increase in TR
(O) a 1 % increase in Q and a 3 % increase in TR
(P) a 2/3 % increase in Q and a 10/3 % increase in TR
30.
Each of the identical firms in the perfectly competitive toy soldier industry has a short run
marginal cost curve with the following form:
MC = 10 + 3q,
where q is the output of each firm in soldiers and MC is in $/soldier. The market demand
curve for toy soldiers is given by the equation
P = 100 – 0.1Q.
If the short run equilibrium price in the market is $70 per soldier, then the number of firms in
the industry at this time is:
(A) 0
(B) 1
(C) 2
(D) 5
(E) 7
(F) 10
(G) 15
(H) 20
(I) 25
(J) 30
(K) 40
(L) 70
(M) 300
(N) impossible to determine unless we know each firm’s shutdown point.
11
PART II - SHORT ANSWER PROBLEMS (total of 25 marks)
31. (9 marks) There are two labelled graphs below. The first shows the situation of one of a
number of identical firms in an industry, the other shows the situation of the perfectly competitive
industry as a whole. The industry shown is a constant cost industry, which is initially in short run
and long run equilibrium. On both graphs, show the effects of a decrease in market demand, as
follows.
(a) On the diagram for the industry, show the new short-run equilibrium market price (P1) and
quantity exchanged (Q1).
(b) On the diagram for the firm, show the new short-run market price (P1) and the new short-run
quantity produced (q1). Show (by shading in the appropriate area) the amount of profit/loss now
earned by the firm in the short run.
(c) Show any changes in the firm’s cost curves in the short run.
(d) Show the new long run industry output (Q2) and the output of each firm in the industry (q2).
MC
SSR
AC
Po
SLR
Po
qo
Qo
Firm
Industry
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32. (7 marks) The diagram below shows the situation faced by a natural monopoly producer. Draw
on the diagram any additional lines you need and label them. (a) Show the quantity that the
unregulated monopoly producer will produce (QM) and its selling price (PM). (b) Show (by shading
in) the profit that will be earned by the unregulated monopoly producer. (c) Show (using diagonal
lines) the consumer surplus available under unregulated natural monopoly. (d) Show the quantity that
would be produced (QMC) and the price (PMC) if the monopolist is regulated and compelled to follow
marginal cost pricing. (e) Show the quantity that would be produced (QAC) and the price (PAC) under
“average cost” (or “zero economic profit”) pricing.
P
AC
MC
D
0
Q
13
33.(9 marks) The diagram below shows the demand and supply for widgets in southern Ontario. Now,
the government decides to levy a unit tax (or flat-rate excise tax) on sellers of widgets. (a) Label the initial
equilibrium price (P0) and quantity exchanged (Q0). (b) Show any shifts in curves that occur. (c) Show the
new price paid by buyers (PB) and received by sellers (PS) and the new quantity exchanged (QT) after the
tax. (d) Show on the diagram the buyers= share (BS) and sellers= share (SS) of the tax. (e) Show on the
diagram the amount of excess burden of the tax, by labelling it EB. (f) Show also (by shading it in on the
graph and labelling it TR) the amount of tax revenue raised. Label each of these changes clearly, for
marking purposes.
P
S
D
0
Q
14