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a05-part1 - UNIVERSITY OF TORONTO Faculty of Arts and...

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Unformatted text preview: UNIVERSITY OF TORONTO Faculty of Arts and Science August Examinations 2005 ECO 100Y1 Y Duration: 3 hours Examination Aids allowed: Non-programmable calculators only INSTRUCTIONS: 0 Students are required to answer Part I [multiple choice] for 20% of the exam mark, Part II [short answer questions] for 30% of the exam mark, and either Part III [Professor Hare’s Sections L0101 and L5101] or Part IV [Professor Indart’s Section L0201] for 50% of the exam mark. 0 Record all your answers for Part I on the SCANTRON sheet provided Ml, in addition, on the first page of the examination booklet for Part II for verification. The answer on the SCANTRON sheet will be selected if there is a difference. 0 Answer Part II in a separate examination booklet. 0 Answer Part III or Part IV in a separate examination booklet. PART I To be answered by all students (white pages) PART II To be answered by all students (white pages) PART III To be answered ONLY by Professor Hare’s students [Sections L01 0] and L5101] (blue pages) PART IV To be answered ONLY by Professor Indart’s students [Section L0201] (green pages) Page 1 of16 PART I [20%] 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. No deductions will be made for incorrect answers. Write your answers to the multiple choice questions ALSO on the first page of the examination booklet used for Part II [short answer questions]. You may also use this page for rough work. Then transfer your answers to each multiple choice question onto the separate SCANTRON sheet. Your answers must be on the SCANTRON sheet. In case of a disagreement, the answer to be marked is the one on the SCANTRON sheet. 1. Suppose that sirloin steaks are produced in a perfectly competitive industry in the short run production period. A shock occurs such that the industry price for sirloin steaks increases and the industry output decreases. As result, which one of the following statements correctly identifies the shock: a) b) C) d) 6) disposable incomes increase and sirloin steak is a normal good disposable incomes decrease and sirloin steak is an inferior good wage rates in the meat packaging industry increase property taxes increase in the meat packaging industry none of the above are correct 2. Suppose that the production function indicates that 200 units of labour and 400 units of capital can produce 1,000 units of output and that 600 units of labour and 1,200 units of capital can produce 4,000 units of output. On this basis, the firm is experiencing: a) b) C) d) 6) increasing marginal returns to labour decreasing marginal returns to labour constant returns to scale increasing returns to scale none of the above 3. The law of diminishing marginal productivity [returns] starts at the quantity of labour input where: a) b) C) d) e) a straight line ray is tangent to the total physical product curve marginal product equals average product an increment in labour starts to generate a smaller positive increment in output increasing returns to scale occurs an increase in labour can not generate any fiirther increases in output Page 2 of 16 4. Which one of the following statements is correct: a) b) c) d) e) if the price of a product increases and total revenue is unchanged, then the demand curve is relatively inelastic if the price of a product increases and total revenue rises, then the demand curve is relatively elastic if the price of a product falls and total revenue falls, then the demand curve is relatively inelastic if the price of a product falls and total revenue rises, then the demand curve has unitary elasticity none of the above are correct 5. Which one of the following statements would be correct: a) b) c) d) e) if the income elasticity for a product is positive, the product is an inferior good normal goods have downward sloping demand curves if the price elasticity of demand were greater than one [absolute value], then the demand curve would be relatively inelastic if the cross elasticity of demand were negative, then the two products would be substitutes both ‘b’ and ‘d’ are correct 6. Kelly consumes only sahnon steak and pork chops. Assume that the price of salmon steaks increased. As a result, which one of the following statements is correct: a) b) c) d) e) if salmon steaks were a normal good for Kelly, then the substitution and income effects would work in opposite directions if salmon steaks were a normal good for Kelly, then the income elasticity for salmon steaks would be negative if salmon steaks were an inferior good for Kelly, then the income elasticity for salmon steaks would be positive if salmon steaks were an inferior good for Kelly, then the substitution and income effects would work in the same direction none of the above 7. A firm is using its plant to produce 500 units of output daily. Its marginal Cost at this output is $8.00; its Average Cost is $7.50; its Average Variable Cost is $4.00. The daily Fixed Cost associated with this plant must be a) b) C) d) 6) $7.50 $750 $1,750 $3,750 none of the above Page 3 of 16 8. A pure monopolist is in short run equilibrium and making economic profits. Property taxes increase by $10,000. As a result, which one of the following statements would be correct: a) b) C) d) the monopolist’s price and output would both increase the monopolist’s price and output would both decrease the monopolist’s price would increase and its output would fall the monopolist’s price would decrease and its output would increase e) none of the preceding statements is correct 9. If the monopolist operated in the inelastic range of his demand curve, a) he would be operating where his AR is negative b) his marginal revenue would be negative 0) his marginal revenue would be negative although his total revenue would be at a maximum d) he could raise his total revenue by lowering his price e) none of the above 10. A perfectly competitive industry is in long run equilibrium with a constant cost industry supply curve. The government imposes a specific commodity tax of $1.00 per unit of output. As a result, which one of the following statements is correct in the long run: a) b) c) d) 6) consumer price will increase by $1.00 and industry output would fall consumer price would increase, but not by $1 .00, and industry output would fall industry output would increase and consumer price would be unchanged industry output would decrease and consumer price would decrease none of the above 11. Country A produces two products, bicycles and pizza, with factors labour and capital. Which one of the following statements is correct concerning the production—possibilities curve: a) b) c) d) e) if labour migrated [left] Country A, there would be no change in the PPC if Country A engaged in international trade, then the PPC would shift outwards at all points if an innovation occurred only in the bicycle industry, then the PPC would shifi outwards at all points if the Country achieved a positive level of net investment, then the PPC would shift outwards at all points none of the preceding statements is correct 12. Which one of the following statements is correct for a firm in a perfectly competitive industry: a) b) c) d) e) in the short run, the firm would produce a positive output if average revenue were less than average variable costs in the short run, the firm would make economic profits if average revenue equalled average fixed costs in the long run, the firm would make normal profits (i.e., zero economic profits) if the industry price equalled marginal cost in the long run, the firm would produce a positive output even if average revenue was less than average total cost none of the preceding statements are correct Page 4 of 16 13. Suppose that Thailand has a fixed foreign exchange rate with a balance of payments deficit. Which one of the following independent events would reduce the balance-of—payments deficit: a) b) C) d) 6) Chinese exports to Thailand increased Thailand increased short-term interest rates China placed new restrictions on textile imports from Thailand more residents of Thailand visited China none of the preceding statements is correct 14. A perfectly competitive industry is in short run equilibrium and each firm is initially making normal profits. The price of a substitute good falls. As a result, which one of the following statements is correct: a) b) C) d) e) the industry price and output would both increase and each firm would produce a smaller output and make economic losses the industry price and output would both increase and each firm would produce a larger output and make economic profits the industry price and output would both decrease and each firm would produce a larger output and make economic profits the industry price and output would both decrease and each firm would produce a smaller output and make economic losses more firms would enter the industry 15. Assume that Japan has a flexible foreign-exchange rate. Which one of the following statements would allow for a depreciation of the Japanese currency: a) b) C) d) 6) Japanese exports to Australia increased more Asian visitors vacationed in Japan more American parent companies have increased their foreign direct investment in subsidiaries in Japan Brazil places new import restrictions on Japanese exports none of the preceding statements is correct 16. Which one of the following statements about investment is correct: a) b) C) d) 6) net investment may be negative net investment includes the total of all machinery and equipment produced during the year gross investment must equal net investment gross investment plus depreciation equals net investment none of the above are correct Page 5 of 16 17. In a simple economy with no government and no trade, which one of the following statements is correct in the investment/saving model: a) desired investment always equals desired saving at all levels of Y b) at equilibrium, desired saving equals desired investment and actual saving equals actual investment 0) if desired investment exceeded desired saving, then there would be unintended [undesired] inventory accumulation ' d) if desired saving exceeded desired investment, then there would be unintended [undesired] reductions in inventories e) none of the above are correct 18. A country has a simple set of behaviour equations for consumption, investment, government spending, exports and imports. Only the consumption function has slope and the marginal propensity to consume is established at 0.75. Under these conditions, which one of the following statements would be correct if the government were to raise taxes by $500 million and then use this extra tax revenue of $500 million to buy domestically produced military equipment: a) Y would be unchanged b) Y would increase by $2,000 million c) Y would decrease by $2,000 million (1) Y would increase by $500 million e) none of the above are correct 19. Monetary policy would be more effective under which one of the following set of conditions: a) the more elastic the liquidity preference curve [demand for money] and the more inelastic the marginal efficiency of investment curve b) the more elastic the liquidity preference curve and the more elastic the marginal efficiency of investment curve c) the more inelastic the liquidity preference curve and the more inelastic the marginal efficiency of investment curve d) the more inelastic the liquidity preference curve and the more elastic the marginal efficiency of investment curve e) none of the above 20. Consider the AD-SRAS [AD-SAS] model of the economy. An increase in the price of oil, a very important input in production, will cause a) both the AD and the SRAS curves to shift up b) the AD curve to shift down and the SRAS curve to shift up c) the AD curve to shift up and the SRAS curve to shift down (1) the AD curve to shift down e) the SRAS curve to shift up Page 6 of 16 a) b) d) PART II [30%] SHORT ANSWER QUESTIONS (To be answered by all students) Answer EACH of the TEN questions in a separate examination booklet Analyze the situation in each question, using a well-labelled diagram when relevant and provide a brief explanation Each question is worth 3 marks A pure monopolist is in short run equilibrium and making economic profits. Disposable incomes decrease. The product has positive income elasticity. Use a diagram to show the full impact of this shock on the pure monopolist in the short run. Briefly explain. Statement: “Diminishing marginal productivity [returns] starts at the quantity of labour input where a straight line from the origin is tangent to the total (physical) product curve.” Position: Do you agree with the statement? Draw the proper diagram to explain your answer. 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: “Sean reviews this information and suggests that the firm is not in perfect competition and should shut down to minimize its economic losses.” Position: Do you agree with the statement? Draw the proper diagram to explain your answer. Maureen consumes only tuna [x-axis product] and lamb chops [y—axis product]. Maureen receives an increase in her commission income. In order to maximize her level of consumer satisfaction, Maureen chooses to purchase fewer units of tuna after the increase in her commission income. Statement: “Sally, an economics student, believes that Maureen’s behaviour is not consistent with consumer theory.” Position: Do you agree with Sally’s View? Draw the proper diagram to explain your answer. Statement: “Products with inelastic demand curves are ‘good’ industries for the introduction of a specific commodity tax since the impact on equilibrium market price and quantity will be relatively small.” Position: Do you agree with the statement? Draw the proper diagram(s) to explain your answer. Page 7 of 16 1) Suppose that the desired cash reserve ratio is 12.5% and that there are no excess cash reserves in the banking system. Suppose now that Ryan deposits $500 in cash in his chequing account at the Royal Bank of Canada. Calculate the final change in the cash reserves of the banking system and the M1 money supply. g) Assume that Spain and Argentina produce only two goods: lamb and wine, with labour as the only factor of production. In Spain, 100 units of labour can either produce 400 units of lamb or 1,000 units of wine. In Argentina, 100 units of labour can either produce 200 units of lamb or 200 units of wine. Statement: “Sam reviews this data and takes the position that only one country has an absolute advantage in both products. Therefore, Sam concludes that the country that does not have an absolute advantage in either product cannot achieve gains from international trade.” Position: Do you agree with Sam’s Views? Explain your answer. h) Using the expenditure approach to measure GDP, estimate the specific changes in each component of GDP (e. g., consumption, investment, etc.) resulting from the following transactions: Canada imports 1,000 major computers from Japan for $10,000 Canadian each. Six hundred of these computers are sold to consumers in Canada for $14,000 each; one hundred computers are exported to Europe for $12,000 each and the remaining three hundred computers are held in inventory at their imported price. All the above figures are in Canadian dollars. i) Assume that a country has too high a level of unemployment with price stability and very low rates of interest. Statement: “Andrew, an economics student, believes that monetary policy, working through the transmission mechanism, would not bring this economy to full employment.” Position: Do you agree with Andrew’s position? Draw the proper diagram to explain your answer. j) Using the AD and SRAS [SAS] model, show what would happen to the level of prices and to the level of real GDP under each of the following independent shocks. Initially assume that the economy is not at full employment but price stability exists. i) a “tight” (contractionary) monetary policy is introduced; ii) energy costs increase; iii) labour productivity increases. Page 8 of 16 PART HI To Be Answered only by students in Professor Hare’s Sections L01 01 and L5101 Use a Separate Examination Booklet for this Section PART III [50%] Is Divided Into Three Sections: Answer the single question in Section A [11 marks] Answer three out of four questions in Section B [8 marks each: 24 marks total] ' Answer three out of four questions in Section C [5 marks each: 15 marks total] Section A [11 marks] Answer Question 1 1. - “Kelly has reviewed the literature on the importance of technological change and productivity growth. Kelly knows about the contribution to economic growth from technological change provided by the 1956 Solow model. Kelly also knows the statements by Krugman and Baumol which indicate that, in the long run, the ability of a country to increase its standard of living depends upon its ability to increase labour productivity. Connor is aware that Canada has developed two significant gaps with the United States: a productivity gap and a standard of living gap. Unfortunately, these twin gaps have been growing for a number of years. Connor supports the suggestion of Canadian businessmen who present the position that Canada should adopt the following economic priority: close the per capita income gap with the United States within fifleen years. Reguiredi Assess the importance of technological change and productivity growth as they relate to improved standards of living in industrial countries. Next, provideinformation on the twin gap problem for Canada. Explain whether it is important for Canada to reduce the twin gaps. Do you support the economic strategies of the Canadian businessmen who support full convergence with the United States within fifteen years? Where do you think the Canadian government stands on these issues? Page 9 of 16 Section B [24 marks] Answer Three of Four Questions in This Section [8 marks each] 2. “Scooters are produced with factors capital [K] and labour [L]. Constant returns to scale exists in this industry. Examine the impact on labour productivity in this industry if two independent events were to occur: a) Event One: The price of labour [the wage rate] increases by 5%, and at the same time, the price of capital [rental fee] increases by 2%; b) Event Two: A capital intensive innovation occurred in the scooter industry. Required: In each case, draw the appropriate diagram; show the impact of the shock identified and show in the new equilibrium how labour productivity would be affected by the shock. . Note: Two separate diagrams are required. 3. “Murphy spends all his disposable income on salmon steak [x-axis product] and lamb chops [y—axis product]. For Murphy, the income and the substitution effects for salmon steak work in opposite directions. The price of salmon steak increases. Colleen, Murphy’s friend, reviews the effects of the price increase for salmon steaks and suggests that Murphy’s substitution effect would be _ greater than Murphy’s income effect; the income consumption curve would be negatively sloped and the demand curve for Murphy for salmon steak would have a negative price elasticity of demand [formula calculation]. Position, consumer indifference curve diagram and explanation 4. A perfectly competitive industry is initially in short run equilibrium with exactly “11” identical firms. Each firm is initially making normal profits. The product has a negative income elasticity. A personal in...
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