Download Study guide for Nov. midterm and Exam

Economics 100.15
November 2003
QUESTIONS IN TEXT AND STUDY GUIDE WHICH ARE HELPFUL IN PREPARING FOR THE
SECOND FALL MID-TERM AND THE CHRISTMAS EXAM
I hope to cover through all of section I. C. 2. on the course syllabus by Christmas. We will get through
section I. C. 1. by the November midterm. I hope to reach section I. C. 2. b. by that midterm.
The Christmas examination will include this material and all topics covered for the October midterm.
The 2nd fall midterm will cover the material treated in class between the October midterm and Nov. 21st.
since this midterm is one week before the end of classes only a little information will be added after the
second fall midterm.
The number of questions on a topic is not a good guide to the importance of that topic.
1. Theatre Antigonish wishes to increase its revenues. It is contemplating raising its ticket price from
$11 to $13. The manager anticipates that the number of people attending will fall from 225 to 175
as a result of the change. What is the elasticity of demand for plays at Theatre Antigonish? Will the
increase in ticket price have the desired result?
2. Answer the following three questions:
i.
Bus travel in Nova Scotia is an inferior good. It's income elasticity is more likely to be +2,
+1, or -.5? (Circle one.)
ii.
If the long-run supply elasticity for a commodity is +1 is the Short-run supply elasticity more
likely to be +1.25 or +.5? (Circle one.)
3. Some people always mistrust government intervention in the market, while others always
mistrust profit maximising firms and urge the government to intervene in the market. Discuss the
circumstances in which resources will not be used efficiently when markets are completely
unregulated.
4.
Assume that the Nova Scotia Symphony is running a deficit and needs to increase its revenues.
They hire you as an economic advisor to determine whether they should increase or decrease
ticket prices. Explain how the concept of demand elasticity can help to determine the correct
action. Would knowing the price of theatre tickets help in determining the action to take?
(People who like the symphony tend to like theatre as well.) Why?
5. a. Draw the demand curve and the average and marginal cost curves of a firm which produces
lumber in a perfectly competitive industry, showing that the firm is earning a profit. Show the
profit maximising price and output and indicate the firm’s profits on the diagram. (You may omit
the AFC curve.)
b. Explain the changes which will occur in this industry and to this firm as the industry moves
into long-run equilibrium.
1
6. The government of Metropolis wishes to reduce the deficit of its transit company by increasing the
revenue from riders. Their economic advisor has calculated that if the fares are increased from $.90
to $1.10 the number of riders will fall from 12,000 to 8,000. Calculate the elasticity of demand.
How can Metropolis increase the revenue earned by its transit system? Explain your answer.
7. Suppose an economist makes the following statement: ‘An increase in the tax on tobacco will
reduce the amount of smoking. Such a tax increase will be beneficial to Canadians.’ Discuss the
parts of the statement which are positive and the parts which are normative. Explain why they are
different.
8. In Canada, milk production is regulated through milk marketing boards. Using the appropriate
diagram, show the impact the quotas imposed by such boards have on the equilibrium price and
quantity of milk produced. Use the concept of elasticity to explain why a milk marketing board
regulates the industry through quotas, but a pork marketing board might reject such a policy.
9. Assume the National Energy Board has set a goal of reducing oil consumption from 62 to 58
million barrels a year. Its economic advisors recommend raising the price per barrel from $28 to
$32 in order to achieve this goal. However the advisors state that if income rises sharply in Canada
the price rise would have to be larger to achieve the goal. Calculate the elasticity coefficient which
the economic advisors assume applies to the demand for oil and use the concept of income
elasticity of demand to explain why rising incomes would require a larger price increase to achieve
the goal of reduced oil consumption.
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10. The following table shows the costs of a firm in a perfectly competitive market.
OUTPUT
TOTAL COST
0
300
1
400
2
450
3
510
4
590
5
700
6
840
7
1020
a. Fixed costs of this firm are _____.
Minimum average variable costs of this firm are ______.
Diminishing marginal returns begin when output = _______.
b. Complete Table B using information from Table A to determine the profit maximising output.
TABLE B
Price
Output
Profit
(loss)
$50
_____
_____
80
_____
_____
140
_____
_____
11. Draw a diagram showing the cost and demand curves of a firm in a perfectly competitive industry
which is in long-run equilibrium. Explain the process which results in such an industry achieving
productive and allocative efficiency.
12. Complete the following table.
Labour
Output
Marginal
3
Average
0
0
Product
Product
1
10
____
____
2
22
____
____
3
30
____
____
4
36
____
____
5
40
____
____
____
____
a. Where do diminishing marginal returns begin?
b. Discuss the implications of the law of diminishing marginal returns for the limits to the growth of
production in the world as a whole.
13. a. Complete the following table of the costs of a curve in a perfectly competitive industry:
OUTPUT TOTAL COST
0
25
10
55
20
75
30
85
40
105
50
135
60
175
70
225
MC
ATC
AVC
80
285
b. Fixed costs of this firm are ________.
c. Complete the following table showing the profit maximising output at each price:
price output profit (loss)
$1.50
$2.50
$3.00
$4.00
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d. The price at which this firm will shut down is __________.
e. In long-run industry equilibrium, the price in this industry will be _______ output will be _______
and profits will be ______.
14. Draw the short-run average cost curves of a firm in a perfectly competitive industry. Explain how the
firm determines its profit maximising output. What is the supply curve of a firm in a perfectly
competitive industry? Explain your answer.
TYPES OF TRADE QUESTIONS WHICH MAY BE ON THE CHRISTMAS EXAMINATION.
(Trade will NOT be on the November midterm.)
1. In the last several decades, nations have agreed to substantial reductions in tariff
barriers. Some nations are very productive, and can produce large quantities of outputs
from their labour, capital and land. Other nations are much less productive, and
produce smaller quantities of outputs from their labour, capital and land. Can both
more productive and less productive nations benefit from free trade? Explain your
answer.
2. Assume that in Thailand more land, labour and capital are required to produce all
commodities than in Canada. Can both Thailand and Canada benefit from trading with
each other? Explain your answer.
3. Use the following table in your answer to this questions. Assume that Pictou and
Antigonish are the only trading partners in a world where only two goods are
produced. Explain which goods each will export and which goods each will export.
Calculate the maximum and the minimum rates of exchange between corn and
soybeans. Explain how both partners can benefit from trade.
Antigonish
Corn
Pictou
soybeans corn soybeans
bu.
bu.
bu.
bu.
0
100
0
125
25
80
10
100
50
60
20
75
75
40
30
50
100
20
40
25
125
0
50
0
5