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University of Toronto Department of Economics

ECO100: Introductory Economics Robert Gazzale, PhD

Term Test 1: Form Code: A: 2013–2014 Solutions: Full While you wait for the exam to start, please fill in the information below and complete the FRONT and BACK of the Scantron form. DO NOT OPEN THIS TEST BOOKLET UNTIL INSTRUCTED.

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General Instructions

1. 100 minutes. 100 points. Allocate your time wisely!

2. Aids allowed: a simple (i.e., non-graphing, non-programmable) calculator.

3. Non-Multiple Choice questions: write answers in pen in this test booklet. Scantron Instructions

Answer MULTIPLE CHOICE questions on supplied Scantron sheet (bubble form).

Fill in all information on both sides of the form.

Your Form Code is A.

Pencil recommended for Scantron. Black or blue ink can be used, but not erased!

Each Multiple Choice question is worth 3 marks. No deductions for incorrect answers.

Multiple choice marks are based entirely on the Scantron. Any writing in this test booklet will not be considered.

Please Do Not Write in this Space

Part

I

/ 51 Marks

Page

10.

/ 10 Marks

Page

8.

/ 10 Marks

Page

11.

/ 12 Marks

Page

9.

/ 10 Marks

Page

12.

/ 7 Marks

 

Total

/100 Marks

University of Toronto Department of Economics

ECO100: Introductory Economics Robert Gazzale, PhD

TEST VERSION A

I. [51 Marks] Multiple Choice Questions: Indicate answer on Scantron.

1. [3 Marks] Each of the following graphs depicts the demand curves for two consumers. Which graph correctly depicts the market demand curve for a market consisting only of these consumers? (There is no choice e!)

consisting only of these consumers? (There is no choice e!) (a) (c) (b) (d) 2. [3

(a)

only of these consumers? (There is no choice e!) (a) (c) (b) (d) 2. [3 Marks]

(c)

only of these consumers? (There is no choice e!) (a) (c) (b) (d) 2. [3 Marks]

(b)

only of these consumers? (There is no choice e!) (a) (c) (b) (d) 2. [3 Marks]

(d)

2. [3 Marks] Table 1 gives total costs as a function of Quantity produced. At which per-unit price do you produce exactly three units?

 

Total

Quantity

Cost

1

$15

2

$27

3

$41

4

$57

5

$75

Table 1: Total cost as a function of quantity produced.

20131028A

2

Term Test 1: Solutions: Full

University of Toronto Department of Economics

ECO100: Introductory Economics Robert Gazzale, PhD

A. $13.50 per unit

B. $14.50 per unit

C. $16.50 per unit

D. $41.50 per unit

E. It is never rational to produce exactly three units.

3. [3 Marks] In April, you paid $50 for a September Jays game. Now that the game is here you realize: 1) you will have to pay $5 for transportation to the game; 2) Fairooz is willing to pay you $15 for the ticket; and 3) if you do not go to the game you can work and make $25. Which of the following is true?

A. Because you purchased the ticket, you will go to the game.

B. You only go to the game if you believe you will get $50 or more in enjoyment value.

C. You only go to the game if you believe you will get $45 or more in enjoyment value.

D. You only go to the game if you believe you will get $40 or more in enjoyment value.

E. You only go to the game if you believe you will get $5 or more in enjoyment value.

4. [3 Marks] A plumber spends all of his time either unclogging toilets or installing faucets. What is the effect of purchasing a machine that reduces the time required to unclog each

toilet?

A. Opportunity cost of toilet unclogging: increases; Opportunity cost of faucet instal- lation: no change.

B. Opportunity cost of toilet unclogging: decreases; Opportunity cost of faucet instal- lation: no change.

C. Opportunity cost of toilet unclogging: increases; Opportunity cost of faucet instal- lation: decreases.

D. Opportunity cost of toilet unclogging: decreases; Opportunity cost of faucet instal- lation: decreases.

E. None of the above.

5. [3 Marks] It takes Marco 20 minutes to fold a load of laundry and 2 minutes to change

a diaper. It takes Ragan 30 minutes to fold a load of laundry and 4 minutes to change

a diaper.

A. Marco has both an absolute and a comparative advantage in both chores.

B. Ragan does not have a comparative advantage in either chore.

University of Toronto Department of Economics

ECO100: Introductory Economics Robert Gazzale, PhD

C. Ragan has a comparative advantage in folding laundry.

D. Ragan has a comparative advantage in changing diapers.

E. In order to figure out who has the comparative advantage, we need to know how often diapers need to be changed relative to the number of loads of laundry.

6. [3 Marks] Consider an economy with three producers, each of whom can produce either wine or cheese. Each faces a constant opportunity cost of producing a unit of wine: 1 unit of cheese for producer 1; 2 cheeses for producer 2 and 3 cheeses for producer 3. If current production is efficient with 2 producers specializing in wine, what is the opportunity cost of an extra unit of wine?

A. 3 units of cheese.

B. 2 units of cheese.

C. 1 unit of cheese.

D. Unable to determine with information given.

E. None of the above.

7. [3 Marks] We both currently consume both lines of code and pages of documentation. In one hour, you can write 20 lines of computer code or write 4 pages of documentation. The proposed trade: you give me 3 lines of code for each page of documentation I give you. In which case will the proposed trade makes us both better off?

A. In one hour, I can write 10 lines of computer code or write 2 pages of documentation.

B. In one hour, I can write 80 lines of computer code or write 8 pages of documentation.

C. In one hour, I can write 12 lines of computer code or write 6 pages of documentation.

D. In one hour, I can write 40 lines of computer code or write 10 pages of documentation.

E. In one hour, I can write 30 lines of computer code or write 4 pages of documentation.

.

8. [3 Marks] Assume all supply and demand curves have the usual slopes, and those with a management PhD can either teach at a business school or work in banking. If banks increase their demand for management PhDs , what will be the effect on the supply curve (of workers with a management PhD) facing business schools?

A. The supply curve will shift up and to the right.

B. The supply curve will shift up and to the left.

C. The supply curve will shift down and to the left.

D. The supply curve will not shift.

E. None of the above.

University of Toronto Department of Economics

ECO100: Introductory Economics Robert Gazzale, PhD

9. [3 Marks] Assume that over the past year, there has been an increase in the price of tea and an increase in the cost of labour in coffee-producing countries. Assuming coffee and tea are substitutes, what will be the effect of these changes in the coffee market?

A. An increase in the equilibrium price and quantity.

B. An increase in the equilibrium price, but a decrease in the equilibrium quantity.

C. An increase in the equilibrium price, but the equilibrium quantity could either in- crease or decrease.

D. An increase in the equilibrium quantity, but the equilibrium price could either in- crease or decrease.

E. None of the above.

10. [3 Marks] Supply is given by Q s = 3 + P and demand by Q d = 15 P . Which of the following is true if the market is perfectly competitive?

3

A. {P = 5, Q s = 8} is an equilibrium.

B. {P = 9, Q s = 12} is an equilibrium.

C. {P = 12, Q d = 11} is an equilibrium.

D. A, B and C are all true.

E. None of the above are true.

11. [3 Marks] According to Jan’s plan, she will spend all of her income, purchasing 20 units of X and 30 units of Y . She notes that the 20th unit of X gives her 200 units of utility, whereas the 30th unit of Y gives her 300 units of utility. What should Jan do to maximize utility?

A. Jan should purchase more than 20 units of X and fewer than 30 units than Y .

B. Jan should purchase fewer than 20 units of X and more than 30 units than Y .

C. Jan should purchase 20 units of X and 30 units of Y .

D. We have insufficient information to answer this question.

E. None of the above.

12. [3 Marks] You rationally adjusted your purchases in response to a change in either prices or income. As a result of your adjustment, the marginal utility from your last unit of X increased while the marginal utility from your last unit of Y decreased. Under standard assumptions about marginal utility, which of the following could have caused this?

University of Toronto Department of Economics

ECO100: Introductory Economics Robert Gazzale, PhD

A. An increase in the price of X when X and Y are complements.

B. An increase in the price of X when X and Y are substitutes.

C. An increase in the price of Y when X and Y are substitutes.

D. An increase in the price of Y and a decrease in the price of X.

E. An increase in income when X is normal and Y is inferior.

13. [3 Marks] Assume a (permanent) 5% increase in the price of X. Which of the following is not true?

A. Quantity demanded of X will likely be higher in 1 year than in 5 years.

B. We will see a larger reduction in the equilibrium quantity of X if close substitutes to X also increase in price.

C. We will see an increase in the in the equilibrium quantity of X if it is a Giffen good.

D. Total expenditures on X will increase if X is inelastically demanded.

E. A subsequent 8% reduction in the equilibrium quantity of X would mean that it is elastically demanded.

14. [3 Marks] Income elasticity of beer has been estimated at -0.1. Currently, income is 50 and quantity demanded is 100 units. Assuming no changes in prices, what will be the quantity demand if income increases to 52?

A. 96.

B. 98.

C. 102.

D. 104.

E. None of the above.

=

15. [3 Marks] Assume i) labour is the only variable factor of production; ii) you can buy as much labour as you want at $10 per hour; and iii) the market for your output is perfectly competitive. At P 0 , your firm produces Q 0 and makes an economic profit. Which of the following is the result of short-run profit maximization if the price of your output decreases?

A. Production increases and the average product of labour decreases.

B. Production increases and the average product of labour has increased.

C. Production increases and the average product of labour has not changed.

D. Production decreases and the average product of labour has decreased.

E. Production decreases and the average product of labour has increased.

University of Toronto Department of Economics

ECO100: Introductory Economics Robert Gazzale, PhD

16. [3 Marks] Consider a farm. In each of the following situations, assume labour and seeds can be varied while the tractor and the amount of land is fixed. Which of the following can explain situation 2 having higher variable costs of producing 100 units than situation 1, but a lower total cost of producing 100 units.

A. Situation 2 has more productive, but more expensive, seeds.

B. Situation 2 has more productive and less expensive seeds.

C. Situation 2 has a less productive, but less expensive tractor.

D. Situation 2 has a more productive and more expensive tractor.

E. Situation 2 has an increase in the tax that you pay for your land.

17. [3 Marks] Assume no change in the LRATC. 1 All firms in a perfectly competitive market have access to the same technology and input prices. Production entails a $1000 per period fixed cost. A firm sells 1000 units a price of $10, incurring an average of $8 per unit in variable costs.

A. The firm must increase output to increase short-run profits.

B. The firm must decrease output to increase short-run profits.

C. Assuming this firm is maximizing short run profits, it will produce less in future periods as the market price will decrease in the long run.

D. Assuming this firm is maximizing short run profits, it will produce more in future periods as the market price will increase in the long run.

E. Assuming this firm is maximizing short run profits, it will continue to produce 1000 units in the long run.

1 Long-Run Average Total Cost curve.

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] Valentine’s Day is a holiday where lovers give each other gifts, including flowers. Each year, the holiday brings large increases in both the price of roses and the quantity transacted. TFU: Roses therefore violate the law of demand.

(2) [5 Marks] Assume rationality as defined by an economist. Bart’s demand is given by

If both face the

Q b (P ) = 20 P , whereas Homer’s is given by Q h (P ) = 10 P . TFU:

same prices, then Bart values his last cup more than Homer values his last cup.

(3) [5 Marks] Assume diminishing marginal benefit. Ezekiel entered, and won, a drawing for free lifetime violin lessons. He wants to improve his playing, and the 968th lesson will definitely improve his playing. TFU: He should take at least 968 lessons.

(4) [5 Marks] You just purchased a food truck for $20,000. If you hire someone to operate the truck for one year, you will incur $75,000 in expenses and bring in $85,000 in revenues without requiring any of your time. TFU: You should open a food business using your truck.

III. [29 Marks] Short answer.

(1) [5 Marks] You go to Java Bob in order to purchase one scone and some coffee. Coffee is $2.00 for the first cup, and $1.00 for each additional cup. A scone costs normally costs $3.00, but costs only $2.50 if you purchase 2 or more cups of coffee. In the following table, indicate the marginal cost of acquiring each cup of coffee.

Cups of

Marginal

Coffee

Cost

1

 

2

 

3

 

University of Toronto Department of Economics

ECO100: Introductory Economics Robert Gazzale, PhD

Cups of

Marginal

Coffee

Cost

1 $2.00

 

2 $0.50

 

3 $1.00

 

Figure 1: Solution.

(2) [5 Marks] Briefly explain why it is reasonable to assume a particular wheat farmer faces perfectly (infinitely) elastic demand even though the market quantity of wheat demanded increases as the price decreases.

(3) [6 Marks] Demand is given by P (Q) = MW T P (Q) = 100 Q . What price maximizes total expenditures on this product?

4

Second, we could set elasticity equal to 1 and solve.

(4) [6 Marks] Each of the 10 firms in a perfectly competitive market has marginal cost given by MC(q i ) = 15 + q i . What is the market supply function (market quantity as a function of market price)?

2

(5) [7 Marks] Assume that the technology/firm size that minimizes the LRAT C curve gives

and marginal cost as

MC(q i ) = 15 + q i . Assuming a perfectly competitive market where all firms have access

TOTAL cost as a function of quantity as T C(q i ) = 100 + 15q i + q

i

4

2

2

to these cost functions, what is the long-run equilibrium price?

University of Toronto Department of Economics

ECO100: Introductory Economics Robert Gazzale, PhD