test2_solns

# test2_solns - Department of Economics University of Toronto...

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Page 1 of 11 Department of Economics Prof. Gustavo Indart University of Toronto July 27, 2006 ECO 100Y – L0201 INTRODUCTION TO ECONOMICS Midterm Test # 2 LAST NAME FIRST NAME STUDENT NUMBER INSTRUCTIONS : 1. The total time for this test is 1 hour and 50 minutes. 4. Aids allowed: a simple calculator. 5. Write with pen instead of pencil. DO NOT WRITE IN THIS SPACE Part I /30 Part II 1. /5 2. /5 3. /5 Part III 1. /30 2. /25 TOTAL /100 SOLUTION

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Page 2 of 11 PART I (30 marks) Instructions : Enter your answer to each question in the table. Only the answer recorded in the table will be marked. Table cells left blank will receive a zero mark for that question. Each question is worth 3 (three) marks. No deductions will be made for incorrect answers. 1. Consider a perfectly competitive firm in the following position: output = 4000 units, market price = \$2, fixed costs = \$10,000, variable costs = \$1000, and marginal cost = \$1.10. To maximize profits in the short-run , the firm should A) reduce output B) expand output C) shut down D) increase the market price E) not change output 2. In the short-run, a decrease in a perfectly competitive firm’s fixed costs should lead to 3. Suppose a typical competitive firm has the following data in the short-run : price = \$10; output = 100 units; ATC = \$12; AVC = \$7. 4. 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? 1 2 3 4 5 6 7 8 9 10 B E B D C A E C B B
Page 3 of 11 5. 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 from 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 firms, except A, cooperate and restrict output D) no firms restrict output E) all firms revert back to their competitive outputs

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