m06-part1 - INSTRUCTIONS: PART I PART II PART III PART IV...

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Unformatted text preview: INSTRUCTIONS: PART I PART II PART III PART IV PART V PART VI UNIVERSITY OF TORONTO Faculty of Arts and Science APRIL/MAY EXAMINATIONS 2006 ECO 100Y1 Y Duration: 3 hours Examination Aids allowed: Non-programmable calculators only Students are required to do Part I and QUE of Parts II, III, IV, V, or VI. Part I is the multiple choice section and is worth 50%. Record all your answers for Part I on the SCANTRON sheet provided m in the examination booklets (Note: in case of any disagreement, the answer to be marked is the one on the SCANTRON sheet). For the Scantron sheets please use a black pencil or a black or blue ball-point pen. There is no penalty for guessing in the multiple choice so be sure to provide an answer for every question. Answers for the other Part will be written in examination booklets. The blank pages may be used for rough work (which will not be marked). To be answered by all students. To be answered by students from Professor Indart’s section (L0101) To be answered by students from Professor Pesando’s section (L0201) To be answered by students from Professor Hare’s section (L0301) To be answered by students fiom Professor Carr’s section (LO401) To be answered by students from Professor Wolfson’s section (L5101) Page 1 of 29 PART I [50%] MULTIPLE CHOICE QUESTIONS (To be answered by all students) INSTRUCTIONS: Multiple choice questions are to be answered using a black pencil or a black or blue ball-point pen on the separate SCANTRON sheet being supplied. Be sure to fill in your name and student number on the SCANTRON sheet! Write the name of your instructor on the SCANTRON sheet (in the area where it says “DO NOT WRITE IN THIS SPACE”). Each question is worth 1 mark. N o deductions will be made for incorrect answers. Write your answers to the multiple choice questions ALSO on the first page of the first examination booklet used for short answer questions. You may use this question booklet for rough work, and then transfer your answers to each multiple choice question onto the separate SCANTRON sheet. Your answers must be on the SCANT RON sheet. In case of a disagreement, the answer to be marked is the one on the SCANTRON sheet. 1. Suppose that 1 unit of labour can produce either 10 units of wool or 4 pineapples. What is the opportunity cost of producing 1 pineapple? a) b) c) d) e) 10 units of wool 4 units of wool 0.4 units of wool 2 units of wool none of the above If per capita income decreases by 5 percent and household expenditures on fur coats decrease by 10 percent, one can conclude that the price elasticity of demand for fur coats is a) b) c) d) 6) elastic inelastic unity positive not determinable from the information given 3. A fall in the price of a good fiom $11 to $9 results in an increase in quantity demanded from 19,000 to 21,000 units. Without considering the sign, the price elasticity of demand in this part of the demand curve is a) b) C) d) e) 0.2 0.5 2.0 5.0 none of the above Page 2 of 29 4. If wheat farmers were faced with a demand curve of unit (or unitary) elasticity, then a) the total receipts of farmers would not change due to shifts in demand b) a shift in supply would have little effect on wheat prices c) a poor harvest would cause a drop in total receipts for wheat farmers d) a good harvest would cause an increase in the quantity demanded of wheat 6) none of the above 5. The price of apples at a local market rises from $2.95 to $3.05 per kilo, and as a result the quantity of apples that households purchase decreases from 5100 to 4900 kilos/week while the quantity of oranges that households purchase increases from 3950 to 4050 kilos/week. The cross—price elasticity is a) -l .33 b) -0.75 c) 0.75 d) 1.33 e) insufficient information to know 6. The average product for six workers is 15. If the marginal product for the seventh worker is 1 8, a) marginal product is rising b) marginal product is falling c) average product is rising d) average product is falling e) marginal product is rising and average product is falling 7. Oranges are produced with a fixed factor land and a variable factor labour. Which one of the following statements is correct? a) when the average product of labour is increasing, the marginal product of labour must also be increasing b) diminishing marginal productivity [returns] starts at the labour input where total physical product starts to decrease c) diminishing marginal productivity [returns] starts at the labour input where a straight line ray is tangent to the total physical product curve (1) diminishing marginal productivity [returns] starts at the labour input where marginal product of labour equals average product of labour e) none of the above are correct 8. Suppose fixed costs are $100 and average variable costs are constant regardless of output. Which of the following is then true? a) marginal cost will equal average total cost b) average total cost will decrease when output is increased c) marginal cost will be less than average variable cost d) average total cost will be constant e) none of the above Page 3 of 29 9. Which one of the following statements is false? a) b) c) d) 6) average total cost is total cost per unit of output average fixed cost plus average variable cost equals average total cost marginal cost is the increase in total cost resulting from a unit increase in output total cost equals fixed cost plus average total cost marginal cost depends on the amount of labour hired 10. When cost curves are drawn for a perfectly competitive firm, all of the following are generally assumed except that the a) b) C) d) 6) firm is too small to influence factor prices marginal product of the variable factor eventually declines average variable cost initially declines, then rises at higher output levels average fixed costs are constant total fixed costs are constant 11. When one additional unit of labour is hired, total product increases from 100 to 110 units of output per unit of time. Marginal product must therefore be a) b) c) d) 6) increasing positive decreasing constant zero 12. If the industry demand curve is downward-sloping and the market is perfectly competitive, an increase in the price of an input used to produce the good will: a) b) c) d) e) not affect consumer surplus increase consumer surplus reduce the price of the good increase the quantity bought and sold of the good none of the above 13. If the increase in the price of good A causes the demand curve for B to shift to the left, then a) b) c) d) e) A and B are substitutes A and B are complements the price of A must be higher than the price of B B must be a normal good Consumer preferences for B must have fallen 14. Suppose that the tuna fish industry has an upward sloping supply curve. The government now introduces an income tax cut such that disposable incomes increase. As a result, the price of tuna fish falls. We can therefore conclude that tuna fish: a) b) c) d) e) is a normal good the demand curve for tuna fish is elastic the demand curve for tuna fish is inelastic is a substitute good is an inferior good Page 4 of 29 15. When marginal product is increasing with increasing use of a variable input a) b) c) d) 6) average product is rising and is greater than marginal product average product is falling and is greater than marginal product average product is falling and is smaller than marginal product average product is falling average product is rising 16. Let the supply curve for oranges be upward sloping. Suppose that bad weather conditions adversely affect this year’s crop of oranges. However, it is discovered that orange producers have a higher level of total revenue. Given this information, which of the following statements is true? a) b) c) d) e) the supply curve for oranges is elastic the supply curve for oranges is inelastic the demand curve for oranges has unitary elasticity the demand curve for oranges is inelastic the demand curve for oranges is elastic 17. Recently, it has been revealed that there have been severe reductions in the fish stocks in the Atlantic fishing industry. As a result, a) b) c) d) e) we would expect to see increases in the demand for meat (e.g., beef), since this is a complement to fish we would expect to see reductions in the price of fish, leading to reductions in the demand for meat, since meat and fish are substitutes we would expect reductions in the price of fish, leading to increases in the demand for meat, since meat and fish are substitutes we would expect to see increases in the demand for meat, since meat is a substitute for fish we would expect to see increases in the price of fish, leading to reductions in the demand for meat, since meat and fish are complements 18. For a perfectly competitive firm, the marginal revenue curve a) b) c) d) e) is the same as the firm’s demand curve and the average revenue curve lies below the firm’s demand curve lies above the finn’s demand curve and the average revenue curve lies below the firm’s demand curve and the average revenue curve are both the same as the firm’s demand curve lies above the firm’s demand curve and the average revenue curve is the same as the firm’s demand curve lies below the average revenue curve and the average revenue curve is the firm’s demand curve 19. Assume that a perfectly competitive industry has a perfectly inelastic supply curve. The government introduces a specific commodity tax of $2.50 per unit of output. As a result, which one of the following statements would be correct? a) b) c) d) e) the consumer price would increase by $2.50 the consumer price would fall by $2.50 the burden of the tax would fall completely on consumers the price received by the producer would decrease by $2.50 none of the above Page 5 of 29 20. Which one of the following would cause the demand curve in an industry to increase? a) the price of a substitute product decreased b) disposable income increased and the good was an inferior good c) the price of a complementary product increased d) disposable income decreased and the good was a normal good 6) none of the above 21. Assume that apples and oranges are substitute goods. Given the initial supply and demand curves for apples, a reduction in the price of oranges will tend to a) b) c) d) 6) increase the price of apples increase the demand for apples increase the demand for oranges decrease the demand for oranges decrease the price of apples 22. A perfectly competitive firm is currently producing an output level where price is $10.00; average variable cost is $6.00; average fixed cost is $4.00 and marginal cost is $8.00. In the short-run, in order to maximize profits this firm should? a) b) c) d) e) not change output decrease its output increase its output shut down increase its market price 23. If a competitive industry is facing a decrease in demand for its product, the theory of perfect competition predicts that in the long-run a) b) C) d) 6) newer, more efficient firms will enter the industry and earn normal profits existing firms will modernize plant and equipment in order to increase efficiency existing firms will expand output as a means of recoveringlosses the industry will raise its price to earn higher revenue capacity in the industry will gradually shrink 24. Predictions regarding a perfectly competitive firm’s long—run profit-maximizing position include all of the following except: a) b) c) d) 6) price equals marginal cost price equals marginal revenue price equals minimum short-run and long-run average total cost economic profits are greater than zero economic profits are zero 25. Comparing the short-run and long-run profit-maximizing positions of a perfectly competitive firm, which statement is true? a) b) C) d) 6) price will equal marginal cost in the short—run, but not necessarily in the long-run economic profits may exist in the short-run and in the long-run in order to profit-maximize, the firm must always produce at the minimum of average total cost in the short-run and in the long—run the price must equal average total cost in the long-run, but not necessarily in the short-run none of the above Page 6 of 29 26. Consider a perfectly competitive firm in the following position: output = 4,000 units, market price = $2, fixed costs = $10,000, and variable costs = $1,000. To maximize profits in the short-run, the firm should a) b) c) d) 6) reduce output expand output shut down increase the market price not enough information to determine 27. In the short-run, a decrease in a perfectly competitive firm’s fixed costs should lead to a) b) c) d) e) a decrease in output a decrease in the number of sellers an increase in price lower variable costs none of the above 28. A perfectly competitive industry is in short-run equilibrium with “11” identical firms and each firm is earning zero economic profits (i.e., earning normal profits). Assume that firms’ ATC, AVC, and MC curves have the traditional U-shape. Under these circumstances, which one of the following statements is correct in the short-run? a) b) c) c1) 6) with a decrease in fixed costs, each firm would suffer losses and firms would exit the industry with an increase in variable costs, each firm would make economic losses with a decrease in industry demand, each firm would make economic losses and would produce a higher output with a decrease in variable costs, each firm would make economic profits and would produce a lower output with an increase in industry demand, each firm would make economic profits and would produce a smaller output ' 29. A perfectly competitive industry is in short-run equilibrium. Which one of the following statements is correct in the short-run? a) b) C) d) e) if fixed costs were to increase, then the industry price would increase and industry output decrease if fixed costs were to increase, then the industry price would decrease and industry output would increase . if fixed costs were to decrease, then industry price would increase and industry output would fall if fixed costs were to decrease, then industry price would decrease and industry output would increase none of the above Page 7 of 29 30. Suppose a typical competitive firm has the following data in the short-run equilibrium: price = $10; output = 100 units; ATC = $12; AVC = $7. Which of the following statements is correct? a) in the long-run the industry will expand because of economic profits b) in the long-run the industry will contract because firms are suffering losses c) the size of the industry will remain the same in the long-run d) price will fall in the long-run 6) there is not enough information to formulate an answer about the long-run 31. In the long-run production period, which one of the following statements is correct according to conditions of long-run equilibrium? a) both the firm in pure (perfect) competition and a pure (unregulated) monopolist could each make economic profits b) both the firm in pure (perfect) competition and a pure (unregulated) monopolist would profit maximize where price equalled marginal cost c) the firm in pure (perfect) competition would profit maximize where price equalled marginal cost and the pure (unregulated) monopolist would profit maximize where price exceeded marginal cost (1) the firm in pure (perfect) competition would profit maximize where price equalled marginal cost and the pure (unregulated) monopolist would profit maximize where price was less than marginal cost 6) none of the above 32. Suppose all of the firms in a perfectly competitive industry form a cartel and agree to restrict output, thereby raising the price of the product. Individual firm A will gain the most fiom the existence of the cartel if a) all firms, including A, cooperate and restrict output b) firm A restricts output, while the other firms do not c) all fums, except A, cooperate and restrict output d) no firms restrict output c) all firms revert back to their competitive outputs 33. A profit-maximizing monopolist will not produce the output level at which marginal cost equals price because a) profit would be zero in that case b) fixed cost would be maximized c) entry into the industry keeps the price lower than that level d) the monopolist always charges the highest price the market will bear e) none of the above 34. A pure (unregulated) monopolist is in short-run equilibrium with economic profits. Which one of the following statements is correct? a) an increase in rent (a fixed cost) will cause an increase in the monopoly price and a decrease in the monopolist’s output b) an increase in rent (a fixed cost) will cause an increase in the monopoly price and an increase in the monopolist’s output c) the monopolist’s price will equal its marginal cost at the equilibrium output (1) the monopolist’s marginal revenue will equal its average revenue at the equilibrium output 6) none of the above Page 8 of 29 35. When the monopolist charges a price where the price elasticity of demand equals 1, his a) b) c) d) 6) total receipts are rising, although marginal revenue is falling total receipts are falling total profits are at a maximum total receipts are at a maximum none of the above 36. If the monopolist operated in the inelastic range of his demand curve, a) b) c) d) 6) he would be operating where his AR is negative his marginal revenue would be greater than marginal cost his marginal revenue would be negative his marginal revenue would be negative although his total receipts would be at a maximum he could raise his total receipts by lowering his price 37. If the government imposes a lump-sum tax [e.g., a tax of $10,000 per year] on a monopolist, it will reduce profits because the tax a) b) c) d) 6) shifts the demand curve to the left and at the same time increases all costs shifis the demand curve to the right and at the same time increases all costs increases the price consumers pay but also reduces the price the monopolist receives increases the average total cost but not the marginal cost, leaving price and output unchanged increases both the average total cost and the marginal cost, leaving price and output unchanged 38. Which of the following is included in the calculations of current GDP? 21) b) c) d) e) the purchase of a second hand automobile pizza purchased by college students for dinner volunteer work undertaken by Mary Smith the purchase of a 1939 painting welfare payments 39. Nominal GDP fell fiom 100 to 95 during the year. At the same time, inflation was 10 percent. Therefore real GDP 3) b) c) d) 6) fell by 10 percent was unaffected rose by 10 percent fell by 15 percent none of the above 40. Assume a simple model without government and without an external sector. If an increase in exogenous investment of 40 leads to an increase in consumption of 160, then the marginal propensity to save is a) b) c) 0.10 0.20 0.25 d) 0.40 e) 0.75 Page 9 of 29 41. If a household’s disposable income increases from $10,000 to $15,000 and its consumption expenditures increase from $8,000 to $11,000, then a) the household is dissaving b) the slope of the consumption fimction is 0.6 c) the marginal propensity to consume is 0.4 d) the average propensity to consume over this range of income is negative e) the average propensity to consume over this range exceeds 1 42. The sale of government bonds by the Bank of Canada will cause a) a decrease in the rate of interest b) a decrease in the (cash) reserves of banks c) an increase in the supply of money (1) an increase in bank loans to the public e) none of the above 43. Suppose that a hypothetical economy has achieved price stability but unemployment is too high. Assume that the consumption function is: C = 45,000 + 0.80Y and that investment and government spending are autonomous expenditures only. Initially, there is no international trade, taxes or transfer payments. The government introduces an autonomous tax of $500 million and then uses these funds to increase autonomous government expenditure on domestically produced goods. As a result of both of these transactions, taken together, the final impact on Y would be: a) no change in Y b) an increase of $2,500 million in Y c) a decrease of $2,500 million in Y (1) an increase of $500 million in Y e) a decrease of $500 million in Y 44. If there is an appreciation of the Canadian dollar in the foreign exchange market, then Canadian goods a) are more expensive to Canadian b) are more expensive to foreign buyers c) are less expensive to Canadian (1) are less expensive to foreign buyers 6) none of the above 45. Ifdesired expenditures exceed actual expenditures, a) inventories will build up, causing national income to rise b) national income will fall, because desired expenditures are less than actual expenditures c) shortages of goods and reductions in inventories will cause producers to increase output and national income to rise (1) national income may increase or decrease, depending on the relative sizes of the average propensity to consume and the average propensity to save 6) none of the above Page 10 of 29 46. Consider a hypothetical economy where, at the start of 2005, aggregate output was $100 billion and the population was 10 million. During 2005, aggregate output increased by 5%, the population increased by 2%, and the average price level remained constant. Given this information, which of the following statements is correct? a) aggregate output per capita was $1,000 at the start of 2005 b) aggregate output was $100.5 billion at the end of 2005 c) aggregate output per capita was $10,500 at the end of 2005 d) the annual growth rate of output per capita was approximately 3% during 2005 e) none of the above is correct 47. Consider a very simple model of the economy where consumption and investment are the only two components of desired aggregate expenditure. The expressions for the consumption and investment functions are given by C = 100 + 0.8Y and I = 200, respectively. In this economy, the simple spending multiplier is and the equilibrium level of income is a) 2.0; 1500 b) 2.5; 1000 c) 5.0; 750 d) 5.0; 1000 e) 5.0; 1500 48. Assume that there is a 5% cash reserve ratio for commercial banks against their deposits and further, that commercial banks do not keep excess cash reserves. Suppose that Timothy puts $1 ,000 in Canadian currency in his bank aCcount. As a result, which one of the following statements is correct? a) cash reserves would increase by $1,000 and the M1 money supply would increase by $1,000 b) cash reserves would increase by $1 ,000 and the M1 money supply would increase by $20,000 c) cash reserves would decrease by $1,000 and the M1 money supply would decrease by $1,000 d) cash reserves would decrease by $1 ,000 and the M1 money supply would decrease by $20,000 e) none of the above 49. International trade according to comparative advantage allows each country to consume a) more of the goods it exports but less of the goods it imports than without trade b) more of the goods it imports but less of the goods it exports than without trade c) less of the both goods it exports and goods it imports than without trade (1) more of the both goods it exports and goods it imports than without trade e) either A or B above, depending on the terms of trade 50. India and Nigeria are considering international trade. In India, 200 units of labour can produce either 200 units of rice or 50 bicycles. In Nigeria, 200 units of labour can produce either 25 units of rice or 25 bicycles. On the basis of this information, which one of the following statements is correct? a) Nigeria has an absolute advantage in rice b) Nigeria has an absolute advantage in bicycles c) Nigeria should specialize in rice d) India should specialize in rice e) India should specialize in bicycles Page 11 of 29 PART II [50%] PART II To be answered ONLY by students of Professor Indart’s section (L0101) Answer ALL six questions 1. (12 marks) Indicate whether you agree with the following statements. Draw the proper diagram(s) to help you explain your answer. Marks will be given for your explanation. a) (3 marks) John spends all his disposable income on tuna [x-axis product] and beef [y- axis product]. John has a negative income elasticity for tuna and it is known that his substitution effect for tuna is stronger than his income effect. Suppose that there is a decrease in the stock of tuna and the price of tuna increases. Statement: “John will maximize his level of satisfaction or utility by purchasing more tuna and therefore his demand curve for tuna has a positive slope.” b) (3 marks) A perfectly competitive industry is initially in both short-run and long-run equilibrium with ‘n’ identical firms. Suppose that the most recent budget has reduced personal income tax rates. The product has a negative income elasticity. Statement: “In the new short-run equilibrium, the industry price will fall and industry output will rise; each firm will produce a smaller output and make economic losses.” c) (3 marks) A perfectly competitive industry is initially in both short-run and long-run equilibrium with ‘n’ identical finns. Suppose that the most recent budget has reduced personal income tax rates. The product has a negative income elasticity. The industry has a constant cost long-run supply curve. Statement: “In the new long—run equilibrium, the industry price will fall and the industry output will also fall; each firm will produce an unchanged output and some firms will leave the industry.” (1) (3 marks) A firm in the short-run production period generates the following information at its current level of output: the industry price is $15; the marginal revenue is $9; the average total cost is $18; the marginal cost is $9 and average fixed cost is $5. Statement: “This firm is not in perfect competition and should shut down to minimize its economic losses.” Page 12 of 29 2. (9 marks) The public’s demand for water from Natural Springs is P = 1000 — 0.1Q, where Q is the number of cases of water bottles and P is the price of a case of bottles. Only one firm currently has access to Natural Springs water, and can produce a case of bottles according to this formula: Total Cost = 100Q. a) (3 marks) Calculate the following values for the profit-maximizing equilibrium: price, quantity, profits, consumer surplus, and price elasticity of demand. Show all your work. b) (3 marks) Suppose that the government now intervenes in this market and imposes a price ceiling of $300 per case of bottles of Natural Springs water. Calculate the following values for the profit-maximizing equilibrium: price, quantity, profits, and consumer surplus. Show a_ll your work. c) (3 marks) Let’s go back to the initial situation depicted in part a) above, and suppose now that the government intervenes to permit a large number of firms to gain access to Natural Springs, each of which faces the same cost equation as shown above. No single firm can influence the market price. Now calculate the following equilibrium values for the Natural Springs water market: price, total industry quantity, and the profits of a typical firm. Show all your work. 3. (4 marks) Below are data from the national accounts of a country. Assume that all relevant items you need to answer the questions have been provided. Ca - ital Consum - tion Allowances Undistributed Co orate Profits 300 o orate Profits Taxes xports Personal Consum - tion Ex . enditure Indirect Taxes minus Subsidies Interest Income Use the above data to compute the following: 5 :3» m p—I 01-h ! t—d \Or—Iv—t m-h-qu OOOOO a) (1 mark) Gross Domestic Product (GDP) b) (1 mark) Government Spending on Goods & Services (G) c) (1 mark) Dividends Paid to Households (D) d) (1 mark) Personal Income (PI) Page 13 of 29 . (8 marks) Consider an economy defined by the following equations: Consumption C = 100 + 0.8YD Taxes TA = 150 + 0.125Y Government Transfer Payments TR = 50 Investment I = 460 Government Expenditure G = 400 Exports X = 200 Imports Q=100+0.1Y Full employment GDP Yfe = 2,800 a) (3 marks) What is the equilibrium level of GDP W)? What is the size of the recessionary or inflationary gap? Show all your work. b) (2 marks) What is the size of the government deficit or surplus? What is the value of the marginal propensity to spend? What is the value of the simple (Keynesian) expenditure multiplier? Show all your work. (3 marks) What will happen to the equilibrium level of national income if the government were to reduce lump-sum taxes (that is, those taxes that are independent of Y) by 50? What is the balance in the government budget now? Show afl your work. (9 marks) The Canadian economy is initially in short-run equilibrium at a level of GDP below full-employment (Yfe). Suppose now that the demand for Canadian exports increases by $5 billion as a result of a strong expansion in the US economy. a) (3 marks) Using a fully-labelled AD-AS diagram, show the initial equilibrium (point E1) and the new short-run equilibrium (pointh) as a result of the increase in exports. Assume a positively-sloped AS curve. b) (3 marks) Suppose that the simple aggregate expenditure multiplier is equal to 2. Will equilibrium GDP change by $10 billion in the AS-AD model as shown in part a) above? Explain clearly with the help of the diagram. c) (3 marks) Redraw the initial AS-AD equilibrium (before exports increase) in a new fully-labelled diagram. Now consider the following shock to the economy: as a result of technological improvement, workers become more productive and earn larger incomes. Show the impact on the diagram. Will the price level rise or fall? Briefly explain why the price level might rise or fall. Page 14 of 29 6. (8 marks) Italy and France produce only two goods, wine and wool, using a single input, labour. An Italian worker in an eight-hour day can produce 100 bottles of wine or 100 bales of wool, while a French worker can produce 75 bottles of wine or 25 bales of wool in an eight-hour day. a) (2 marks) In the absence of trade, what is the opportunity cost in Italy and in France of one unit of wine? b) (2 marks) If trade is opened up between the two countries, in which product will each of the countries specialize? Explain your answer. c) (2 marks) Suppose that labour productivity in both wine and wool production in France doubles. How does this change your answer in b)? Explain. d) (2 marks) If mutually advantageous trade occurs between Italy and France, what will be the range of the international terms of trade between bales of wool and bottles of wine? Explain. Page 15 of 29 ...
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m06-part1 - INSTRUCTIONS: PART I PART II PART III PART IV...

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