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test2_solns

test2_solns - Department of Economics University of Toronto...

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Page 1 of 9 Department of Economics Prof. Gustavo Indart University of Toronto December 2, 2005 ECO 100Y – L0101 INTRODUCTION TO ECONOMICS Midterm Test #2 LAST NAME FIRST NAME STUDENT NUMBER INSTRUCTIONS : 1. The total time for this test is 55 minutes. 2. Answer all questions in the space provided (if space is not sufficient, continue on the back of the previous page). 3. Aids allowed: a simple , non-programmable calculator. 4. Use pen instead of pencil . DO NOT WRITE IN THIS SPACE 1. /10 5. /13 2. /10 6. /12 3. /16 7. /9 4. /12 8. /18 TOTAL /100 SOLUTIONS

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Page 2 of 9 Question 1 (10 marks) The diagram below illustrates a typical taxi driver’s individual supply curve (assume that each taxi ride is of the same distance). a) Suppose that the city sets the price of taxi rides at \$6 per ride. What is this typical taxi driver’s producer surplus? Explain . (5 marks) If the price of taxi rides is \$6, then the number of taxi rides supplied by this taxi driver will be 60. The producer surplus is the area below the price line and above the supply curve, that is, the difference between the price of a taxi ride and the minimum amount the taxi driver is willing to accept for each ride. The area representing the producer surplus is an inverted right-angle triangle where the base is 60 rides and the height is \$6 for a total producer surplus equivalent to \$180 (recall that the area of a triangle is equal to ½ * the base * the height). This area is shown in the diagram above. b) Suppose now that the city keeps the price of a taxi ride set at \$6, but decides to charge taxi drivers a “licensing fee.” What is the maximum licensing fee the city could charge to the typical taxi driver? Explain . (5 marks) The city could charge this taxi driver a maximum licensing fee equal to her consumer surplus, that is, \$180. If this were the case, then the taxi driver would be obtaining just the equivalent to the minimum price she’s willing to accept for each of the 60 rides. Price of taxi ride Quantity of taxi rides \$8 \$4 40 80 S \$6 60
Page 3 of 9 Question 2 (10 marks) For each of the following situations, draw a diagram containing two indifference curves that will represent the consumer’s preferences, and explain your answer. a) For Isabel, cars and tires are perfect complements, but in a ratio of 1:4; that is, for each car, Isabella wants exactly four tires. Be sure to label and number the axes of your diagram. Place tires on the horizontal axis. (5 marks) If cars and tires are perfect complements for Isabel, then an additional car without four additional tires will not give her any additional utility or satisfaction. Similarly, four more tires without an additional car will not give her any additional utility or satisfaction either. Her indifference curves, therefore, are L-shaped and vertices of these indifference curves must be multiples of the ratio 1:4 of cars to tires. In the diagram we can see two indifference curves where the vertices are 1 car and 4 tires, and 2 cars and 8 tires respectively. The curve further from the origin represents the higher level of utility.

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test2_solns - Department of Economics University of Toronto...

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