test2_solns - Department of Economics University of Toronto...

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Page 1 of 13 Department of Economics Prof. Gustavo Indart University of Toronto June 26, 2008 ECO 100Y INTRODUCTION TO ECONOMICS Midterm Test # 2 LAST NAME FIRST NAME STUDENT NUMBER Circle your section of the course : L0201 – T/R from 3:00 to 5:00 PM L5101 – T/R from 6:00 to 8:00 PM INSTRUCTIONS : 1. The total time for this test is 1 hour and 50 minutes. 2. Aids allowed: a simple calculator. 3. Write with pen instead of pencil. DO NOT WRITE IN THIS SPACE Part I 1. /10 2. /10 3. /10 4. /10 5. /10 Part II 1. /15 2. /15 Part III /40 TOTAL /120 A A SOLUTIONS
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Page 2 of 13 PART I (50 marks) Instructions : Answer all questions in the space provided (if space is not sufficient, continue on the back of the previous page). Each question is worth 10 marks. Marks will be given entirely for the explanation. 1. (From Test 1 – Summer 2007) Oranges are produced with a fixed factor (land) and a variable factor (labour). Statement: Ronaldo – a former ECO100 student – states with authority that when the average product of labour is increasing, the marginal product of labour must also be increasing in the orange industry. Position: Do you agree with Ronaldo’s statement? Use a proper diagram to analyze this situation and indicate, with reasons, whether you agree or disagree with Ronaldo. I don’t agree with Ronaldo’s statement. The average product of labour is increasing as long as the marginal product of labour is greater than the average product. Let’s look at an example. Suppose that the average product of labour is 10 when 5 units of labour are used in production and that the marginal product of the 6 th unit of labour is 16 – what is the average product of labour when 6 units of labour are used in production? Well, since the additional unit of labour increases total product by more than each of the previous 5 units had, on average, increased total product, the average product of labour rises. In our example, total product increases from 50 units to 66 units and thus the average product of labour increase from 10 units to 11 units. Therefore, the correct statement should be that when the average product of labour is increasing, the marginal product of labour must be greater than the average product in the orange industry. But note that the marginal product of labour might be increasing or decreasing when it’s greater than the average product. This is illustrated in the following diagram. AP MP A B L L B L A AP MP
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Page 3 of 13 2. (From Test 2 – Summer 2006) Scooters are produced in a constant cost industry with two factors of production: capital [K] and labour [L]. The price of labour [the wage rate] increases by 5% and, at the same time, the price of capital [rental fee] increases by 2%. Statement:
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test2_solns - Department of Economics University of Toronto...

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