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Unformatted text preview: Page 1 of 17 pages. Do 5 of 7 Questions.
UNIVERSITY OF TORONTO 5
Faculty of Arts and Science . .
AUGUST EXAMINATIONS 2003 '1 We
ECONOMICS 200Y Y Duration: 2 hours
Aids Allowed: NonProgrammable Calculator STUDENT INFORMATION:
NAME (print) FIRST LAST
STUDENT #
SECTION (circle): Slasor Wolfson
INSTRUCTIONS: Select 5 questions out of the 7 questions on this exam paper. Each question is worth 20
marks. Be aware that every question spans more than one page. Note: Question 1 is for Slasor students only;
and
Question 2 is for Wolfson students only. All answers are to be written on this examination paper. Page 2 of 17 pages.
Do 5 of 7 Questions. 1. THIS QUESTION IS FOR SLASOR STUDENTS ONLY. “If there is a monopoly in an otherwise perfectly competitive economy, then the
equilibrium of the economy will n_o_t be Pareto efficient.” Explain the above statement carefully. Does it make any difference whether the
monopoly practises price discrimination or not? (Diagrams are needed, of course). Page 3 of 17 pages.
Do 5 of 7 Questions. Solution to Q1 cont’d: 2.1 b) d) Page 4 of 17 pages.
Do 5 of 7 Questions. THIS TWOPART QUESTION IS FOR WOLFSON STUDENTS ONLY. (12) Jane has a house worth $90,000, her only asset. In any given year, there is a
10% chance that it will burn doyvn. If it does, the scrap value will be $22,500. Jane
has a utility function of U = W A In the space below, draw the shape of J ane’s Utility Function. Label the axes. From part a), I know Jane is (risk neutral / risk averse / risk seeker) because: What is the Expected Value of Jane’s risky venture? EV: What is the Expected Utility of Jane’s risky venture? EU= What is the maximum Jane would be willing to pay to insure her house against
loss? Maximum = Suppose Home Insurance Company (HIC) offers insurance based on the actuarial
cost of insurance, plus a $500 administrative fee. Between what two prices could a
mutually beneﬁcial contract of insurance be made between Jane and HIC? Between and Page 5 of 17 pages.
Do 5 of 7 Questions. 2.2 (8) Let’s move to indifference theory and uncertainty. A game is proposed as
follows: A die is thrown. If a 1 or 2 shows, $6 is paid; if a 3 or 4 shows, $12 is
paid; if a 5 or 6 shows, $24 is paid. The cost to play is $14. a) How does risk averse Ron feel about this game?
(Play it / Indifferent / Reject it) b) Explain your answer to part a) above: 0) How does risk neutral Nellie feel about this game?
(Play it / Indifferent / Reject it) d) In the indifference diagram below, show the equilibrium for Ron (label as R). New
show a potential equilibrium for Nellie (label as N) that is clearly consistent with
your answer to part c. Assume a player can “take either side of the bet”. Brieﬂy explain why you selected Point R for Ron: Brieﬂy explain why you selected point N for Nellie: Page 6 of 17 pages.
Do 5 of 7 Questions. 3. Multiple Choice Provide the best answer to the following multiple choice questions by circling your response below. There are 10 questions at 2 marks each. No penalty for incorrect
responses. 3.1 Picture a graph with chicken on the vertical axis and pork on the horizontal axis.
Marco’s indifference curves are vertical. This implies that he receives no satisfaction from pork
receives no satisfaction from chicken
dislikes pork dislikes chicken likes both chicken and pork equally 9999‘s» 3.2 Wrestling tickets, W, sell for $20 and stock car race tickets, S, sell for $10. Suppose
that Billy Bob, whose preferences satisfy all the usual assumptions, buys ﬁve
wrestling tickets and two stock car race tickets each month. With this consumption
bundle, his Marginal Rate of Substitution of wrestling matches for stock car races (AS / AW) is 3. Which of the following is most likely correct? a. Billy Bob could increase his utility by buying more wrestling tickets and fewer
stock car race tickets b. Billy Bob could increase his utility by buying more stock car race tickets and fewer wrestling tickets Billy Bob is at an interior solution and is maximizing his utility Billy Bob is at a comer solution and is maximizing his utility e. Billy Bob is on his budget constraint and is maximizing his utility 9‘.“ 3.3 The demand schedule for apples slopes downwards. If that is so, which of the
following is the best answer? The substitution and income effects work in the same direction The substitution effect and the income effect work in opposite directions, with the income effect larger 0. The substitution effect and the income effect work in opposite directions, with the
income effect smaller d. Either a or b Either a or c 53".” .0 999‘.” 3.5 Page 7 of 17 pages.
Do 5 of 7 Questions. The production function q = KL exhibits decreasing returns to scale constant returns to scale increasing returns to scale decreasing returns to scale in one region and increasing returns to scale in another
region constant costs of production Suppose that the market for soap is monopolistically competitive. Which of the
following statements is most likely to be false? Each ﬁrm selling soap is able to convince consumers that its product is different from other ﬁrms’ soap Each ﬁrm will charge a price above marginal cost Each ﬁrm is unlikely to remain in the industry if it bears economic losses over a
long period of time Each ﬁrm will set marginal revenue equal to marginal cost to maximize proﬁts
Each ﬁrm will produce an output that minimizes its average costs Questions 3.6 and 3.7 below refer to the following: XYZ Company faces a wage rate of $80 per day and a daily user cost of $120 per
machine. The ﬁrm is a price taker in both factor markets. Imagine a graph with the
number of workers on the horizontal axis and machines on the vertical axis. 3.6 9999‘?” 99.0.7.” An isocost line for XYZ Company has a slope equal to: the slope of every one of its convex isoquants
—4 /3
—3/4
—2/3
—3/2 If XYZ Company is producing 600 units of output using an input combination
involving MP (Marginal Product) for labour of 4 and MP for robots (machines) of
3, then XYZ Company is: using an economically efﬁcient input combination using too many machines and not enough labour to minimize cost
using too much labour and not enough machines to minimize cost
minimizing the total cost of producing 600 units clearly a member of a cartel 3.8 9999‘?) 3.9 0999‘? 3.10 9‘93 Page 8 of 17 pages.
Do 5 of 7 Questions. Consider an isoquant curve that is graphed with units of Labour on the horizontal
axis and units of Capital on the vertical axis. Suppose that, at a given point on the isoquant, the Marginal Product of Labour is 10 and the Marginal Product of Capital
is 20. At that point the Marginal Rate of Technical Substitution (AK / AL) equals 2
the slope of the isoquant is —2 the Marginal Rate of Technical Substitution (AK / AL) is 0.5
both a and b are correct none of the above are correct If the price of a factor does not change when a ﬁrm buys more of it or less of it, the
Marginal Factor Cost of that input is the price of the factor rising falling equal to the Marginal Product of that factor
none of the above Ginny must spend her entire income on milk and chocolate. She chooses to spend it
all on milk, buying ten bottles of milk. This means that she considers chocolate to be a “bad” the ﬁrst unit of chocolate must have zero marginal utility the ﬁrst unit of chocolate must generate less marginal utility than the tenth bottle of
milk the ﬁrst unit of chocolate must generate less marginal utility per dollar than the
tenth bottle of milk none of the above are correct 4.1 4.2 Page 9 of 17 pages.
Do 5 of 7 Questions. LabourLeisure Choice A worker is free to work as many hours as she likes at a certain hourly wage rate.
She has no nonwage income. (5) Use a fully labelled indifference curve diagram to show her equilibrium,
assuming she does choose to work some hours. Use a day as the time period. (5) If the government were to introduce a social security scheme Which pays $40
per day to anyone who is not employed at all (the payment is cutoff if she works
even a little), is it possible that some workers would stop working and others would
go on working? ' (Yes / No). Explain your answer, using a diagram. 4.3 4.4 Page 10 of 17 pages.
Do 5 of 7 Questions. (5) Now consider an alternative social security scheme that also pays $40 per day to
anyone who is totally unemployed but which also allows partial payments to people
who are not totally unemployed. Under this scheme, the $40 payment is reduced by
$1 for every $2 that the recipient earns. Will some people who did not work under the original scheme in 4.2 above do
some work and thus cost the government less if this alternative scheme is adopted? (Yes / No). Explain your answer, using a diagram. (5) Will some people who worked and cost the government nothing under the
original scheme cost the government something if the alternative scheme in 4.3 is
adopted? (Yes / No). Explain your answer, using a diagram. ...
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 Fall '10
 LeeBailey
 Economics, Microeconomics, Utility, stock car race, car race tickets

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