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Unformatted text preview: ECMA04H Final Exam, December 2007 Time: 3 hours
Professors Michael Krashinsky and Gordon Cleveland THIS IS VERSION B OF THE EXAM  MAKE SURE TO INDICATE THIS
VERSION ON YOUR SCANTRON SHEET, AND ON YOUR ANSWER
BOOKLET, BOTH WHICH ARE TO BE TURNED IN AT THE END OF THE
EXAM. YOU WILL TAKE THE QUESTION SHEETS AWAY WITH YOU. INSTRUCTIONS 1. This exam consists of 14 numbered pages, plus the sheet which covers this one. Please check that you have all the pages. OWV A ~ 1 f \
'01} 5 U (9‘7 /
2. On the Scantron answer sheet, you must ‘ g \ , \
—> PRINT your last name and first name 5 if“ if ,5
—> enter your student number as the identification number ‘ S’ u
~* FILL IN THE BUBBLES under your name and student number ’3 _
—> FILL IN THE BUBBLE ASSOCIATED WITH YOUR TEST VERSION ff _, 3
NOTE  THIS IS VERSION B 3. On the answer booklet, you must fill in your name and student number. DO NOT REMOVE THE
STAPLE FROM THE ANSWER BOOKLET. 4. If you fail to carry out all the tasks indicated in parts 2 and 3, 4 marks will be deducted from your ﬁnal score. g‘ "$0 5. This exam consists of 40 multiple choice questions (and a 41St which simply confirms your exam version)
as well as several short answer questions. For the multiple choice questions, choose the correct answer. If
two multiple choice answers both seem to be approximately correct, choose the best of the two answers.
Enter the answers to the multiple choice questions on the Scantron sheet provided to you by filling in
the appropriate bubble. If bubbles are not filled in on the Scantron sheet, there will be no marks
given for answers. Each correct answer is worth 2 marks (except for question 41, which simply confirms your exam version); incorrect answers receive 0 marks. Questions 42 to 44 are to be answered in the answer
booklet.  3 6. When entering your answers on the Scantron sheet: . , , —> Use a medium (HB) pencil ‘2 :8 / lb‘ —> Fill in the bubble neatly and completely / ' —> Erase any changes as completely as possible —> Be very careful to place each answer in the correct place , / 7. Total time for the exam is 3 hours. You may leave early, but not in the last five minutes of the exam. At the end of the exam, remain in your seat. The exam will be collected from you. Wait until
you are dismissed to leave. 8. Use only approved calculators. Calculators which can store information will be confiscated. If the
confiscated calculator is found to contain notes of any kind, academic consequences willensue. 9. HINT: You will have to work quickly on this exam, so do not spend too much time on any single question. ' You will not have to provide a longer answer than is allowed for in the answer booklet.
‘ ' t ~. @3925: 10. Cheating will be dealt with to the fullest extent possible under University rules. ll W“) 3 ' ‘ . H KW) \‘S'Uvaximti
11. Good luck. Have an enjOYable Christmas break. ll Q? Li X] (’0 13 C is N 2 _ VERSIONB ,
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:30: 1’33 Page 3 of 14 This final exam includes 40multiple—choice questions (plus a 41St identifier question). Answer each question
by choosing the best alternative and indicating your choice in the appropriate place on the scantron sheet
provided with this exam (you will turn it in at the end of the exam). Questions 42 through 44 are to be
answered on the Answer Sheet (which you will also turn in at the end of the exam). You may take the
question sheets away with you, so you can use the fronts and back of these pages for your rough work. If you
wish to keep a record of your answers, make a note of them on your question sheets. Each correct answer to questions 1 through 40 is worth 2 marks (there is no deduction for wrong answers). PART I: MULTIPLE CHOICE QUESTIONS (80 marks) 1—3. A country produces goods X and Y and has the following equation for its productﬁ‘ipn possibilities
frontier: 5Y + X3/2 = 125 #6 i : 6,6» x“ 1 f ‘32? 21%!
Questions 1 through 3 concern this country. ”T / ﬁ ' 9 1. You are told that the economy is producing efficiently and has chosen to produce and consume 16 units of X and 12.2 units of Y. At this point on the production possibilities frontier, you can use calculus to obtain i la
the opportunity cost of X (rounding to two decimal points) as: ' 0W .. “is W E, X y
A) 4 B) 3.6 C) 3.2 D) 2.4 1.2 ‘ d? : bx) ‘0 F) 1.6 G) 12.8 H) 6.4 I) 0.77 J) 1.31 2. You are told that the economy is producing efficiently and has chosen to produce and consume 8 units of
X and 20.4752 units of Y (rounded to four decimal points). At this point which is on the production
possibilities frontier, you can use calculus to obtain the opportunity cost of Y (rounding to four decimal points) as:
A) 1.1785 @ 8485 C) .3907 D) 2.5594 E) .5657
F) 1.7680 . z": H) 3.5361 1) 0.7071 J) 1.4142 3. Suppose that those in charge of this economy want to maximize the value of what is produced in the
economy using international prices. Internationally, X sells for $3 and Y sells for $5, so that the equation for
value is given by the equation V = 3X + 5Y The point on the PPF that will maximize the value of the
output involves the production of how many units of X (measured to the nearest two decimal points)? A) 25 B) 16 C) 9 @27 E)1
F)20 G) 2 H) 4.24 1) 5 J) 6.67
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m2” :mmg’» '2 mg; a]! one? [0" ‘A Page 4 of 14 \M/ 4—7. The market for purebred dogs (which we will assume are produced in a competitive industry) is in
equilibrium, and its short run supply and demand schedules have the usual shapes. Purebred dogs are a
normal good and you can safely ignore any effects of income on the demand for related goods. Highprotein
dog food is a complementary good to purebred dogs, and mixedbreed dogs are a substitute good for purebred
dogs. Questions 4 through 7 concern this market in the short run, and each question should be considered in
isolation from the others (that is, in each question assume that the changes described in the other questions
have not occurred). In all cases, P" and Q“ refer to the equilibrium price and quantity of purebred dogs. 4. Increased efforts by local dog shelters to place dogs results in a reduction in the price of mixed—breed
dogs. At the same time, there is a technological innovation in breeding dogs occurs which reduces the
resources required to produce purebred dogs. As a result of all this, in the market for purebred dogs: A) P" and Q" both rise B) P" and Q’“ both fall C) P* rises and Q" falls \l/ \\/
D) P" falls and Q* rises E) P* rises, but we do not know exactly what happens to Q“ T \
(133* falls, but we do not know exactly what happens to Q* \’ G) Q" rises, but we do not know exactly what happens to P“ H) Q" falls, but we do not know exactly what happens to P* I) either P“ and Q* both rise, or P* and Q" both fall, or neither changes
J) either P" rises and Q’“ falls, or P* falls and Q" rises, or neither changes 5. Consumers’ incomes rise. At the same time, the price of mixedbreed dogs rises. As a result, in the
market for purebred dogs: @* and Q" both rise B) P* and Q* both fall C) P" rises and Q* falls T f
) P“ falls and Q” rises E) P" rises, but we do not know exactly what happens to Q"
F) P“ falls, but we do not know exactly what happens to Q’“ T f G) Q’” rises, but we do not know exactly what happens to P* H) Q" falls, but we do not know exactly what happens to P“ I) either P" and Q" both rise, or P" and Q” both fall, or neither changes
I) either P" rises and Q" falls, or P* falls and Q* rises, or neither changes 6. There is a wage increase among people who end up working as breeders of purebred dogs. At the same
time, the price of high—protein dog food rises in price. As a result, in the market for purebred dogs: A) P" and Q" both rise B) P* and Q" both fall C) P* rises and Q* falls \\/ /\\
D) P* falls and Q* rises E) P* rises, but we do not know exactly what happens to Q“
F) P" falls, but we do not know exactly what happens to Q* , ,1 4f) \\/ \
G Q" rises, but we do not know exactly what happens to P* \1,’ * falls, but we do not know exactly what happens to P* ‘ \
I) either P" and Q* both rise, or P* and Q" both fall, or neither changes \/ \/ I) either P" rises and Q* falls, or P" falls and Q* rises, or neither changes , /\ 7. There is a technological/innovation in breeding dogs occurs which reduces the resources required to \ \\/
produce purebred dogs. At the same time, the manufacturers of dog pens (a critical input for breeding (i k
purebred dogs) breaks the union representing workers in the dog pen industry; as a result, dog pens drop in price. As a result of all this, in the market for purebred dogs: A) P” and Q* both rise B) P* and Q* both fall C) P* rises and Q* falls
@P‘ falls and Q* rises E) P* rises, but we do not know exactly what happens to Q"= F) P" falls, but we do not know exactly what happens to Q" G) Q" rises, but we do not know exactly what happens to P* H) Q" falls, but we do not lmow exactly what happens to P* I) either P* and Q" both rise, or P” and Q* both fall, or neither changes
I) either P* rises and Q" falls, or P’k falls and Q* rises, or neither changes Page 5 of 14 8—1 1. A consumer has a utility function for cable movies given by the following function: U = (6+2003)X  3X2
where X is the number of cable movies viewed per year, and U is measured in dollars. The letter “a” is a
parameter of this function (that is, “a” is a constant, but you are not told what its value is; the exact value of
“a” will affect the shape of the demand curve and, of course, the exact nature of the utility function). You are
told that a>0. Using what you have learned in this course, you can easily show that the demand function for
this consumer is given by: P = (6+200a)  23X You can also show that if P = 6, then X = 100. Questions 8 through 11 concern this consumer. 8. If the price of cable movies is set at $6 per movie, the elasticity of demand for this consumer, expressed as
a positive number, will be: A) 3/100a B) 100a/6 C) 6/100a D) 100a/3 @3133)
F) 25/3a G) (3+100a)/a H) a/(3+100a) I) 50/3a “"50 9. If the price of cable movies is set at $6 per movie, the consumer surplus gained by this consumer each year
through purchasing cable movies will be: A) 600 + 10,000a B) 10,000a — 600 C) 600 + 20,000a
D) 20 000a  600 E) 40,000a F) 20,000a G) 5000a H) 10,000a I) 10,000/a J) none of the above 10. Imagine that the cable company is trying to boost sales. It offers this consumer the following alternative
to a price of $6 per movie: the consumer would pay no permovie fee, but instead would pay an annual access
charge that would permit the consumer to view as many movies as he or she liked, at no additional charge.
The maximum annual access charge that this consumer would be willing to pay (as an alternative to the $6
per movie fee) would beg», A) 600 + 3a «gym $637722); C) 600 + (9/a) D) 600 + 9a E) 3/a
F) 9/a a73"’"““’“’""‘ “““ ’ H) a/9 I) 600 + a/3 J) 600 + 3/9 11. Now forget about the allinclusive fee and return to the initial situation in which the consumer is charged
a price of $6 per unit. Suppose that the government imposes a tax of $2 per unit on this good, and that the effect of the tax falls entirely on consumers (so that the price paid by consumers rises to $8). Assume that
a>.01
The deadweight loss associated with such a tax would be: A)a B) 2a C) 43 D) 1/4a E) l/a G) 2/a _ H) 4/a I) 200  (2/a) J) 200  (l/a) \ . . Page 6 of 14 12. Which of the following statements about the elasticity of demand is (are) generally true? @the demand is inelastic, a rise in price will in general cause the total amount spent on the good
by consumers to rise.
11) If the demand is inelastic, we know that a monopolist will want to lower the price
If the demand is elastic and producers try to sell more of the good, the total revenue received by
producers will generally rise. A)on1yIv B) only 11 C) onlyIII D)I&II 61E F) H & 111 G) I, I1 & III H) none of the three 13—24. A firm in a perfectly competitive constant cost industry has total costs in the short rlén gjigirgclzy:
TC=0.25q2+5q+625 q 2 2 W ‘7” ‘ where q is output per day and TC is the total cost per day in dollars. The firm has fixed costs of $400 (already included in the TC equation above). The TC equation generates minimum average costs of $30 (per unit) at q = 50. You are also told that this size firm generates minimum long run average costs (that is, minimum LAC occurs at q = 50, with min LAC = $30). Questions 13 through 24 concern this firm and this industry. / 13. In the short run, shut down price for this firm is: \ \O
A) $30 B) $28 C) $25 D) $24 E) $22 K X /
F) $10 G) $15 H) $18 @0 J) $21 . X” ‘ 14. Now you are told that in the short run there are 1250 ﬁrms, including this one, in the industry, all with
the same cost curves described above. Suppose that the demand curve facing the industry is given by the
equation P = 75 — .0006Q where P is the price per unit and Q is the number of units demanded per day.
The profit earned by an individual firm per day in the short run is: A) $0 B) $150 @125? D) $165 E) $348
F) $320 G) $241 _ 1) $77 J) $89 15 . Continuing the situation described in question 14 (the short run, with 1250 ﬁrms and demand given by
P = 75 — .0006Q), the equilibrium price in the short run is: A) $25 B) $30 C) $31 D) $32 6%
F) $34 G) $35 H) $36 1) $38 J) $40 16. Continuing the situation described in question 14 (demand given by P = 75 —' .0006Q, 1250 firms in the
short run), suppose now that we move into the long run (you are reminded that information on long run costs
was given at the beginning of the problem). The number of firms in the industry, rounding to the nearest
integer, is: ' A) 1250 B) 1000 C) 1400 D) 1450 gig/0P F) 1600 G) 1750 H) 1800 I) 2000 J) 500 17. Continuing with question 16, suppose that we are still in the long run. The total output of the industry
per day in the long run is: A) 25,000 B) 50,000 C) 100,000 D) 120,000 B) 125,000
F) 90,000 G) 80,000 15m» I) 70,000 J) 66,667 Page 7 of 14 18. Now return to the situation described in question 14 (the short run, with 1250 firms and demand given by P = 75 — .0006Q). Now suppose that the government imposes a tax on the sellers of this product of $10 per
unit. In the short run, the fraction of the tax that falls on sellers will be equal to: A) 0 B) 1/10 C) 1/5 D) 2/5 E) 1/2 @ G) 7/10 H) 4/5 1) 9/10 J) 1 19. Continue the problem in question 18 (in which the government imposes a tax on the sellers of this
product of $10 per unit). In the short run, the total price paid by buyers will be equal to: A) $40 @P C) $38 D) $37 E) $36
F) $34 G) $33 H) $32 1) $31 J) $30 20. Continue the problem begun in question 18 (in which the government imposes a tax on the sellers of this
product of $10 per unit). The firm in the short run will earn profits of : A) $0 B) $102 D) $401 E) $50
F) $51 G) $431 " 381 1) $225 J) none of the above 21. Continue the problem begun in question 18 (in which the government imposes a tax on the sellers of this product of $10 per unit). Now suppose that we are in the long run. The number of firms in the long run,
rounded to the nearest integer, will be: A) 1250 B) l C) 1400 D) 1450 E) 1500
F) 1133 ) 1167 / H) 1083 I) 1033 J) 833 L13 = 7r \omvé Q3 Page 8 of 14 22. Now return (one last time!) to the situation described in question 14 (the short run, with 1250 firms, and
no tax). Suppose now that demand falls dramatically to P = 32 — .0006Q). The equilibrium price in the short run is: . v (y "5);, (:9; mamas r ostlmroﬁe) *5“
A) $0 = $15.80 1 C) $15 D) $24 E) $20 F) $30 G) $32 H) $36 D$38 J) $40 17 T \noeou '2” ' ~
23. The statement that best represents the situation described in question 22 in the short run is: ’2‘” 0”“ A All firms will operate in the short run, but will lose more than their fixed costs. . P W ““0“ “WC C7 Rawam‘
a, All firms will shut down in the short run. C) All firms will earn positive profits in the short run. D) All firms will operate in the short run, but some will lose more than others. E) Some firms will shut down in the short run and some will operate; those that operate will do better than
those that shut down. F) Some firms will shut down in the short run and some will operate; both those that operate and those that
shut down will lose their variable costs. G) Some firms will shut down in the short run and some will operate; those that shut down will do better
than those that operate. H) Some firms will shutdown in the short run and some will operate; both those that operate and those that
shutdown will lose their fixed costs. 24. Continue the problem begun in question 22. Now suppose that we are in the long run. The number of
firms in the long run, rounded to the nearest integer, will be: A) 1250 B) 1000 C) 1400 D 1450 E) 1500
F) 667 G) 500 H) 333 @ J) 167 go a ”314‘:me Q Page 9 of 14 2527. Suppose that output is produced by relatively small factories with long run average cost curves having
their minimums at 12 units of quantity per day and average cost of $25 per unit. Since 12 units is much less
than the total number of units consumed each day, this industry would normally be competitive (assume that
each firm operates one factory), but for comparison, we will permit a monopolist to seize control of all the
factories, close down any that are not needed, and bar entry into the industry. If and when the industry is
monopolized, average cost does not change, so that the monopolist may produce as much or as little as is
desired, at $25 per unit. Demand in the industry is given by P = 40  0.0025Q where P is the price per unit and Q is the total number of units demanded by consumers per day. Questions
25 through 27 concern this industry. 25. When the industry is perfectly competitive (that is, before the monopolist seizes control of the industry),
the number of firms in the industry, rounding to the nearest integer, is: A) 100 B) 150 C) 250 D) 300 E) 333
F) 1500 G) 1000 H) 750 @109 J) 400 26. When the industry is monopolized, the dollar value of the loss suffered by consumers I A) $0 B) $5625 C) $11,250 D) $22,500 E) $33,750
F) $45,000 G) $67,500 H) $90,000 I) $112,500 27. When the industry is monopolized, the efficiency loss to society (also known as the deadweight loss) will
be: A) $0 B) $5625 /C:$1 ﬁ? D) $22,500 E) $33,750
F) $45,000 G) $67,500 H) $90,000 I) $112,500 J) $225,000
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1/ 28—30. A monopolist in the short run has total costs given by the following equation:
TC:TFC+mQ+0.5nQ2 W2,“ m r ﬂQ/ where TFC is the total fixed cost, and m and n are parameters in the cost function. The monopolist faces a
demand curve given by the equation: P=AbQ ?: Pr rle where A and b are parameters in the demand function. As before, you are reminded that parameters are constants whose value is not known to you; the parameters define the exact shape of the demand curve and the cost curves. You are given the fact that the parameters and the TFC are chosen so that there are no issues in this question of the firm losing so much money that it chooses to shut down. Questions 28 through 30 concern this situation. m t r\ c) *— A ~ My (‘3 «f e W "'7‘ 2’99"
hawker), ‘2‘ ﬁr "fl/Rb m by the profitmaximizing monopolist will be: C) (A—m / b+n D) (A2m)/(b+n)
G)" Am H) (2b+n)/(A—m) \N A) (A2m)/(2b+n)
E) (Ab)/(m+0.5n) .
I) (2b+n)/(A2m) J) (m+0.5n)/b 29. Now the government places a tax of T dollars per unit on the seller (the monopolist). The tax is not so
large as to eliminate all production in this industry. In the short run, the fraction of the tax which falls on the
buyers is: A) (A—rn)/(2b+n) B) b/(2b+n) C) 2b/(2b+n) QHQBLYIL
E) b/(b+n) F) n/(b+n) G) b/n H) n/b
I) (b+n)/(2b+n) J) (2b+n)/(b+n) 30. Continuing question 29 in which the government places a tax of T dollars per unit on the seller (the
monopolist): In the short run, the fraction of the tax which falls on the seller is: A) (A—m)/(2b+n) B) b/(2b+n) C) 2b/(2b+n) D) n/(2b+n)
E) b/(b+n) B/LILCbin)_\ G) b/n H) n/b
I) (b+n)/(2b+n) (I) (2b+n)/(b+n) ﬂ) mrmtlfc=pt€lloﬂ L
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CV" h ”(37: s,“ "Gritmm Page 11 of 14 31. You are told that a firm is producing in the short run where AC > P = MR = MC >AVC. Based on this
information, you would conclude that the firm: A) is earning positive profits and should not change the level of output AC 7 F I: ‘M {I W... ‘7 “Vt
B) is earning positive profits and should increase the level of output ﬂ \\,
is earning positive profits and should decrease the level of output
is earning negative profits and should not change the level of output
E)is earning negative profits and should increase the level of output
F)/is earning negative profits and should decrease the level of output
G) is earning negative profits and should shut down
H) is earning zero profits and should not change the level of output
I) is earning zero proﬁts and should increase the level of output
J) is earning zero profits and should decrease the level of output 32. You are told that a firm is producing in the short run where P > AC >MR > MC > AVC. Based on this
information, you would conclude that the firm: A) is earning positive profits and should not change the level of output @is earning positive profits and should increase the level of output
) is earning positive profits and should decrease the level of output D) is earning negative profits and should not change the level of output E) is earning negative profits and should increase the level of output F) is earning negative profits and should decrease the level of output G) is earning negative profits and should shut down H) is earning zero profits and should not change the level of output I) is earning zero profits and should increase the level of output J) is earning zero profits and should decrease the level of output 3335. There are two firms in a small and isolated community, and each is generating 100 units of pollution.
The residents suffer harm of $32 for each unit of pollution, and thus conclude that they would benefit $32 for
each unit of pollution abatement by the firms. The cost of pollution abatement for the two firms is as
follows: TCAI = 4X12
TCA2 = 2X2 + 1.5X22 where TCA1 and TCA2 are the total costs of abatement for firms 1 and 2, and X1 and X2 are the number
of units abated by each firm respectively. Questions 33 through 35 concern this situation. rim31 mm axx if n
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: 1‘1 it; 3 Page 12 of 14 33. The optimal amount of abatement for both firms together (that is, the total amount of abatement for this
community is: A) 4units B) 6 units C) 8 units 12) 10 units E) 12 units
F) 20 units G) 18 units H) 16 units I) 14 units J) none of the above 34. Suppose that the government correctly determines the optimal amount of pollution abatement, but
decides that the best way to eliminate the correct amount of pollution is to pass a law requiring each firm to
eliminate exactly half of the optimal number of units. Criminal penalties will be levied against firms which
fail to achieve their targets, and firms are not permitted to trade responsibilities with other ﬁrms. In this case,
this policy will raise the total cost of abatement above the efficient solution by: A) $24.75 B) $87.50 C) $196 D) $234 F) $49.50 G) $64 H) $170 1) $35.50 J) none of the above 35. The government is trying to decide between two methods of reducing pollution. One is a tax on
emissions of pollution. The second is a system of tradeable emissions permits. Which of the following
statements about the comparison of the two systems are generally correct? I) Tradeable emissions permits become a valuable asset for firms with low marginal costs of
abatement.
II) A system of tradeable emissions permits will provide stronger incentives for firms to make
pollutionabating innovations than a tax on emissions.
IH) Both taxes and tradeable permits can potentially provide the appropriate incentives for firms to
engage in the efficient amount of pol tion reduction.
A) only I B) only [I C) only III ) E) I & III
F) II & III G) I, H & 111 H) none of the three 36. Which of the following statements about the regulation of natural monopolies are generally correct? I) Regulators often attempt to set price equal to average cost. 1/ \/ II) The most efficient outcome would be to set price equal to marginal cost, but this requires
government subsidies. HI) Regulated firms may lose the incentive to keep costs low. \/ A) onlyI B on C) onlyIII D)I&II E)I&III
F) II & HI G) I, II & III H) none of the three 37. Which of the following statements about pure public goods are generally correct? 1) Public goods are generally both nonrival and excludable.
II) Free—rider problems generally make the market fail to provide the efficient amount of a public good/
HI) All goods provided by governments are known as public goods. A)onlyI C)onlyIII D)I&]I E)I&III F) II & III G) I, H & III H) none of the three Page 13 of 14 38—40. A small country has domestic demand and supply curves given by the following equations: domestic demand P = 200 — .04Q domestic supply P = 20 + .05Q
If there is no trade, equilibrium quantity is 2000 and equilibrium price is $120.
The country discovers that it can buy or sell as much of the commodity internationally as it wishes at a price
of $40 per unit. Questions 38 through 40 concern this country. 38. If the country moves from autarchy to free trade, the net gain to this country will be: A) $4000 B) $8000 C) $20,000 D $36,000 E) $72,000”
F) $256,000 G) $200,000 H) $167,000 1W J) $108,000 39. Suppose that the country imposes a tariff equal to 50% of the international price. The amount of revenue
collected through this tariff will be: A) $8000 B) $16,000 C) $20,000 D) $24,000 E) $30,000
F) 54,000 G) $48,000 H) $64,000 1) $70,000 J) $80,000 40. Continue the situation in question 39 in which the country imposes a tariff equal to 50% of the
international price: the deadweight loss associated with the tariff (relative to the situation under free trade)
will be: A) $1000 B) $5000 r/C) $9000. D) $4000 E) $12,000
F) $15,000 G) $18,000 , 00 1) $20,000 J) $28,000 41. What is the version of the exam which you have just written? Hint  your correct answer is B A) Version A B) Version B C) Version C D) Version D
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01" ‘éQU Page 14 of 14 PART II: SHORT ANSWER QUESTIONS (20 marks) Answer each question in the appropriate place in the ANSWER BOOKLET. Provide as much detail as
possible in the diagrammatic answers. 42. In Canada, the production of 1 unit of food (F) requires 1/10 of a unit of labour and the production of 1
unit of eleCtronic equipment (E) requires 1/4 of a unit of labour. In Japan, the production of 1 unit of food
(F) requires 3/4 of a unit of labour and the production of 1 unit of electronic equipment (E) requires 1/8 of a ‘
unit of labour. Canada has 100 units of labour and Japan has 120 units of labour. In the absence of trade,
Canada produces and consumes 500 units of food and 200 units of electronic equipment, and Japan produces
and consumes 120 units of food and 240 units of electronic equipment. These two products and these two
countries are the only ones in the world. When trade is opened up, the two countries trade food for electronic
equipment clothing at a 3to4 ratio (3 units of food for every 4 units of electronic equipment), and 240 units
of food and 320 units of electronic equipment are exchanged. On the diagrams provided, draw the
production posSibilities curve for each country. Indicate (POINT A) where each country starts out before
trade occurs. Indicate the point at which each country produces (POINT P) and consumes (POINT C), and
show the trading line (the consumption possibilities curve) for each country. Label your diagram as completely as possible. Below the diagram, explain who will oppose and support free trade in each country.
(8 marks) 43. On the diagram provided, you are shown the AC, AVC, and MC curves for a monopolist, as well as the
demand curve and MR curve facing the monopolist. On the diagram clearly show the monopoly output and
price (label them as QM and PM), and monopoly profit as an area (label the area as PROFIT and indicate
whether it is positive or negative). (4 marks) 44. There are only two producers of widgets in a country, and entry is impossible. Each producer can
produce widgets at a cost of exactly $2 per unit, and each firm can produce either 2, 3, or 4 units of output.
The demand curve facing the entire industry is given by P = 14  Q
Assume that each firm sets its output based on the assumption that the other firm will not vary what it
produces. Fill in the payoff matrix provided in the answer booklet. In the matrix insert arrows clearly
showing the incentives for each firm to leave or enter each box. Clearly show the box which maximizes joint
profits (indicate with the letters JPM) (and splits them evenly between the two firms) and the box which
represents the stable (“Nash”) equilibrium (indicate with the letters SE). Below the diagram indicate the gain to society (also called the net social benefit) that occurs in the box which maximizes joint profits (and
splits them evenly between the two firms) and in the box which represents the stable (“Nash”) equilibrium. (8 marks) _.ii..._._.........W................:
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 Fall '09
 Cleverland

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