test3_solns

# test3_solns - Department of Economics University of Toronto...

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Page 1 of 10 Department of Economics Prof. Gustavo Indart University of Toronto July 24, 2009 ECO 100Y INTRODUCTION TO ECONOMICS Midterm Test # 3 LAST NAME FIRST NAME STUDENT NUMBER Check your section of the course : L0201 (T/R from 2:00 to 4:00 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 /25 Part II 1. /12 2. /7 3. /8 4. /8 5. /12 6. /8 TOTAL /80 SOLUTIONS

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Page 3 of 10 PART II (55 marks) Instructions : Answer all six questions in the space provided. Question 1 (12 marks) Pando Publishers is preparing the publication of a new first-year economics textbook. Pando will have the exclusive rights to publish this textbook. The demand curve for this textbook is given by the expression P = 150 – 0.01 Q , where P is the price in dollars and Q is the quantity of books. Pando only faces the following costs: 1) the author is paid \$60 thousand to write the book; and 2) the marginal cost of publishing the book is a constant \$30 per book. a) What is the expression for Pando’s marginal revenue (MR) curve? (2 mark) The marginal revenue curve has the same vertical intercept of a straight line demand curve but it is twice as steep: MR = 150 – 0.02 Q b) Draw Pando’s demand (D), marginal revenue (MR), average variable cost (AVC), and marginal cost (MC) curves in the diagram above. (2 marks) Price (dollars) Quantity of books (thousands) 10 20 150 50 100 5 15 40 6 AVC = MC MR D 7.5 30 90 Economic Profits

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Page 4 of 10 c) What quantity would Pando choose to print if it wishes to maximize profits? What price would it charge? Briefly show how you obtained all these figures . Show Pando’s equilibrium price and quantity in the diagram above. (2 marks) 1) MR = MC to determine Q*. 150 – 0.02 Q = 30 Æ 0.02 Q = 120 Æ Q* = 120/0.02 = 6,000 2) P* = 150 – 0.01 Q* = 150 – 0.01 (6,000) = 150 – 60 = 90 d) What is the average total cost (AC) of producing the equilibrium output of part c) above?
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