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ECONOMI CS 100 <

T E R M T ES T #3
Monday January 28, 2013
1. Duration of Test: 90 minut
2. Thereare6 questions of unequal value:
1. Yes or No +Writing Assignment 18
2. Firm and Industry in Competition 22
3. Rail Monopoly . 28
4. TechieDeviceMarket *^"*y = 22
5. Theory of Trade 12
6. MultipleChoice 8
TOTAL 110
+ Bonus
3. Show your work for fiall marks (excludingYes/No and MC questions).
4. I will pick my test paper upon Monday Feb 4 at thefollowing tutorial room:
3:00PM UC52 UC 87
4:30PM UC244 UC 85
I attend oneof thesetutorials (pick up test at lectureon Mon. Feb 4 at 6PM):
Tuesday 4:00PM VC 115 K , , . . VC212 ,
Tuesday 6:00PM AH 107 VCI Ol
Wed. 4:00PM UC 163 Thurs 4PM VC215
I don't attend tutorials* (pick up test at lectureon Mon. Feb 4 at 6 PM):
* NOT E: Answers to the test provided in the tutorials only.
1.
Name:
First Last 2.
Student No.
4._
Grade out of 110 converted to percentage; Max Grade = 100%
5..
I f you writein pen, disputesover re-marlcingarelesslikely;
nevertheless, you may writein pencil i f you wish I 6.
Bonus
TOTAL
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1. Yes or No + Writing Assignment (18 marks) ^^^is
1.1 (8) Hereis an easy way to start this test... just circleeither Yes or No for thefollowing
statements to indicatewhether you agree("Yes") or disagree("No") with each of them.
Thank your kindly prof for not including apenalty for awrong answer!
(Assumepositively-sloped Supply and negatively-sloped Demand as appropriate. Keep in mind
theconcepts discussed in lectures.)
a) I f theMarginal Product of Labour (MP l ) isfalling, then Short Run Marginal
Cost (SMC) will berising. Ye s / No
b) A profit-maximizing monopolist, currently producing output, will respond to
an increasein Total Fixed Costs (TFC) by increasing thepriceof output in the Yes /No
c) A profit-maximizingfirmwill shut down in theshort runi f its Total
RevenuesjfTR) arenot at least equal to its Total Fixed Costs(TFC). Yes / No
d) Hockey Superstar is very good with his hands. His handswork magic in
hockey and in carpentry too. He spends most of his timepractising his hockey
skills and little timeat carpentry - instead hebuys theservices of an expert
carpenter to build shelves in his house. Superstar's behaviour exhibits the
principleof comparativeadvantage.
f
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1.2 Economists Have To Write Too! (10 marks) ^ J ij< ^
Hereisa"weestory". A small lakeisdiscovered on public lands. Onceknown, thereisfull
accessby all nearby residentsto it. It quickly becomesapopular fishingspot for theexotic fish
that arein it. After awhile, agovernment study showsfew exotic fish remain in thelake.
Writean articlefor thelocal newspaper, usingEconomicsframework and terminology to analyze
thescenario. Besureto definethetermsyou usesincemost readers, unlikeyou, havenot had the
benefit of ECO 100! Includearecommendafion to government designed to restorefish stocks
over timethrough natural reproduction. Writewell! , v . . . . . . . . >

^^'r^
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2. Firm and Industry in Perfect Competition (22 marks)
2.1 (13) Consider aperfectly competitivemarket in theshort run. For each situation below,
develop adiagramof therepresentativefirm and adiagramof theindustry. In the firm
diagram, includeSMC, SAC (or ATC) and AVC, assuming thetraditional U-shaped cost
curves. In theindustry diagram, consider only theshort run. Hereis onepieceof
information to usewisely and show on both diagrams - theminimumpoint of AVC
opcurs at apriceof $ 10. [Y ou can chooseto usethis in either.part a) or part b).
a) Profits >0 for each firm. Show theprofits area.
What ruledid
must hold truei f Profits >0?
b) Profits <0. Thefirm continues to operate. Show theprcmts situation on your diagram
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(9) Supposethat an industry currently contains 100 firms. But therearemany morefirms
which could enter i f they choseto. Eachof thefirms (thosecurrently in theindustry, and
thepotential new entrants) has the sameU-shaped cost structure. . j
Supposethereis apermanent increasein (negatively-sloped) industry dopand. In^thenew
long run equilibrium.
i) theindustry quantity will-(ificrease)f decrease / not change)
ii) each firm's quantity will (increase / decrease/^tfot change)"
Supposeinstead that this is an increasing cost industry. In thediagram below, for the
industry only, show an initial equilibrium (Point A ), theshort run equilibrium after
demand has increased (Point B) and thefinal new long run (and associated short run)
equilibrium (Point C).
.
Industry
! 3
Y! > r \{ H
0
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3. A Rail Monopoly (28 marks)
To reduce greenhouse gas emissions, the village of Otoyk bans car travel. Seeing a new business
opportunity, Occident Express decides to offer a new rail service, the only fast transportation
service in Otoyk, to its residents.
Building therail infrastructure costs Occident $1,000,000. To operate the service, it has to
employ 20 workers for every 1,000 passengers. Each worker is paid a fixed salary of $9,000
monthly. Transporting each 1,000 passengers also requires $20,000 in fuel per month.
[Use symbol Q for the number of passengers.]
3.1
a)
b)
c)
d)
(10) First some questions about the cost structure:
What is the Total Fixed Cost (TFC) for Occident Express?
TFC=
What is its Total Variable Cost (TVC equation)? Ci-,, l
T V C -
What is its Total Short Run Cost (STC equation)? .
ST C-
What is its Short Run Marginal Cost (SMC)?
SMC
=
e) Fill in thefollowing Tableof Costs. [Not many marks allocated, but youwill need the Table later!]
Q
TFC TVC STC AFC
(avg fixed)
A VC
(avg
variable)
ATC
(avg total)
SMC
0
O ICCCOC(^.




1,000
iL J rr, rc.C

2,000 \
Hoc c^,-
( "fcccq
1 C 0
...
... ...
5,000
l U CCCrr
2oc c <:(C
Zee
LfrC
..' I 0

... ... ...
10,000
6 QCC C(C
loo
2 C)0 I CO
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3.2 (8) Now questions about pricing under rules established by theGovernment of Otoyk:
Theresidents of Otoyk haveaDemand schedulefor monthly rail passesof P =500 - 0.03Q.
a)

Although Occident is theonly transportation provider, theGovernment requires it to
chargethe'efficient' priceassociated with perfect competition. What is that price(P)?
How many passengerswill therebeper month (Q)? Fill in theTablebelow, assuming
that Occident does operate. "Z. J / ^ Q
Price(P)
o
b)
c)
Under this pricing requirement, calculatethemonthly profits for Occident.
cc)
Monthly Profits
I n thefree-hand diagrambelow, show thescenario described above(you need not show
AFC, but you should includeSAC, AV C, SMC and show theP, Q values and profit
area.) [Your diagramdoesnot haveto beprecise, but it should reflect theshapesimplied by theequations
you calculated in part 3.1]
P

moreon next page
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3.3
a)
b)
C )
d)
(10) Next, there is a different pricing regime, as follows: Occident is successful in getting
the Government of Otoyk to repeal the original pricing rule. The firm can now charge
whatever price it wishes.
What wil l be the price, number of passengers and monthly profits in this scenario? Fill
Price Passengers Profits
Having created the rail infrastructure, wil l Occident operate it in the short run in this
sppnario?
(^e^/ No / It is Indifferent / Not enough information to determine).
Explain below with reference to profit-maximizing rules:
Wil l Ocgident operate in the long run? ' ' ; ; '
(Yes (n^)/ It is Indifferent / Not enough information to determine).
[No explanation required!]
This entire question reflects a particular type of monopolist. What is it called?
[No explanation required!] ^ .
Type =
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4. Techie Device Market (22 marks) '
Supposeyou arean executiveof theCherry TechieDeviceCompany and you arerequired to
providean updateon thecurrent market outlook to your boss. Assumethat every firm in the
devicemarket has the samecost structureand offers the samedevice, except for certain
distinguishing features that somecustomers value. Put another way, at agiven pricefor devices,
someconsumersliketheCherry device; other consumers prefer acompetitor's device. Thereare
many competitors. Techiedevices areknown to benormal goods. . .
4.1 (8) Herearetheinitial questions you haveto answer: .
a) What is thestructureof this techiedevicemarket?
(What namedo wegivethis typeof market?) ; l- i;.* t : ; ; x,^ .
Structure
b) Is your firm (Cherry) aprice-taker?
c) How would you describetheeconomic relationshipbetween your product (Cherry device)
and thoseof other producers (e.g.. Bananadevice)?
Relationship
C)
What is theslopeof thedemand scheduleyou arefacingfor your Cherry device?
(Horizontal / Vertical /t^^atively-sloped^ Positively-sloped) ^
My conclusion is based on this relationshipbetween theSubstitution Effect (SE) and
IncomeEffect (IE) alongagiven demand schedulefor Cherry devices:
Relationship
d) What is them-iceelasticity of demand you arefacingfor your Cherry device?
lastic / relatively inelastic / perfectly inelastic)
Explain briefly below:
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4.2 (6) In thediagrambelow, show thelong run equilibriumfor your firm, assuming that there
aremany current (and potential) techiedevicefirms in this industry. AssumeU-shaped
cost curves. On thecost side, show only AC and MC.
What profit- r diagram? Rule=
What aretheprofits of your Cherry firm in thelong run?
(Negative / Zero //Positive / Cannot be determined)
4.3 (8) Supposethat Cherry techiedevices arecurrently produced in thenearby country of
Utopia(all other techiedevices areproduced domestically, with the samecost structureas
Cherry's). Supposethat thegovernment of Utopia increases theminimumwagethereby
impacting on thepriceof labour services used only by Cherry. Assuming no changein the
overall demand for techiedevices, what do you expect theeconomic responses to be, in
each of the cases below? [Bebrief. Siiort form, "bullet statements" areacceptable. Assumealso that the
decisions by Cherry do haveimpacts on other firms.']
a) For theCherry firm in theshort run, assuming it continues to produce: , . ; . ; ,
b) For other techiedevicefirms in theshort run: . . - . ,
c) For theCherry firm in thelong run:
d) For other techiedevicefirms in thelong run:
^Ignorethereality that thedecisions of onefirmin amarket with many other firms isunlikely to haveasignificant
impact onall theseother firms!
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5. Theory of Trade (12 marks)
Consider thetraditional model of international trade, with asingleinput (labour), no
transportation costs, etc. Herearethedataon inputs required per unit of output in England and
Canadafor theproduction of Blues (B) and Greens (G).
Units of Labour Input Required
Per Unit of Output :
England Canada
Blues
Greens
Test #1 included aquestion that was aprecursor to theTheory of Trade, includingcalculations of
opportunity cost. No questions herefor marks about that!
I nstead, determinethefollowing:
5.1 (2) ^Which^untry has thecomparativeadvantagein theproduction of Greens?
(England^ Canada)
5.2 (4) What aretheboundariesof theTermsof Tradethat will permit both countries to
engagein trade?
Boimdaries:
5.3 and IS produci (6) SupposeEngland has 900 \yorkers and is producing150 units of Blues on its
Production Possibilities Curve. TheTerms of Tradeis currently at 1B for 2.5G. I t exports
250 units of thegood in which it has acomparativeadvantage. What goods arenow
availablefor consumption in England? Fill in theTablebelow.
Blues Greens
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6. Multiple Choice (8 marks)
Providethebest answer to thefollowing multiplechoicequestions by circling your response
directly on thequestion paper. A correct answer is worth 2 marks; no penalty for awrong
answer. Read questionsfully beforeanswering!
6.1 {From Web Quiz) Theopportunity cost to afirm of using an asset is zero i f
a) No money was spent to acquirethe asset jv * '
The asset has no alternative uses
d) The asset was given to thefirm for free
d) The asset is already owned by the firm
e) Al l of theabovesignal zero opportunity cost.
6.2 (Adapted From Sample Test) In order to increaseits salesfrom 10 to 11 units, afirm must
drop its pricefrom $9 to $8.
a) Thefirm is aperfect competitor
b) Thefirm is amonopolist
c) Themarginal revenueof the11* unit is $88
d) Themarginal revenueof the11'^unit is-$2
A profit-maximizingfirm would never operateat apriceof $8 '
fp Both y ) and ) arecorrect (you fill in).
6.3 Which of thefollowing illustrates theECO 100 concept of external benefit (positive
externality)?
a) Carlabuys chocolates which makes her very happy when sheconsumes them
b) Thechocolatefactory exudes achocolateodour; theneighbour, Harry, hates this odour;
his happinessfalls
c) Thechocolatefactory exudes achocolateodour; theneighbour, Larry, loves this odour;
his happiness rises - - - '= -
d) Thechocolatefactory obtains new orders for product; it hires moreworkers
e) Thegovernment takes over theproduction of chocolates, sinceit is amerit good
f) Not oneof theabovequalifies as an illustration.
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6.4 Yankeeland and Republicaarecurrently producingboth beef and soybeans. Republica
cannot match thejabour^roductivityo^f Yankeeland in either industry. However,
Republica's productivit^issomewhat beittsi^jglatively speaking, in thebeef industr
TheECO 100 trademodel, with an appropriate"Terms of Trade", suggests that
Republicawill ^
a) deriveno advantagefrom tradingits soybeans for beef from Yankeeland
f
increasethedomestic production of soybeans sinceit can producemoreof them
import soybeansfrom Yankeeland
export soybeans to Yankeeland
e) not consumeany soybeans domestically sinceall will beexported
f) both d) and e)
BONUS Y E S / NO (2 Marks)
Thesequestions, based on In-Class Test Preparations, should befamiliar to you! 1 mark each
this time!
a) When Marginal Revenueis less than AverageRevenue, theDemand
scheduleis negatively-sloped.
member firms and effectively
blocks entry of new firms can beassured that this schemewill create
profits for eachof thesefirms. (Assumeno changein costsor market demand.)
Bonus Question (1 mark)
In class last Monday, I woreaT-shirt celebratingthechampionshipof what team?
(Full nameof theteamshows you areasportsfan; full credit availablefor just thenameof thecity!)
Name=
" I a m s t i l l o u t t h e r e c h a s i n g my d r e a m s a n d t r y i n g t o m a x i m i z e my p o t e n t i a l . E v e r y d a y . "
MikeBabcock
Coach of theDetroit Red Wings (Stanley CupChampions, 2008)
Coach of Canada's Olympic Men's Hockey Team(Gold Medal Winner, 2010)
Fromhis book: Leave No Doubt