eco200_mockmidterm2_2009

eco200_mockmidterm2_2009 - UNIVERSITY OF TORONTO Faculty of...

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UNIVERSITY OF TORONTO Faculty of Arts and Science December 2009 PRACTICE QUESTIONS FROM PREVIOUS TERM TESTS 1 ECO200 Non-programmable calculators are allowed No other aids allowed The contents of this term test are copyrighted by the University of Toronto. The sale, license, and bundling of the contents of the test will be prosecuted by the le- gal services of the University of Toronto. Please report unauthorized use to car- los.serrano@utoronto.ca. Question 1 (35 points) [Optimal Choice of Inputs] Consider that you are a manager of a f rm (e.g., Delphi) that produces car seats. Producing car seats requires labor (L) and capital (K). The production function of the f rm is (   )= 1 2 1 2 where  = 1 2 1 2 1 2  = 1 2 1 2 1 2 The price of labor is =50 , the price of capital is =50 . (a) What was Delphi’s isoquant function to produce 1000 car seats? [5 points] (b) What is Delphi’s marginal rate of technical substitution (i.e., MRTS)? [5 points] (c) Suppose that and are F exible. What is the optimal level of and to produce 1000 car seats [15 points] Suppose that a year later GM orders seats to Delphi with a total cost for Delphi, including labor and capital expenditures, of $100000? (d) Suppose now that =40 and the price of capital is =50 Note that the price of labor is di f erent. Assume that and are F exible. What is the optimal level of and ?[10po in t s ] Question 2: Taxation (30 points) Suppose the market for meat in Minnesota is perfectly competitive. The demand and supply of meat are the following ( ) = 400 ( )= (a) What is the equilibrium in the market for meat? [10 points] Consider that the government of Minnesota introduces a tax to producers of $2 per unit of output. (b) What is the new equilibrium? [15 points] Congressman Kennedy, from a farm district in Minnesota, proposes that consumers instead of producers should be paying the $2 tax. Assume that consumers are more F exible than producers. The congressman argues that the DWL would be smaller. 1
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(c) Explain in one line whether the congressman is right or not? (No partial credit will be provided unless you argue your answer) [5 points] Question 3: (30 points) [Taxation] Suppose the market for cheese in the US is perfectly competitive. The demand and supply of cheese are the following ( ) = 100 ( )=1 0 (a) Calculate what is the equilibrium in the market for cheese? [10 points] Consider that the US federal government introduces a tax to consumers of $2 per unit of output. (b) Calculate what is the new equilibrium? [15 points] (c) Suppose that before the tax the economy is in a long-run equilibrium where
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eco200_mockmidterm2_2009 - UNIVERSITY OF TORONTO Faculty of...

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