ECO101_2022_Exam (1)

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December 2022 Examinations UNIVERSITY OF TORONTO Faculty of Arts and Science ECO101H1F: Principles of Microeconomics: L0101; L2501 & L5101 Duration: 2 hours Examination Aids: Non-programmable calculator; Ruler Family (Last) Name: Given (First) Name: Student Number: UofT email: Exam Reminders • Fill out your name, student number and email on the top of this page. • Do not begin writing the actual exam until the announcements have ended and the Exam Facilitator has started the exam. • As a student, you help create a fair and inclusive writing environment. If you possess an unauthorized aid during an exam, you may be charged with an academic offence. • Turn off and place all cell phones, smart watches, electronic devices, and unauthorized study materials in your bag under your desk. If it is on your wrist or in your pocket, it is an academic offence. • When you have completed your exam, raise your hand for someone to come and collect your exam. Do not collect your bag and jacket before your exam is handed in. • If you are feeling ill and unable to finish your exam, please bring it to the attention of an Exam Facilitator so it can be recorded before leaving the exam hall. • In the event of a fire alarm, do not check your cell phone when escorted outside. • Students must hand in all examination materials at the end. ECO101-Specific Reminders • 120 minutes. 60 multiple-choice marks. 60 short-answer marks. 120 marks. Allocate your time wisely! • For each multiple-choice question, choose the one best answer and record it on the bubble sheet at the end of this booklet. Answers recorded elsewhere will not be considered. • Short-answer questions: – Any time you are asked to Explain your assessment or conclusion, all of the marks are earned for the explanation. – When explanations are needed, be clear, accurate, and concise . Avoid the temptation to write too much. – Page 15 is blank. If you need to continue an answer on this page, you must write “Continued on page 15” in the question’s answer space. 20221203 ECO101 December 2022 Exam (Gazzale)

I. [60 Marks] Multiple Choice Questions: Indicate answer on Bubble Sheet at the end of this booklet. 1. [2 Marks] Percy is choosing between buying a laptop or a tablet. When the price of laptops decreases, Percy’s willingness to pay for a tablet and the opportunity cost of purchasing a tablet . A. increases; increases. B. increases; decreases. C. increases; stays the same. D. decreases; increases. E. decreases; decreases 2. [2 Marks] Annabeth has 40 kilos of sugar that she uses to produce either cotton candy or caramel. 1 caramel needs 1 3 kilos of sugar and 1 stick of cotton candy needs 1 5 kilos of sugar. If she uses her sugar efficiently, the opportunity cost of 2 extra caramels is sticks of cotton candy. A. 3 5 B. 5 3 C. 6 5 D. 10 3 E. 10 3. [2 Marks] Consider the perfectly competitive market for bikes where supply and demand have the usual slopes. If there is an increase in the price of steel used in the production of bikes, we expect market price and market quantity . A. will increase; will decrease. B. will increase; will increase. C. will decrease; will decrease. D. will increase; will increase. E. could increase or decrease; could decrease or increase 4. [2 Marks] A bird flu outbreak has killed many egg producing chickens recently. As a result, consumer spending on eggs will increase if egg is . A. demand; inelastic B. demand; elastic C. demand; elastic or unit elastic D. supply; inelastic or unit elastic E. supply; inelastic 20221203 ECO101 December 2022 Exam (Gazzale)

5. [2 Marks] Assume a perfectly perfectly competitive market where supply and demand have the usual slopes. A per-unit subsidy on kale paid to producers causes the market price of kale to decrease. Relative to the pre-subsidy market, with the subsidy we have and producer surplus . A. neither excess demand or supply; increases. B. neither excess demand or supply; decreases. C. excess demand; decreases or stays the same. D. excess demand; increases. E. excess supply; could increase, decrease or stay the same. 6. [2 Marks] Assume a competitive market where supply and demand have the usual slopes. The market starts at equilibrium with P = $100 and Q = 1 , 000 , 000 . What is the change in consumer surplus if, as a result of an increase in the price of an input in production, the short-run price increases to $101? A. Consumer surplus does not change. B. Consumer surplus decreases by less than $1,000,000. C. Consumer surplus decreases by $1,000,000. D. Consumer surplus decreases by more than $1,000,000. E. None of the above. 7. [2 Marks] A firm has the typical cost curves. If total cost increases by $10 at every quantity, then at every quantity average variable cost and average fixed cost . A. increases; increases by $10. B. increases; stays the same. C. could increase or stay the same; could increase or stay the same. D. stays the same; increases by $10. E. stays the same; increases. 8. [2 Marks] Assume a perfectly competitive constant-cost market. In 2022, is currently at long- run equilibrium, with P = $100 and Q = 1 , 000 , 000 . In 2023, labour productivity permanently increases. If this is the only change, when the market returns to long-run equilibrium, the market price will be and quantity will be . A. $100; 1,000,000 B. $100; more than 1,000,000 C. $100; may be more than, less than, or equal to 1,000,000 D. less than $100; 1,000,000 E. less than $100; more than 1,000,000 20221203 ECO101 December 2022 Exam (Gazzale)

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9. [2 Marks] Market demand for krypton is downward sloping. The profit maximizing monopolist charges $75 per-unit and sells 100 units. If there is an increase in demand, marginal revenue for the 100th unit . A. will decrease. B. will stay the same. C. will increase. D. could increase or decrease E. will equal the marginal cost of the 100th unit. 10. [2 Marks] Assume both players make their choices at the same time. Which of the following is a Nash equilibrium if the game is played one time? Player 2 L C R Player 1 T 20,15 5,15 15,20 M 15,5 10,10 15,5 B 15,20 5,15 20,15 A. Player 1 chooses T . Player 2 chooses L . B. Player 1 chooses T . Player 2 chooses R . C. Player 1 chooses B . Player 2 chooses L . D. Player 1 chooses B . Player 2 chooses R . E. None of the above. 11. [2 Marks] The market for internet access in Olympus has two identical providers: Alcyoneus and Thanatos. At the current Cournot equilibrium market price of $85 a month, each firm sells 250 connections. If Thanatos decides to sell 251 units instead, Thanatos’ profits and Alcyoneus, profits A. will increase; will increase. B. will increase; will decrease or stay the same. C. will decrease; will stay the same. D. will decrease; will decrease. E. will decrease; will increase. 20221203 ECO101 December 2022 Exam (Gazzale)

12. [2 Marks] Assume supply and demand in the market for Christmas trees have the usual slopes. The production of Christmas trees creates a positive externality through reduced pollution and cleaner air. If there is an increase in the per-unit external benefit, the number of Christmas trees sold and total surplus . A. increases; increases. B. increases; decreases. C. stays the same; increases. D. stays the same; decreases. E. decreases; decreases. 13. [3 Marks] You paid $75 for a Lizzo concert ticket, but you would have been willing to pay up to $100. The ticket is non-transferable and non-refundable. Your friend asks you if you’d like to see a movie that same night. The movie ticket costs $15. You value watching the movie at $90. If you do not go to either the concert or the movie, you stay home, which you value at $10. What is the opportunity cost of going to the movie? A. $115. B. $100. C. $40. D. $25. E. $15. 14. [3 Marks] There are two people, Adil and Mara, and two tasks, dishes and laundry. Mara has the absolute advantage in both tasks, and the comparative advantage in laundry. Mara gets sick, and both her dishes per hour and laundry per hour decrease by half. After this reduction in productivity, has the comparative advantage in laundry and has the absolute advantage in dishes. A. Mara; Adil. B. Mara; either Mara or Adil; C. either Mara or Adil; either Mara or Adil. D. Adil; Adil. E. Adil; either Mara or Adil. 20221203 ECO101 December 2022 Exam (Gazzale)

15. [3 Marks] Gollum’s marginal willingness to pay for meal kits is downward sloping (i.e., decreas- ing in quantity). Currently, each kit costs $8 and the shipping charge is $3 per kit. He buys 10 kits a month. He is offered a special deal: pay $30 a month and shipping is free. With this deal, Gollum buys meal kits a month and his consumer surplus . A. the same number of; stays the same. B. more; increases. C. more; could increase or decrease. D. fewer; could increase or decrease. E. fewer; decreases. 16. [3 Marks] There are 5 potential consumers in a competitive market. Each buys only 1 unit if they buy anything. Their Willingness to Pay (WTP) for 1 unit is given in the table below. Buyers A B C D E WTP $23 $38 $40 $36 $43 We have 5 potential sellers in the market. Each produces and sells only 1 unit if they sell anything. Their production cost for 1 unit is given in the table below. Sellers U V W X Y Cost $18 $36 $34 $31 $21 In the equilibrium of the competitive market, what is the lowest WTP among buyers who purchase an item? A. $23. B. $36. C. $38 D. $40 E. $43 17. [3 Marks] Assume competitive markets where supply and demand curves have the usual slopes. Every firm in the perfectly competitive soda market can produce either soda or cleaning liquid with the same inputs. The cross-price elasticity of demand for soda and the price of cleaning liquid is zero. If the demand for cleaning liquid increases, we predict the market price of soda will and the quantity of soda will . A. remain the same; remain the same. B. increase; increase. C. increase; decrease. D. decrease; increase. E. decrease; decrease. 20221203 ECO101 December 2022 Exam (Gazzale)

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18. [3 Marks] Assume competitive markets where supply and demand curves have the usual slopes. The price of computer chips used in the production of both luxury cars and mobile phones has increases. If, as a result, consumer spending on luxury cars increases and consumer spending on mobile phones decreases, we can infer that luxury-car demand is and mobile-phone demand is . A. elastic; elastic. B. elastic; inelastic. C. elastic; either inelastic or unit elastic. D. inelastic; elastic. E. inelastic; inelastic. 19. [3 Marks] Assume condo rentals are a perfectly competitive, constant-cost market. Assume (absolute value of) elasticity of demand is 1.5. The government is considering a $500 per unit tax, but has not yet decided whether to impose on buyers or sellers. If implemented, in the short-run the equilibrium market price and per-period tax revenue will be in the short-run than in the long run.. A. increases; lower. B. increases; higher. C. could increase or decrease; lower. D. could increase or decrease; higher. E. decreases; lower. 20. [3 Marks] You have a contract to sell 100 burritos per day. To make 100 burritos, you need a kitchen, ingredients and 5 hours of your time. You rent the kitchen for $100 per day, although if you did not use it you could rent it to someone else for $150 per day. Each burrito needs $3 in ingredients. While you can work as many hours as you like as an architect for $80 per hour, you pay yourself $40 per hour to make burritos. What is the marginal cost of a burrito? A. $5 B. $6 C. $7 D. $8.50 E. None of the above 20221203 ECO101 December 2022 Exam (Gazzale)

21. [3 Marks] Vibranium is a perfectly competitive, constant-cost market. The market starts in long-run equilibrium. Assume both a) an increase in worker productivity in the vibranium industry; and phone producers switch to vibranium for phone batteries. The equilibrium market price for vibranium in the short run and in the long run. A. will increase; will increase, but will be be less than the short-run price. B. will increase; could increase or decrease. C. will decrease; could increase or decrease. D. could increase or decrease; will decrease. E. could increase or decrease; will increase. 22. [3 Marks] Assume a constant cost industry with a perfectly competitive market. A taco truck firm hires workers to produce tacos using labour and materials. It has a fixed cost of $400. The total cost of producing 1000 units is $2500. Each worker produces 15 tacos an hour and is paid $20 an hour. The firm sells 1000 tacos at a price of $3 and the truck produces 1000 tacos. What is the marginal cost of the 1000th taco? A. $1.33. B. $1.73 C. $2.90 D. $3.00 E. None of the above. 23. [3 Marks] The market for vibranium has two identical producers competing in a Bertrand manner. Initially, market demand is Q = 300 - P and each has a constant $10 marginal cost. If the price of steel, a complement to vibranium increases, in the resulting new Bertrand equilibrium, consumer surplus and producer surplus . A. increases; increases. B. increases; decreases. C. decreases; increases. D. decreases; remains the same. E. decreases; decreases. 20221203 ECO101 December 2022 Exam (Gazzale)

24. [3 Marks] Absurdistan is having an outbreak zpox, an infectious disease. Zpox vaccinations have the typical downward sloping demand and upward sloping supply, and getting vaccinated produces a positive externality. If the government imposes a subsidy that makes the flu vaccine free for consumers, producer surplus and deadweight loss . A. decreases; decreases. B. decreases; becomes zero. C. increases; becomes zero. D. increases; decreases or becomes zero. E. increases; could increase, decreases or become zero. II. [14 Marks] For each question, indicate whether or not you agree or disagree with Elvis’ statement (or whether it depends) and explain your assessment. All marks are earned for the explanation. (1) [6 Marks] Elvis says, “While I am persuaded that a moderate increase in a minimum wage may result in little to no loss in minimum wage employment, there is no labour-market model that predicts an increase in employment as a result of an increase in a minimum wage.” Agree , Disagree or It depends ? Explain. 20221203 ECO101 December 2022 Exam (Gazzale)

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(2) [8 Marks] While producing electricity from fossil fuels contributes to global warming, a negative externality affecting all, producing electricity from wind turbines does not. Cape Wind wants to install turbines near an island, but island residents object, saying they would impose a negative externality by ruining their view. A consultant concludes that the turbines are efficient. Elvis says, “Assuming the consultant is correct, the only way to ensure the efficient outcome is to give Cape Wind the right to install the turbines.” Agree , Disagree or It depends ? Explain. 20221203 ECO101 December 2022 Exam (Gazzale)

III. [24 Marks] Chiron owns the only warrior-training school in Pelion. He is the only teacher, and his time is the school’s only input. Each one-hour lesson consists of one student and one teacher. Adhering to an ancient code of conduct, he does not take a salary, but he does keep the school’s profits. Per-period market demand for hours of training is Q = 300 - 2 × P . (1) [6 Marks] Given the information in this question, explain what the school’s marginal cost function must look like, and why it makes economic sense that it looks the way it does. (2) [6 Marks] If he charges everyone the same per-hour price, how does he determine the profit- maximizing price? Explain as completely as possible given the information in this question. 20221203 ECO101 December 2022 Exam (Gazzale)

continued from previous page (3) [6 Marks] Assume market demand ( Q = 300 - 2 × P ) comes from the individual demands of 10 identical students, and Chiron is not constrained to charging a single per-unit price. As completely as possible given the information in this question, explain a pricing scheme that maximizes profits. (For full marks, the scheme can have at most 2 prices.) (4) [6 Marks] Assume instead that market demand ( Q = 300 - 2 × P ) comes from 300 indi- viduals who each demand exactly 1 hour of instruction. Give an example of third-degree price discrimination he might use, making certain the explain the assumptions under which this scheme increases profits. 20221203 ECO101 December 2022 Exam (Gazzale)

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IV. [22 Marks] Assume a perfectly competitive constant-cost market for gasoline in Ontario. Firms have typical cost curves and the law of demand holds. Both the production and consumption of gasoline impose negative externalities. The current tax per litre of gasoline—payable by the seller—is 35.74 ¢ . (1) [7 Marks] Elvis says, “Because both the production and consumption of gasoline impose negative externalities, both buyers and sellers should pay one-half of the tax”. Agree , Disagree or It depends ? Explain. (2) [7 Marks] If the tax is increased to 40 ¢ per litre, do you predict that tax revenues would increase or decrease. Justify your prediction. ( Note: All of the marks are earned for the justification and not the prediction itself.) 20221203 ECO101 December 2022 Exam (Gazzale)

(3) [8 Marks] Assume the tax is increased to 40 ¢ per litre, and after a year a consultant concludes that despite a decrease in the sum of consumer, producer and government surpluses, total surplus has increased. Is this possible? Explain. 20221203 ECO101 December 2022 Exam (Gazzale)

INTENTIONALLY LEFT BLANK. WE WILL LOOK AT THIS PAGE ONLY IF YOUR ANSWER TO A QUESTION REFERS US TO THIS PAGE. 20221203 ECO101 December 2022 Exam (Gazzale)

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