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UNIVERSITY OF TORONTO
DEPARTMENT OF ECONOMICS

ECO100Y L5101
Midterm Test #3; July 15, 2011



Time Allowed: 60 Minutes



This total marks in this test are 50. The test is divided into two parts:

Part I - problem format - is worth 40 marks (80% of the total marks of 50)

Part II: A) 5 explanation questions worth one mark each (10% of the total mark of 50)
B) 5 multiple choice questions worth one mark each (10% of the total mark of 50)


Show your work where applicable.


YOU MUST USE PEN INSTEAD OF PENCIL




Print your name and student number clearly on the front of the exam and on any loose pages.



Name: _______________________________________
(Family Name) (Given Name)


Student #: ______________________





There are 8 pages to the exam.


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ECO100Y L5101; Midterm Test #3: July 15, 2011
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Part I: Place your answers (and work where necessary) in the space provided.
Clearly label all axes, curves, and points.

1. Competitive Short-run and Long-run Equilibrium: Equations (10 marks)

Suppose that each firm in a perfectly competitive industry has the following cost curves.
Variable Cost = 0.01q
2
+ 9q + 13,225 Fixed Cost = 54,375 Marginal Cost = 0.02q + 9
Demand for the industry is P = 113 0.0025Q

a) What is the shut-down price and output of the firm? (2 marks)

1 mark: q = 1,150 from 0.01q + 9 +13,225/q = 0.02q + 9
1 mark: P = 32 from 0.01*1150 + 9 + 13,225/1150 or 0.02*1150 + 9


b) What is the long-run equilibrium price and output of the firm? (2 marks)

1 mark: q = 2,600 from 0.01q + 9 + (13,225 + 54,375)/q = 0.02q + 9
1 mark: P = 61 from 0.01*2600 + 9 + (13,225 + 54,375)/2600 or 0.02*2600 + 9


c) What is the output of the industry (not the firm) at long-run equilibrium price? (1 mark)

1 mark: Q = 20,800 from 61 = 113 0.0025Q


d) What is the number of firms in the industry at long-run equilibrium? (1 mark)

1 mark: = 8 from 20,800/2600

e) What is the equilibrium output of the firm if industry price is $55? (1 mark)

1 mark = 2300 from 55 = 0.02q + 9

f) What is the equilibrium total cost of the firm if the industry price is $55? (1 mark)

1 mark: = $141,200 from 0.01*2300
2
+ 9*2300 + 13,225 + 54,375

g) What is the economic profit or loss of the firm at equilibrium if the industry price is $55? (1
mark)

1 mark: = -14,700 from 55*2300 - $141,200

h) What is the output of the firm at $30? (1 mark)

1 mark: = nothing (0 since below shut-down price)
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ECO100Y L5101; Midterm Test #3: July 15, 2011
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2. Monopoly and Efficiency: Diagrams (8 marks)

Suppose that Highway 407 is a monopoly charging tolls on cars to use the highway. Fixed
Costs are very large and marginal costs are constant, but greater than 0, over existing
demand. The diagram below depicts the Average Cost and Demand functions for the
number of cars on the highway.
a) Identify price (Pm) and output (Qm) at monopoly equilibrium. (4 marks)
c) Identify the monopolys profit or loss at this equilibrium. (1 mark)
d) Identify the price (Po) and output (Qo) which gives the optimal allocation of resources (0
efficiency loss) for society in your diagram. (1 mark)
e) Identify the efficiency gain or loss for society at monopoly equilibrium (1 mark)
e) Use P* and Q* to indicate the Price and Quantity that you would recommend to regulate this
monopoly? Briefly explain your choice in the space immediately below. (1 mark)
Q
P
Pm
Qm
MC
AC
D
MR
Mono Profit
ACm
Po
Qo
Eff. Loss
ACo


1 mark: draw constant MC > 0 (should not intersect AC)
1 mark: draw MR below D roughly bisecting space between D and the vertical axis
1 mark: Qm from intersection of MC and MR (give this even if MC and MR are wrong)
1 mark: Pm from Demand at their Qm
1 mark: Economic Profit ( Mono Profit) between Pm and ACm from AC at their Qm
1 mark: Po = MC and Qo from MC intersect D
1 mark: Efficiency loss triangle below D, above MC, and between Qm and Qo
1 mark: P* and Q* at AC intersect D (AC pricing) but need to have some explanation such as
(AC pricing is the best option since) the monopoly has an economic loss at MC pricing
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ECO100Y L5101; Midterm Test #3: July 15, 2011
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3. Monopoly and Efficiency: Linear Equations (8 marks)

Suppose that the Wedding Cake industry is a monopoly in Toronto with a Marginal Cost
function defined by MC = 30 + 0.02Q and a Demand function defined by P = 110 0.03Q.
(P is in $/Cake and Q is the number of Cakes per month)

a) What is the equilibrium price and output at monopoly equilibrium? (2 marks)


1 mark: Q = 1,000 from 110 0.06Q = 30 + 0.02Q
1 mark: P = 80 from something like 110 0.03*1,000)




b) What is the price and output that gives socially optimal allocation of resources (0 efficiency
loss) for this industry? (2 marks)


1 mark: Q = 1,600 from 110 0.03Q = 30 + 0.02Q
1 mark: P = $62 from either 110 0.03*1600 = 30 + 0.02*1600




c) What is the social efficiency loss due to monopolization of Wedding Cakes? (2 marks)


1 mark: MC (or MR) = 50 from Q at 1,000 (30 + 0.02*1000 or 110 0.06*1000 (or consistent
with their answer in a)
1 mark: = $9000 from (80 - 50)(1,600 1,000)/2


d) What is the Producer Surplus at 0 efficiency loss (optimal allocation)? (1 mark)


1 mark: = 25,600 from (62-30)1600/2


e) What is the Producer Surplus at Monopoly equilibrium? (1 mark)

1 mark: = 40,000 from (50 + 30)1000/2 or (80 50)100+ (50 30)1000/2

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ECO100Y L5101; Midterm Test #3: July 15, 2011
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4. Comparative Advantage (8 marks)
The following table gives the output per unit of resource. Assume that these are the only
countries and commodities in the world and that there are no economies of scale and no
transportation costs.
Output Dates per Resource Oil per Resource
Iran 12 4
Iraq 6 3
a) In the space below, determine the country with the comparative advantage in Oil production
and the country with the comparative advantage in Date production. Show your calculations.
(3 marks)
1 mark:Iran: 1 Oil costs 12/4 = 3 Dates (or 1 D cost 1/3 Oil)
1 mark: Iraq: 1 Oil costs 6/3 = 2 Dates (or 1 D cost 1/2 Oil)
1 mark: Iraq has comparative advantage in Oil or Iran has comparative advantate in Dates



b) Suppose that Iran has 200 units of the resource and that Iraq has 320 units of the resource. In
the space below, draw each country's production possibility curve in separate diagrams with
Oil on the vertical axis. (2 marks)
Iran Oil
Dates
Oil Iraq
800
2400
960
1920
PPC
PPC
960
2400
CPC
CPC

b)1 mark: correct PPC axes for Iran for Oil (4*200=800 ) and Dates (12*200 = 2400)
1 mark: correct PPC axes for Iraq for Oil (3*320=960 ) and Dates (6*320 = 1940)
(Give full marks if intercepts are correct if they draw both PPCs on one diagram)
Dedust 1 mark if either PPC is not linear
c)1 mark: each country has the same intercepts: Oil = 960 and Dates = 1920
(Deduct a mark if the CPCs arent linear)

c) Suppose that these countries agree to exchange 2.5 units of Dates for 1 unit of Oil

i) In your diagram, draw each country's consumption possibility curve with trade.
(1 mark)
ii) If Iran consumes 960 units of Dates, what is the maximum units of Dates and Oil
that Iraq can consume given trade? Show your work. (2 marks )
1 mark: Iraq consumes 1440 Dates since Iran trades 2400 - 960
1 mark: Iraq consumes 384 oil (960 576)
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ECO100Y L5101; Midterm Test #3: July 15, 2011
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5. Prices Indices (8 marks)

January, 2005 January, 2010
Price/unit Quantity Price/unit Quantity
Chicken (kg) $12.00 10 $9.00 18
Beef (kg) $14.00 12 $18.00 8
The above table gives data for the price/unit and quantity of Chicken and Beef consumed by
the average family in January of 2005 and of 2010. Assuming that 2005 is the base year,
calculate the following values to the nearest decimal.
a) Nominal student consumption in January, 2005. (1 mark)

1 mark: correct set-up and answer: $12*10 + $14*12= $288


b) the Consumer Price Index (CPI) for January, 2010, to the nearest decimal. (2 marks)

1 mark: correct numerator: $9*10+$18*12 = $306 (denominator is $12*10 + $14*12 = $288)
1 mark: correct answer = 100*$306/$288 = 106.25 (accept 106 anything)



c) Real Consumption in January, 2010 relative to January, 2005 according to the CPI. (2 marks)

1 mark: set up: Nominal/CPI = 100*($9*18 + $18*8)/106.25 (or consistent with b)
1 mark: correct answer = $288




d) Real Consumption in January, 2010 according to the GDP deflator measure (1 mark)

1 mark: : correct answer = $328 from something like 100*$306/89.5 or $12*18 + $14*8 = $328



e) Total Inflation/Deflation between 2005 and 2010 relative to 2005 using the GDP deflator
(1 mark)

1 mark: -6.7% (or 7%) (or consistent with answer in b)

f) Real student Income in January, 2010, relative to 2005 using the CPI for 2010 if nominal
student income was $2,500 in January, 2010. (1 mark)

1 mark: $2,352.94 from 2,500/106.25 (accept $2,353) (must have correct answer)
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ECO100Y L5101; Midterm Test #3: July 15, 2011
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Part II A: Explanations.
Give a brief explanation for each of the following questions

1. What is Pareto Optimality? (1 mark)





2. Why is a Natural Monopoly a monopoly? (1 mark)






3. Give two circumstances where competitive equilibrium does not result in the optimal
allocation of resources. (2 marks)









4. Why is output always sold in market economies, according to Say? (1 mark)



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ECO100Y L5101; Midterm Test #3: July 15, 2011
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Part II B: Multiple Choice: Circle the best answer for each question.
Each question is worth 1 mark. No marks deducted for wrong answers.

1. Which of the following is true for employment gains during June, 2011, in Canada and the
U.S. (remember that the U.S. economy is 10 times the size of the Canadian economy)?
a) Canada and the U.S. both gained less than 20,000 jobs
b) Canada gained less than 20,000 jobs and the U.S. gained less than 20,000 jobs
c) Canada gained less than 20,000 jobs and the U.S. gained between 20,000 to 100,000 jobs
d) Canada gained less than 20,000 jobs and the U.S. gained more than 100,000 jobs
e) Canada gained more than 20,000 jobs and the U.S. gained less than 20,000 jobs
f) Canada gained less than 20,000 jobs and the U.S. gained between 20,000 to 100,000 jobs
g) Canada gained more than 20,000 jobs and the U.S. gained over 100,000 jobs
h) None of the above

2. Suppose that a country has an Adult Population of 120 million, Employment of 65 million,
Part-Time Employment of 5 million, Unemployment of 3 million, and 2 million
Discouraged Workers. What is the Unemployment rate (to one decimal)?
a) 4.4% b) 4.6% c) 7.1% d) 7.3% e) 7.8% f) 15.6% g) None of the above

3. Suppose that a country has an Adult Population of 120 million, Employment of 65 million,
Part-Time Employment of 5 million, Unemployment of 3 million, and 2 million
Discouraged Workers as above. If 1 million Discouraged Workers enter the labour-force, 2
million Unemployed persons find jobs and 2 million Part-time workers get full-time jobs,
what is the unemployment rate (to one decimal)?
a) 1.4% b) 2.8% c) 2.9% d) 3% e) 4.2% f) 4.3% g) None of the above
Employment is 65 + 2 given the unemployed who get jobs (shift from part-time to full-time has
no effect on employment) and unemployment is 32+1 (discouraged workers) for 2/(67+2)

4. Suppose that a competitive firm is presently producting at an output where Average Cost >
Average Variable Cost > Price > minimum Average Variable Cost > Marginal Cost. How
does the firm attain equilibrium and what is economic profit/loss at that equilibrium?
a) decrease output for an economic loss b) decrease output for 0 economic profit
c) decrease output for an economic profit d) increase output for an economic loss
e) increase output for an 0 economic profit f) increase output for an economic profit
g) shut down g) none of the above

5. Which of the following is true for a Monopoly relative to a competitive industry?
a) Total Revenue and Total Cost are less for the Monopoly
b) Total Revenue is less and Total cost is greater for the Monopoly
c) Total Revenue is greater and Total Cost is less for the Monopoly
d) Total Revenue is greater and Total Cost is greater for the Monopoly
e) none of the above
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