eco 100y introduction to economics midterm test # 2.../5 2. /5 3. /5 4. /5 5. /5 part iii 6. /15 7....

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Department of Economics Prof. Gustavo Indart University of Toronto June 26, 2012

ECO 100Y INTRODUCTION TO ECONOMICS

Midterm Test # 2

LAST NAME

FIRST NAME

STUDENT NUMBER

Check your section of the course: □ L0101 (M/W from 2:00 to 4:00 PM)

□ L0201 (T/R from 2:00 to 4:00 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. /5

2. /5

3. /5

4. /5

5. /5

Part III 6. /15

7. /10

TOTAL /75

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PART I (25 marks)

Instructions: Enter your answer to each question in the table below. Only the answers recorded in the table will be marked. Table cells left blank will receive a zero mark for that question. Each question is worth 2.5 marks. No deductions will be made for incorrect answers.

1 2 3 4 5 6 7 8 9 10

1. The average product for six workers is 18. If the marginal product for the seventh worker is 15, which one of the following statements is correct?

A) Marginal product is rising and average product is falling. B) Both marginal product and average product are falling. C) Marginal product is falling and average product is rising. D) Both marginal product and average product are rising. E) Not enough information to determine which one is correct.

2. Suppose fixed cost is $500 and average variable cost is $20 at all levels of output. Given

this information, which one of the following statements is true? A) Marginal cost will be less than average variable cost. B) Average total cost will be constant. C) Marginal cost will equal average total cost. D) Average total cost will always decrease as output increases. E) None of the above is true.

Use this space as scrap paper.

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3. When the 5th unit of labour is hired, total product increases from 100 to 120 units of output per unit of time. Given this information, which one of the following statements is true?

A) Marginal product must be increasing. B) Marginal product must be greater than average product. C) Marginal product must be decreasing. D) Marginal product must be constant. E) Not enough information to determine which one is true.

4. For a certain firm, total cost is $100 at 5 units of output and $130 for 6 units. In that range of

output, which one of the following statements is true? A) Marginal cost is rising and greater than average total cost. B) Marginal cost is decreasing and less than average total cost. C) Marginal cost is rising and less than average total cost. D) Marginal cost is decreasing and greater than average total cost. E) Not enough information to determine which one is true.

5. A firm is using its plant to produce 500 units of output daily. Its marginal cost at this output is

$8.00; its average cost is $7.50; its average variable cost is $4.00. Therefore, the daily fixed cost associated with this plant must be

A) $7.50. B) $750. C) $1,750. D) $3,750. E) none of the above.


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Table 1 shows the marginal cost, average variable cost, and average (total) cost of producing various quantities of a commodity by a profit-maximizing firm in a perfectly competitive industry.

Table 1 Output (units) 3 5 8 10 20Marginal Cost $8 $10 $15 $30 $45Average Variable Cost … $10 … 22.5 …Average Cost $40 $25 $27.375 … $33.75

6. Given the information in Table 1 above, what is the firm’s total fixed cost? A) $36. B) $75. C) $84. D) $96. E) It cannot be determined with the information provided.

7. A perfectly competitive firm’s marginal cost is $35, its average cost is $40, its average

variable cost is $30, and its output is 800 units. What is its total cost of producing 801 units? A) Less than 32,000. B) More than 32,035 but less than 32,040. C) 32,035. D) More than 32,000 but less than 32,035. E) None of the above.

8. Jack has a monthly income of $85 which he spends on books (measured on the X-axis) and

CDs (measured on the Y-axis). The price of books is $20 a piece and the price of CDs is $5 a piece. Jack buys 3 books and 5 CDs each month. With this consumption bundle, his MRS of books for CDs is 4. Given this information, which one of the following statements is true?

A) Jack could increase his utility by buying more CDs and fewer books. B) Jack could increase his utility by buying more books and fewer CDs. C) Jack could increase his utility by buying more CDs and more books. D) Jack is maximizing his utility at the present consumption bundle. E) Not enough information to determine which one is true.


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Diagram 1: Rachel’s Budget Lines

9. Refer to Diagram 1 above. Suppose that Rachel’s budget line has changed from BL1 to BL2. Which one of the following would explain the change in Rachel’s budget line?

A) Both the price of food and Rachel’s income increased. B) Both the price of clothing and Rachel’s income decreased. C) The price of food increased and Rachel’s income decreased. D) The price of food decreased and Rachel’s income increased. E) Both the price of food and Rachel’s income decreased.

10. John consumes only two goods: Good X and Good Y. Good X is an income-independent

good for John. He is presently consuming a combination of X and Y that allows him to maximize his utility. If the price of Good X increases and John wishes to maximize his utility, which one of the following statements is correct?

A) John will definitely decrease his consumption of Good X but will increase his consumption of Good Y.

B) John will definitely decrease his consumption of Good X but his consumption of Good Y could either increase or decrease.

C) John will definitely decrease his consumption of both Good X and Good Y. D) John will definitely decrease his consumption of Good Y but will keep his

consumption of Good X unchanged. E) John will definitely decrease his consumption of Good Y but will increase his

consumption of Good X.


BL1

Qua

ntity

of c

loth

ing

Quantity of food

BL2

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PART II (25 marks)

Instructions: Answer all questions in the space provided. Each question is worth 5 marks.

1. Jessica spends all her disposable income on video games [X-axis good] and books [Y-axis good]. The price of video games increases. Jessica has a negative income elasticity for video games and her substitution effect is always greater than her income effect.

Statement: Samantha believes that Jessica will purchase fewer video games after the price increase, her income-consumption line will be negatively sloped, and her demand curve for video games will have a positive slope.

Position: Do you agree with Samantha’s beliefs? Use a proper consumer indifference curve diagram to analyze this situation and indicate, with reasons, whether you agree or disagree with Samantha’s beliefs.

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2. As more labour is used in the process of production, it is generally assumed that the marginal product of labour first increases, it reaches a maximum at some point, and then it decreases.

Statement: Kalifa, an ECO100 student who misses classes regularly, believes that diminishing marginal productivity starts at the quantity of labour at which a straight line through the origin is tangent to the total product curve.

Position: With the help of a proper diagram explain whether you agree or disagree with Kalifa’s belief.

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3. Assita consumes only tuna [X-axis good] and lamb chops [Y-axis good]. The price of tuna falls. In order to maximize her level of consumer satisfaction, Assita chooses to purchase the same quantity of tuna after the decrease in price.

Statement: Christelle, another economics student who misses classes regularly, believes that Assita’s behaviour is not consistent with consumer theory.

Position: Do you agree with Christelle’s view? Use a proper consumer indifference curve diagram to analyze this situation and indicate, with reasons, whether you agree or disagree with Christelle’s beliefs.

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4. Abdul spends all his disposable income on steak [X-axis good] and tuna fish [Y-axis good]. Abdul’s income and substitution effects for steak work in the same direction but the substitution effect is greater than the income effect. The price of steak increases.

Statement: Jad, a good friend of Abdul, suggests that as a result of this price increase, Abdul would now maximize his level of consumer satisfaction by purchasing fewer units of steak; his income consumption curve would have a negative slope; and Abdul’s demand curve for steak would also have a negative slope.

Position: Do you agree with Jad’s suggestions? Use a proper consumer indifference curve diagram to analyze this situation and indicate, with reasons, whether you agree or disagree with Jad’s suggestions.

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5. Stephenny’s marginal rate of substitution (MRS) between coffee (X-axis good) and donuts (Y-axis good) is 3. Stephenny’s tastes change after reading that coffee is bad for one’s health.

Statement: Joudi, a good student of economics, is of the view that Stephenny’s MRS will now be less than 3 at the initial consumption bundle.

Position: Do you agree with Joudi’s view? Analyze this situation and indicate, with reasons, whether you agree or disagree with Joudi’s view.

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PART III (25 marks)

Instructions: Answer all questions in the space provided.

6. (15 marks) Alexander has a monthly income of $200 which he totally spends on gas for his car and food. Gas is an income-independent good for Alexander. The price of gas is $2.00 per litre and the price of food is $2.50 per unit.

a) Write the expression for Alexander’s budget line. Sketch Alexander’s budget line in the above diagram. (2 marks)

Food

(uni

ts p

er m

onth

)

Gas (litres per month) 50 100

80

40

20

60

25 75

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b) Suppose that at the utility maximizing combination of food and gas, Alexander consumes 50 litres of gas per month. How many units of food does Alexander consume when maximizing his utility? (Show how you obtained this figure.) Without drawing any indifference curve, show this utility-maximizing equilibrium in your diagram (label it point A). (2 marks)

c) Suppose now that the government raises the tax on gas, thereby raising the price of gas to $5.00 a litre. Write the expression for Alexander’s new budget line. Draw Alexander’s new budget line in your diagram. If at the new utility maximizing combination of food and gas Alexander consumes now 10 units of food per month, how many litres of gas does Alexander consume per month? (Show how you obtained this figure.) Without drawing any indifference curve, show this utility-maximizing equilibrium in your diagram (label it point B). (2 marks)

d) After the increase in the tax on gas, the government lowers the income tax, thereby increasing Alexander’s disposable income just enough to allow him to afford bundle A of part b) above. What is Alexander’s new level of disposable income? (Show how you obtained this figure.) (2 marks)

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e) Keeping in mind that gas is an income-independent good for Alexander, how many units of food does Alexander consume now per month? (Show how you obtained this figure.) Without drawing any indifference curve, show this utility-maximizing equilibrium in your diagram (label it point C). (2 marks)

f) Assuming smooth and convex indifference curves, draw in your diagram Alexander’s initial indifference curve (i.e., the one he was on before the increase in the price of gas) and the one he reached after the increase in the price of gas but before the decrease in the income tax. (2 marks)

g) Comparing bundles A and C, which one will Alexander prefer? Why? Briefly explain. (3 marks)

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7. (10 marks) Martine owns a small fruit juice shop close to the St. George campus. She pays each of her workers $50 per day. The cost of her other variable inputs (e.g., fruits, cups, etc.) is $0.50 per cup of juice. Her fixed cost is $180 per day. Martine estimates that her daily production when she varies the number of workers she employs is as follows:

Quantity of labour (workers) 0 1 2 3 4 5 6

Quantity of fruit juice (cups) 0 100 210 330 440 540 630

a) What is the MP of the fourth worker? What is the AP of the first five workers? (2 marks) b) What is Martine’s average variable cost (AVC) when she produces 210 cups of fruit

juice? (2 marks)

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c) What is Martine’s total average cost (ATC) when she produces 330 cups of fruit juice? (2 marks)

d) What is the marginal cost (MC) per cup of juice for the first 100 cups of juice? (2 marks)

e) Suppose that her fixed cost increases to $210 per day. What is now the MC per cup of juice for the first 100 cups of juice? (2 marks)

eco 100y introduction to economics midterm test # 2.../5 2. /5 3. /5 4. /5 5. /5 part iii 6. /15 7....

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