A03-part1 - 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

Info iconThis preview shows pages 1–10. Sign up to view the full content.

View Full Document Right Arrow Icon
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 2
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 4
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 6
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 8
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 10
This is the end of the preview. Sign up to access the rest of the document.

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: Non-Programmable 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 TWO-PART 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. Labour-Leisure Choice A worker is free to work as many hours as she likes at a certain hourly wage rate. She has no non-wage 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. ...
View Full Document

This note was uploaded on 04/08/2010 for the course ECONOMICS ECO200 taught by Professor Leebailey during the Fall '10 term at University of Toronto- Toronto.

Page1 / 10

A03-part1 - 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

This preview shows document pages 1 - 10. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online