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test3_mar07

# test3_mar07 - Department of Economics University of Toronto...

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Page 1 of 7 Department of Economics Prof. Gustavo Indart University of Toronto March 7, 2008 ECO 100Y – L0201 INTRODUCTION TO ECONOMICS Midterm Test #3 LAST NAME FIRST NAME STUDENT NUMBER INSTRUCTIONS : 1. The total time for this test is 50 minutes. 2. This question booklet has 7 (seven) pages. 3. Answer all questions in the space provided. If space is not sufficient, continue on the back of the previous page. 4. Aids allowed: a simple, non-programmable calculator only. 5. Use pen instead of pencil . DO NOT WRITE IN THIS SPACE Part I 1. /12 Part II /20 2. /16 3. /12 TOTAL /60

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Page 2 of 7 PART I (50 marks) Question 1 (12 marks) Consider the market for lumber, which we assume here to be perfectly competitive. The diagram below shows the initial equilibrium, where MC P is the private marginal cost, MB P is the private marginal benefit, and MB S is the social marginal benefit. a) Suppose that for each unit of lumber produced, the firm also generates \$5 of damage to the environment. Draw the social marginal cost (MC S ) curve in the diagram. (4 marks) b) What is the allocatively efficient level of lumber output? Briefly explain when allocative efficiency is achieved . (4 marks) c) What can the government do to have the lumber industry producing the allocatively efficient level of output? Briefly explain . (4 marks) \$ Q 15 10 S = MC P D = MB S = MB P
Page 3 of 7 Question 2 (16 marks) [Note: This question is a simplified version of a problem solved in class.]

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