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					           ECONOMICS A02Y            Xmas Test: December 15, 2000         QUESTIONS

PART I - MULTIPLE CHOICE (2 marks each, for 46 marks)
1- 3 The perfectly competitive market for cable TV is in equilibrium, and its demand and supply
        schedules have the usual shapes (positively sloped supply and negatively sloped demand).
        Cable TV is a normal good. A satellite dish is a good substitute for cable TV as far as
        consumers are concerned. Video tapes are a complement in consumption to cable TV.
        Internet services (offered on cable) are a substitute in production for the producers of cable
        TV. Questions 1 to 3 refer to the effects of various events on the market for cable TV; each
        question should be taken as separate.
1. Suppose that, as the population ages, cable television becomes more popular. At the same
    time, the cost of providing cable TV services increases. What happens to equilibrium
    market price and quantity?
    (A) equilibrium price and quantity will both fall
    (B) equilibrium price will fall and equilibrium quantity will rise
    (C) equilibrium price will rise and equilibrium quantity will fall
    (D) equilibrium price and quantity will both rise
    (E) equilibrium price will rise but equilibrium quantity may rise or fall depending on
       the relative size of shifts of supply and demand
    (F) equilibrium price will fall but equilibrium quantity may rise or fall depending on the
        relative size of shifts of supply and demand
    (G) equilibrium quantity will rise but equilibrium price may rise or fall depending on
        the relative size of shifts of supply and demand
    (H) equilibrium quantity will fall but equilibrium price may rise or fall depending on
        the relative size of shifts of supply and demand
    (I) we have insufficient information to determine the effect on price or quantity

2.    A big tax increase by the finance minister decreases the effective amount of consumer
     incomes. At the same time, there is an increased demand for internet services. What
     happens to equilibrium price and quantity of cable TV?
     (A) equilibrium price and quantity will both fall
     (B) equilibrium price will fall and equilibrium quantity will rise
     (C) equilibrium price will rise and equilibrium quantity will fall
     (D) equilibrium price and quantity will both rise
     (E) equilibrium price will rise but equilibrium quantity may rise or fall depending on
        the relative size of shifts of supply and demand
     (F) equilibrium price will fall but equilibrium quantity may rise or fall depending on the
         relative size of shifts of supply and demand
     (G) equilibrium quantity will rise but equilibrium price may rise or fall depending on
         the relative size of shifts of supply and demand
     (H) equilibrium quantity will fall but equilibrium price may rise or fall depending on
         the relative size of shifts of supply and demand
     (I) no change in either equilibrium price or equilibrium quantity


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     (J) we have insufficient information to determine the effect on price or quantity

3.    There is an increase in the price of satellite dishes and a decrease in the price of video tapes
     at the same time. What is the effect on the equilibrium price and quantity of cable TV?
     (A) equilibrium price and quantity will both fall
     (B) equilibrium price will fall and equilibrium quantity will rise
     (C) equilibrium price will rise and equilibrium quantity will fall
     (D) equilibrium price and quantity will both rise
     (E) equilibrium price will rise but equilibrium quantity may rise or fall depending on
        the relative size of shifts of supply and demand
     (F) equilibrium price will fall but equilibrium quantity may rise or fall depending on the
         relative size of shifts of supply and demand
     (G) equilibrium quantity will rise but equilibrium price may rise or fall depending on
         the relative size of shifts of supply and demand
     (H) equilibrium quantity will fall but equilibrium price may rise or fall depending on
         the relative size of shifts of supply and demand
     (I) no change in either equilibrium price or equilibrium quantity
     (J) we have insufficient information to determine the effect on price or quantity



4.      A monopolist is currently producing a quantity of output which puts him in the inelastic
        section of the demand curve for his commodity. He decides to lower the price of his
        product. What will happen to total expenditures by consumers on the monopolist’s product?
        (A) total expenditures will fall
        (B) total expenditures will rise
        (C) total expenditures will stay constant
        (D) there will be a downward shift in demand causing total expenditures to fall
        (E) there will be a decrease in quantity demanded, but it is not possible to determine what
        will happen to total expenditures from the information provided.
        (F) it is not possible to tell what will happen from the information provided




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5.     An economy can produce two goods, X and Y. The equation of the Production Possibilities
       Frontier for this economy is given by:
                                     Y = 512 – X3, 0<=X<=8
       When the economy is producing 7 units of X and 169 units of Y, what is the opportunity cost
       of Y?
       (A) 0 units of Y per unit of X.
       (B) 1 units of Y per unit of X.
       (C) 8 units of Y per unit of X.
       (D) 12 units of Y per unit of X.
       (E) 27 units of Y per unit of X.
       (F) 48 units of Y per unit of X.
       (G) 75 units of Y per unit of X.
       (H) 108 units of Y per unit of X.
       (I) 147 units of Y per unit of X.
       (J) 0 units of X per unit of Y.
       (K) 1/8 units of X per unit of Y.
       (L) 1/12 units of X per unit of Y.
       (M) 1/27 units of X per unit of Y.
       (N) 1/48 units of X per unit of Y.
       (O) 1/75 units of X per unit of Y.
       (P) 1/108 units of X per unit of Y.
       (Q) 1/147 units of X per unit of Y.
       (R ) 1/192 units of X per unit of Y.
       (S) None of the above.


6-9.   The demand and supply of digeridoos is given by:
                      Demand:          P = 100 - 0.02Q
                      Supply:          P = 60 + 0.06Q
       where P is the price in dollars and Q is the quantity in units. Questions 6 through 9 refer to
       this market for digeridoos

6.     Assume the market for digeridoos is in equilibrium. Now, if there is a 1% drop in the price
       of digeridoos, approximately what percentage change in the quantity supplied do we expect
       to see?:
       (A) -10%        (B) -9%      (C) -8%         (D) -7%       (E) -6%         (F) -5%
       (G) -4%         (H) -3%     (I) -2%         (J) -1%       (K) 0%          (L) +1%
       (M) +2%         (N) +3%      (O) +4%         (P) +5%       (Q) +6%         (R) +7%
       (S) +8%         (T) +9%      (U) +10%        (V) none of the above




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7.    Go back to the original equilibrium in the market for digeridoos described in Question 6.
      Now an excise tax of $18 per unit is placed on buyers. The amount of the $18 tax borne by
      buyers will be:
      (A) $0          (B) $0.50      (C) $1.00     (D) $1.50      (E) $2.00     (F) $2.50
      (G) $3.00       (H) $3.50      (I) $4.00     (J) $4.50     (K) $5.00     (L) $5.50
      (M) $6.00       (N) none of the above

8.    Total tax revenue raised will be:
       (A) $675               (B) $900             (C) $1200             (D) $1500
       (E) $1750              (F) $1875            (G) $2000             (H) $2100
       (I) $2400              (J) $2500            (K) $2550             (L) $2750
       (M) $3000              (N) $3500            (O) $3550             (P) $3750
       (Q) $4000              (R) $4500            (S) $4550             (T) $4950
       (U) $5000              (V) $9000            (W) none of the above

9.    The excess burden of the tax will be:
      (A) $0                (B) $750               (C) $1000             (D) $1500
      (E) $1750             (F) $1825              (G) $2000             (H) $2025
      (I) $2125             (J) $2250              (K) $2275             (L) $2300
      (M) $2325             (N) $2350              (O) $2375             (P) $2400
      (Q) $2425             (R) $2450              (S) $2475             (T) $2500
      (U) $2525             (V) $2550              (W) none of the above

10.   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, and that labour is the
      only factor of production. Canada has 200 workers available. Each worker can produce 2
      units of wheat, or 4 units of cloth. Mexico has 500 workers. One unit of wheat production
      in Mexico requires 2 workers, while one unit of cloth production requires 2 workers. We can
      conclude that Canada:
      (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.

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11.       The diagram below represents a choice faced by two neighbours living near the Rouge
          Valley in Scarborough. Each neighbour (Sam and Sue) has to decide whether to spray his
          or her own garden with DDT or to use a natural remedy which is more expensive to
          purchase. The payoffs (the net profit from vegetable production) for Sam and Sue appear
          in the payoff matrix. Based on the information given in the diagram, and assuming each
          neighbour follows his or her own private self-interest, what do we expect to be the result
          of a one-period game:

          (A) Sam will use DDT and Sue will use a natural remedy.
          (B) Sam and Sue will both use DDT.
          (C) Sue will spray DDT and Sam will use a natural remedy.
          (D) Sam and Sue will both decide to use a natural remedy.
          (E) There is no stable equilibrium for this game.
          (F) It is not possible to predict the outcome.


                                       Sue uses natural remedy               Sue uses DDT

      Sam uses natural remedy                 Sue: 300                          Sue: 350
                                              Sam: 300                          Sam: 100
          Sam uses DDT                        Sue: 100                          Sue: 200
                                              Sam: 350                          Sam: 200

12.       Detrimental (i.e., negative) externalities imply all but which one of the following?
          (A) the marginal social cost of an increase in output exceeds the marginal private cost;
          (B) a misallocation of resources will result from the fact that the private market supplies
          less output than is socially desirable;
          (C) private firms will concentrate on private costs, ignoring the cost burden that they
          impose on others;
          (D) taxes that impose additional private costs on those causing the externalities are, in
          principle, capable of correcting the misallocation

13.       At the current level of output of a firm, we know that P > AC > MR = MC>AVC>0. What
          can we tell about the elasticity of demand for the output of this firm at this output?
          (A) elasticity is more than 5.0
          (B) elasticity is less than 1.0
          (C) elasticity is equal to 1.0
          (D) elasticity is more than 1.0
          (E) elasticity is less than 0.0
          (F) elasticity is infinite


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       (G) it is not possible to tell anything about the elasticity of demand
       (H) none of the above

14.    At the current level of output of a firm, we know that AC>P=MR>AVC>MC>0. What we
       can say about the AC and AVC curves, at the current level of output is:
       (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

15-17. A single commercial firm owns a bridge across Lake Ontario, joining Toronto and St.
       Catherines, Ontario. The fixed cost of the bridge is $6720 per day and the variable costs are
       $4.00 per trip per day. The demand for trips each day is
                                         P = 92 - .05Q
       where Q is the number of trips each day and P is the price of a trip.

15.    If the firm acts as an unregulated monopolist, the price charged per trip per day 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) $48         (R) $51
       (S) $67         (T) $89        (U) $200       (V) $600       (W) $900        (X) $1000
       (Y) none of the above

16.    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

17.    Assuming that the regulation is successful, the total gain to society will rise compared to the
       unregulated monopoly position by a certain amount. That amount (the extra gain to society)
       is:
       (A) $10,000           (B) $12,100             (C) $16,400              (D) $19,200
       (E) $20,500           (F) $28,400             (G) $29,600              (H) $31,720
       (I) $34,500           (J) $38,700             (K) $38,900              (L) $42,080

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         (M) $49,220           (N) $51,000             (O) $60,000             (P) $79,640
          (Q) none of the above


18.      Suppose that a perfectly competitive constant cost industry is initially in short and long-run
         equilibrium. What is the effect of an increase in fixed costs on the short-run equilibrium
         price, the industry output, the output of the firm, and profit of the firm?
         (A) no change in price, industry output, firm output, or profit
         (B) increase in price, industry output, firm output, and profit
         (C) increase in price, industry output, and firm output, but decrease in profit
         (D) increase in price and industry output, decrease in profit but no change in firm output
         (E) increase in price and firm output, decrease in profit but no change in industry output
         (F) increase in firm output and industry output, decrease in profit but no change in price
         (G) no change in price, firm output, or industry output but a decrease in profit
         (H) no change in price, firm output, or profit, but a decrease in industry output
         (I) none of the above

     19. What is the shut down price for a competitive firm with Total Variable Cost = q3 – 8q2 +
         20q and Fixed Costs = 84?
         A) 0           B) $2            C) $4              D) $6                 E) $8
         F) $9          G) $10           H) $84              I) none of the above




20       What is the long-run effect on a perfectly competitive constant-cost industry of a $1 per
      unit government tax?
      (A) rise in price by less than $1 and decrease in firm output, industry output and profit
      (B) rise in price by less than $1, decrease in firm and industry output and no change in
        profit
      (C) rise in price by $1 and decrease in firm output, industry output, and profit
      (D) rise in price by $1, decrease in firm output and industry output, and no change in
        profit
      (E) rise in price by $1, decrease in industry output, but no change in firm output or
         profit
      (F) rise in price by $1, decrease in firm output, but no change in industry output or
         profit
      (G) rise in price by $1 but no change in firm output, industry output, or profit
      (H) none of the above


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21      Suppose that Variable Cost = 4q + 0.2q2 and Fixed Cost = 320 for a typical firm in a
     perfectly competitive constant cost industry. All firms in the industry are identical. The
     firm is currently in both long run and short run equilibrium. What is the equilibrium price
     and output of this typical firm?
     (A) output is 4 and price is $8
     (B) output is 4 and price is $24
     (C) output is 8 and price is $8
     (D) output is 8 and price is $24
     (E) output is 10 and price is $41
     (F) output is 40 and price is $20
     (G) output is 40 and price is $24
     (H) none of the above

22. Suppose that the typical firm from the last question, with Variable Cost = 4q + 0.2q2 and
    Fixed Cost = 320 now faces a price of $14 for its output. What would be the economic
    profit or economic loss of the firm in short run equilibrium?
    (A) -$304        (B) - $195         (C) - $145           (D) -$75            (E) 0
    (F) $75          (G) +$195           (I) none of the above

23.What is the competitive wage rate per day if a competitive firm with a total product function
    of Q = 220L – 1.25L2 per day (L > 20) hires 46 workers given a product price of $2?
    (A) $55          (B) $88            (C) $105            (D) $167.5             (E) $210
    (F) $240         (G) $285           (H) $335            (I) none of the above




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PART II -- TRUE-FALSE/EXPLAIN (10 marks each)
      Indicate whether the statements below are true or false (or uncertain) and explain briefly
      (but clearly) why you believe they are true, false or uncertain. Most of the marks are
      given for your explanation. You may use diagrams, words and/or algebra in your
      answers. Answer the questions in the space provided below the statements.

24.    Output may rise or fall in the short run in a perfectly competitive industry, but there are
       always the same number of firms in the industry in the short run.




25     Society would be better off if public goods were produced in perfectly competitive
       markets, instead of being provided by governments.




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PART III - SHORT ANSWER ESSAYS AND PROBLEMS ( total of 34 marks)
     These questions have no answers made up for the web as yet.

26. The diagrams below show an initial short and long run equilibrium in a perfectly competitive
    firm and perfectly competitive industry. Assume that demand in this industry falls.
       (a) Show the fall in demand on the industry diagram and the firm diagram, show the change
           in equilibrium quantity and price in both the firm and the industry in the new short run
           equilibrium.
       (b) Show the profit rectangle in the short run.
       (c) Also, assuming that this is a constant cost industry, show the long run equilibrium
           quantity and the long run equilibrium price.
       (d) Label any new curves you draw on the diagrams and also label all equilibrium quantities
           and prices using the notation that we have used in class during the term.

27.   The diagram below shows a natural monopoly industry.
      (a) Label the different curves on the graph.
      (b) Show the amount that would be produced in this industry if it were left to profit-
          maximize without government interference.
      (c) Show the equilibrium price charged.
      (d) Show the amount of Gain to Society on this diagram under natural monopoly.

      Now, imagine that the government decides to regulate this natural monopoly so that it earns
      zero profit.
      (e) Show the new quantity traded under this regulatory scheme, and the new price.
      (f) Show on the diagram the new amount of Gain to Society. Make sure you label all curves
          and label all quantities and prices on the diagram.

27. There are only two countries in the world – Canada and Mexico -- and there are only two goods
    produced in the world -- food and shelter -- and there is only one resource available – labour --
    with which to produce these two goods. Canada needs one units of labour to produce one unit
    of food and five units of labour to produce one unit of shelter. In total, Canada has 50 units of
    labour available. Mexico needs two units of labour to produce one unit of food and sixteen
    units of labour to produce one unit of shelter. Mexico has 80 units of labour available.
       (a) Draw the Production Possibilities Frontiers of Canada and Mexico on the graph below
           being careful to show the numerical amounts of food and shelter at each end of the PPF
           curves.
       (b) Assume that each of these countries specialize completely in production of the good in
           which they have the comparative advantage. Assume further that after trade is
           established between Canada and Mexico, one unit of shelter trades for six units of food
           (this is the new international trading ratio, or international price of food). Draw the
           Consumption Possibilities Frontiers of both Canada and Mexico on the graph.




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