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UNIVERSITY OF TORONTO
DEPARTMENT OF ECONOMICS

INTRODUCTION TO ECONOMICS ECO100Y
LEC0301 & LEC6001

MICHAEL HO

TEST 2
NOVEMBER 30
TH
, 2012



Name:

ID#:




Tutorial #:



IMPORTANT:

If you do not provide the correct Tutorial #, then your test will be graded later.
Do not use red-coloured pen (this colour is reserved for the markers) and avoid using pencil in your
answer because you cannot appeal any part of your answer if it is done in pencil, except diagram(s).
You must show the step-by-step calculations in every part of Question 1 or a zero will be given.
You must relate your explanation in Question 2 to your diagram(s) for full marks.
Only put your answers in the designated page(s) or space.
Do not separate any page from this test.


Question 1 Question 2
Questions
3 to 7
Total
Marks 45 30 25 100
Score 45 30 25 100

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1. Assume every buyer purchases only one unit of a product, which forms the market demand
. The monopoly firm has constant marginal cost at and zero fixed cost. You
may find it useful to draw your diagram in part (d) as you work through this question.

1. (a) Show your step-by-step calculations of the profit-maximizing output

and price

, profits

, consumer surplus

, producer surplus

, and deadweight loss

if this monopoly
firm is the least powerful type of monopoly. (18 marks)

, profits

,
consumer surplus

, producer surplus

, and deadweight loss

if this monopoly
firm is the most powerful type of monopoly. (15 marks)

1. (c) Use your results to explain the trade-off between efficiency and equity when there is only
one firm serving all the consumers in the market and it is not regulated by the government to
protect the interests of the consumers. (7 marks)


1. (d) Plot all your results in a properly labeled diagram. (5 marks)










1. (b) Show your step-by-step calculations of the profit-maximizing output




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2. Plot the initial budget line

, the new budget line

and the compensated budget line

after the price of

increases. Then, plot the substitution effect , the income effect , and the
total effect for each of the two consumers according to their indifference curves. Please note
that the focus of this question is not on finding the exact quantities of each good that these
consumers would be purchasing before and after the price change. (30 marks)

2. (a) Adam lives in Australia and his income is . Initially, the price of

is and the price of

is . Then, the price of

increases to while the price of

and his income remain

unchanged. Use your findings on , , , and lecture discussion to help you explain
whether (i)

is a normal good and (ii) the demand curve for

is downward-sloping. (13
marks)






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2. (b) Beatrice lives in Barbados and her income is . Initially, the price of

is and the price

of

is . Then, the price of

increases to while the price of

and her income

remain unchanged. Use your findings on , , , and lecture discussion to help you
explain whether (i)

is a normal good and (ii) the demand curve for

is downward-
sloping. (14 marks)




2. (c) Is

a Giffen good to Adam or Beatrice? What are the conditions for a good to become a
Giffen good? (3 marks)



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Questions 3 to 7 (5 marks each)

3. The "law" of diminishing marginal utility implies that the
(A) marginal utility of a good diminishes over time.
(B) first unit of a good consumed will contribute most to the consumer's satisfaction.
(C) last unit of a good consumed will contribute most to the consumer's satisfaction.
(D) total utility is negative.
(E) total utility is constant as more units are consumed.

Answer:


4. The vertical distance between the total cost curve and the total variable cost curve is
(A) total fixed cost.
(B) average fixed cost.
(C) marginal cost.
(D) average variable cost.
(E) average total cost.

Answer:


5. Increasing returns to scale for a firm is shown graphically by
(A) a horizontal long-run average cost curve.
(B) a vertical long-run average cost curve.
(C) an upward-sloping long-run average cost curve.
(D) a downward-sloping long-run average cost curve.
(E) none of the above; returns to scale have nothing to do with the shape of the long-run average
cost curve.

Answer:


6. In economics, perfect competition refers to a market structure where
(A) all firms are earning profits.
(B) firms co-operate with each other.
(C) each firm has zero market power.
(D) firms behave strategically.
(E) firms can set the price of their product.

Answer:


7. One similarity between a monopoly and a firm in perfect competition is that both
(A) face the entire market demand curve.
(B) set their selling price.
(C) have market power.
(D) choose their output independent of demand.
(E) are profit maximizers.

Answer:




End of Test 2 Total = 100 marks