Concordia University Department of Economics ECON 201 INTRODUCTION TO MICROECONOMICS inter 2012 COMMON !

IN"# E$"MIN"TION %ERSION 1

STUDENT NUM(ER& '''''''''''''''''''''''''''''''''''''''''''''''''' )*ease read a** instr+ctions caref+**y, 1. The exam consists of two parts. (i) Part I: 35 multiple-choice questions (35 marks) (ii) Part II: !hoose 5 out of " lon# questions ("5 marks). %rite &our name' stu(ent I) an( answers for the multiple-choice questions on the computer scansheet with a penci*. Please' also write the version of the exam on the computer scan-sheet. *or Part II' write all &our answers on this exam. )o not use a((itional +ooklets. ,ou are allowe( to use a non-pro#ramma+le calculator an( a paper (ictionar&' pro-i(e( that the& are appro-e( +& the in-i#ilator(s). ,ou ma& use either pen or pencil to pro-i(e &our answers for Part II. ,ou are not allowe( to tear an& pa#es out of this exam.

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3. .. -rades& Part I:

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Part II: //////////

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)art I& M+*tip*e [Link] /+estions, rite yo+r ans0ers on t.e comp+ter [Link] in )ENCI# 1Tota*234 mar5s6, 1. It has +een o+ser-e( that uni-ersit& enrolment in !ana(a is hi#her (urin# perio(s of hi#h unemplo&ment. 0 possi+le explanation for this is that a) (urin# perio(s of hi#h unemplo&ment' professors teach +etter. +) when prospects for #ettin# a 1o+ are poor' the opportunit& cost of #ettin# a 1o+ is lower. c) when prospects for #ettin# a 1o+ are poor' the opportunit& cost of (oin# nothin# is hi#her. d6 [Link] prospects for 7ettin7 a 8o9 are poor: t.e opport+nity cost of 7oin7 to +niversity is *o0er, $. 0n 2l&mpic soccer pla&er re-eals that she ha( #i-en up a 1o+ that pai( 335'444 per &ear to train full-time. 5he recei-e( a #rant of 36'444 per &ear from 5ports !ana(a' +ut this coul( not co-er all her trainin# expenses. 7er foo( an( rent were 31"'444 an( trainin# expenses were 314'444. %hat is her annual opportunit& cost of participatin# in the 2l&mpics8 a) 319'444. +) 335'444. c6 ;3<:000, () 3."'444. 3. %hich of the followin# statements is (are) normati-e8 a) If income increases' sales of luxur& #oo(s will fall. +) %hen minimum wa#es are raise(' unemplo&ment rises. c) 0ll of the a+o-e. d6 None of t.e a9ove, .. If the nominal price of tickets to see the +an( :$ has increase( from 3144 to 3154 (urin# a fi-e &ear inter-al' an( the consumer price in(ex has risen from a -alue of 1"4 to $44' then the real price increase in ticket price is: a) 54;. +) .4;. c) 34;. d6 20=, 5.%hich one of the followin# statements is false8 a6 If t.e economist 0ants to e>amine t.e distri9+tion of income in 1?@A: timeB series data s.o+*d 9e +sed, +) If the economist wants to examine the relationship +etween a(-ertisin# expen(itures an( sales (urin# 16<9' cross-section (ata is use(. c) If the economist wants to examine the effect of intellectual a+ilit& upon earnin#s' cross-section (ata coul( +e use(. () If the economist wants to forecast #ross national pro(uct +ase( upon o+ser-ations from pre-ious &ears' timeseries (ata shoul( +e use(. ". !onsi(er the #oo(s electronic rea(ers an( electronic +ooks. In response to a price (ecline in e-+ooks' the market for e-rea(ers shoul( show a) an inwar( shift in (eman(. 96 an o+t0ard [Link] in demand, c) an inwar( shift in suppl&. () an outwar( shift in suppl&. 9. 0n effecti-e price ceilin# on a pharmaceutical (ru# will ha-e no effect on the quantit& tra(e( if: a6 t.e s+pp*y c+rve is vertica*, +) the suppl& cur-e is hori=ontal. c) the (eman( cur-e is hori=ontal. () the (eman( cur-e is -ertical. <.If #oo(s > an( ? are su+stitutes' an increase in the price of > causes: a) quantit& (eman(e( of > to fall an( the (eman( cur-e for ? to shift towar( the ori#in. 96 a decrease in C+antity demanded for D and an o+t0ard [Link] of EFs demand c+rve, c) quantit& (eman(e( of > remains constant' +ut the (eman( for ? (ecreases. () the (eman( cur-e for +oth > an( ? shift. 6. 5uppose the per-unit tax on cars is raise(. If the (eman( for cars is e-er&where unit elastic an( the suppl& cur-e is upwar( slopin# then this will cause tax re-enue to ///. @7int : Tax re-enue A 5pen(in# +& consumers minus firm re-enue. :se elasticit& to fi#ure out what happens to consumer spen(in#. :se (ia#ram to fi#ure out what happens to firm re-enueB. a6 rise $

+) fall c) sta& constant () rise if the suppl& elasticit& is less than one an( fall if the suppl& elasticit& is #reater than one 14.)ata on the prices' quantities sol(' an( a-era#e incomes of +u&ers of >olt !ola an( !oke' o-er se-eral &ears' are shown +elow. ,ear Price of >olt Price of !oke 0-era#e Income of Cu&ers 3$5'444 3$5'444 335'444 335'444 Duantit& of >olt 5ol(

$444 31.44 E can 31.44 E can 15'444 cases $441 31.44 E can 31..4 E can $5'444 cases $44$ 31.44 E can 31..4 E can 15'444 cases $443 31..4 E can 31..4 E can 5'444 cases The arc income elasticit& of >olt is: a) 1.5 +) -4."9 c6 B1,4 () not (etermina+le' #i-en that all the -aria+les are chan#in#. 11.5uppose the market suppl& cur-e for some #oo( is upwar( slopin#. If the imposition of an excise tax causes no chan#e in the equili+rium quantit& sol( in the market' the #oo(Fs (eman( cur-e must +e ////////' meanin# that the +ur(en of the tax has fallen completel& on the ////////. a) :nit elastic #o-ernment. +) 7ori=ontal firms. c6 %ertica*G cons+mers, () 7ori=ontal consumers. 1$.!urrentl& >oe an( 7al&na are consumin# the same amount of straw+erries' +ut >oeFs (strai#ht line) (eman( cur-e is much more elastic than 7al&naFs at the current price. %hich statement is true8 a6 Ha*ynaFs cons+mer s+rp*+s e>ceeds DoeFs, +) 7al&naFs consumer surplus equals >oeFs. c) Go statement can +e ma(e re#ar(in# consumer surpluses. () >oeFs consumer surplus excee(s 7al&naFs. 13.:sin# a suppl& an( (eman( (ia#ram of &our own' if a per unit tax is impose(' the more elastic the suppl& cur-e' the: a) more likel& the (ea(wei#ht loss is to +e affecte(. 96 *ar7er t.e dead0ei7.t *oss, c) lar#er the (ea(wei#ht loss to pro(ucers. () smaller the (ea(wei#ht loss to consumers. 1.. %hen economists (escri+e a #oo( as +ein# Fun(er-price(F' the& mean that: a) output shoul( +e increase( +ecause the mar#inal social +enefit in consumption excee(s the mar#inal social cost of pro(uction. 96 too m+c. of t.e 7ood is 9ein7 prod+ced since [Link] is a ne7ative e>terna*ity associated 0it. t.e 7ood, c) resources are properl& allocate( since societ& wants more of the #oo( at a lower price. () there is an un(er-allocation of resources in the pro(uction of the #oo(. 15. 0 consumer maximi=es his total utilit& when #oo(s 0 an( C are consume( in quantities such that H:0EH:C a) equals the ratio of total utilit& of 0 to that of C. +) equals the ratio of the price of C to the price of 0. c) alwa&s equals unit&. d6 none of t.e a9ove

1". 5uppose a#ain that ,uri +u&s so& milk an( oran#es an( has not &et exhauste( his +u(#et. 7is H: of an a((itional carton of so& milk is $4 an( its price is 31.$5' whereas his H: for an a((itional oran#e costin# 54 cents is 9. *rom this situation' we can (e(uce that he shoul(: a) +u& more oran#es. +) re(uce his consumption of so& milk. c6 9+y more soy mi*5, () (i-i(e his +u(#et equall& +etween so& milk an( oran#es. 19. 0 (eman( cur-e slopes (ownwar( +ecause a) since the mar#inal utilit& increases with increase( consumption' people will +e ea#er to +u& more at lower prices. 96 since t.e mar7ina* +ti*ity decreases 0it. increased cons+mption: t.e price m+st fa** in order to ind+ce peop*e to 9+y more, c) since total utilit& increases with increase( consumption' a lower price is necessar& to encoura#e increase( pro(uction. () lower prices mean a lower consumer surplus which will encoura#e increase( consumption. 1<.If &ou are a risk-neutral person an( ha-e the chance to pla& a #ame where the pro+a+ilit& of winnin# 314.44 is $4; an( the pro+a+ilit& of losin# 33.44 is <4;: a)&ou will +e willin# to pla& the #ame. +) &ou will +e willin# to pla& the #ame +ecause this is a fair #am+le. c)&ou ma& or ma& not pla& the #ame' (epen(in# on how &ou +alance the lo-e of risk with the pro+a+ilit& of loss on a-era#e. d6 yo+ 0i** not p*ay t.e 7ame as it is not a favora9*e one, [Link] has two choices: a 54; chance of winnin# 3$4 an( a 54; chance of losin# 3$4 -ersus a $4; chance of winnin# 3144 an( an <4; chance of losin# 3$4. %hich choice has the lar#er expecte( -alue8 a)Coth choices ha-e the same expecte( -alue. +) The 54;-54; chance. c)Coth ha-e ne#ati-e expecte( -alues an( neither shoul( +e selecte(. d6 T.e 20=B@0= [Link], $4. >onathan has two choices: a 54; chance of winnin# 3$4 an( a 54; chance of losin# 3$4 -ersus a $4; chance of winnin# 3144 an( an <4; chance of losin# 3$5. 0ssume that >onathan is a risk-a-erse in(i-i(ual' then he will choose the followin# option: a6 T.e 40=B40= [Link] as [Link] option is *ess ris5y 9et0een t.e t0o, +) >onathan is in(ifferent +etween the two options an( can (eci(e +& flippin# a coin an( then (eci(e on the +asis of coin outcome. c)The $4;-<4; choice as this option is less risk& +etween the two. () Gone of the a+o-e. $1. If total pro(uct is at a maximum' then a) a-era#e pro(uct must +e fallin# an( +e equal to =ero. +) a-era#e pro(uct must equal mar#inal pro(uct. c) mar#inal pro(uct must +e #reater than =ero an( must +e fallin#. d6 mar7ina* prod+ct m+st 9e fa**in7 and 9e eC+a* to Iero, $$. If factor prices increase' a) a firm will mo-e to a lower point on its lon#-run a-era#e cost cur-e onl&. +) there will +e no chan#e in the cost cur-es in the lon# run. c) there will +e a (ownwar( shift in the lon#-run a-era#e cost cur-e +ut not in the short-run a-era#e cost cur-e. d6 9ot. t.e *on7Br+n and [Link]+n avera7e cost c+rves 0i** [Link] +p0ard, $3. %hich of the followin# statements a+out the relationship +etween mar#inal pro(uct an( a-era#e pro(uct is correct8 a) %hen a-era#e pro(uct excee(s mar#inal pro(uct' mar#inal pro(uct must +e risin#. +) 0-era#e pro(uct equals mar#inal pro(uct when mar#inal pro(uct is at its maximum. c6 .en mar7ina* prod+ct is fa**in7 and avera7e prod+ct is 9e*o0 mar7ina* prod+ct: [Link] avera7e prod+ct is risin7, () 0-era#e pro(uct equals mar#inal pro(uct at mar#inal pro(uctFs lowest point. $.. If a firm (ou+les all its inputs an( output as a result triples then the firm is experiencin# a6 increasin7 ret+rns to sca*e, .

+) (ecreasin# returns to scale. c) economies of scale. () the law of (iminishin# returns. $5. If an in(ustr& is compose( of two firms (temporaril&) an( the& ha-e short-run mar#inal cost cur-es of the form H! A 5 I 4.1D an( H! A < I 4.$D respecti-el&' how much will each suppl& if the #oin# price is 3148 a6 40 and 10, +) $4 an( .4. c) 34 an( 54. () 15 an( .4. $". The perfectl& competiti-e firmJs short run suppl& cur-e is the upwar(-slopin# part of its a)a-era#e -aria+le cost cur-e' at all points a+o-e the point of 0K!min. +) mar#inal cost cur-e' at all points a+o-e the point of 0*!min. c)mar#inal re-enue cur-e' at all points a+o-e the point of minimum a-era#e total cost. d6 mar7ina* cost 1MC6 c+rve: at a** points a9ove t.e point [Link] MC 2 "%C, $[Link] the short run' a monopolist with a loss of 354' alon# with mar#inal re-enue of 3$4' an( mar#inal cost of 315' shoul( a) shut (own. +) expan( output an( raise price. c6 e>pand o+tp+t and c+t price, () cut output an( raise price. $<. Inefficienc& results from monopol& +ecause a) hi#h monopol& prices are not equita+le. 96 a monopo*y +nderBprod+ces re*ative to t.e idea* at [Link]. societyJs mar7ina* cost2mar7ina* 9enefit, c) it makes qualit& pro(ucts that cost a lot. () all of the a+o-e. $6. !artels are inherentl& unsta+le as' a6 "t t.e a7reed +pon prod+ction *eve* price remains .[Link] [Link] t.e mar7ina* cost of prod+ction, +) !artels are forme( +& cheaters. c) !artels are alwa&s forme( +& man& firms an( hence coor(ination is not possi+le. () Coth a L c. 34. :n(er monopolistic competition' lon#-run economic profits ten( towar( =ero +ecause of a)economic inefficienc&. +) pro(uct (ifferentiation. c)the (ownwar(-slopin# (eman( cur-e facin# each firm. d6 t.e *ac5 of 9arriers to entry, 31. 0 ke& characteristic of monopolisticall& competiti-e market structure is: a)2ne firm pla&s the (ominant role in the in(ustr&. 96 Se7mented mar5et does not a**o0 a monopo*istica**y competitive firm to f+**y e>p*oit economies of sca*e, c)M-er& firm in the in(ustr& sells a homo#enous pro(uct. () *irms earn economic profit in the lon# run. 3$. %hich of the followin# is not a requirement of a #ame8 a) Pla&ers. +) Pa&offs. c6 Dominant strate7ies, () ?nowle(#e of the pa&offs. 33. *or the followin# question' assume that in !ana(a the opportunit& cost of coal is 1E3 +arrel of oil an( the opportunit& cost of oil is 3 tons of coal. 0ssume that in Can#la(esh the opportunit& cost of coal is 1E. +arrel of oil an( the opportunit& cost for oil is . tons of coal. %ho has the comparati-e a(-anta#e in pro(ucin# coal an( who has the comparati-e a(-anta#e in pro(ucin# oil8 a6 (an7*ades. .as comparative advanta7e in prod+cin7 coa* and Canada .as t.e comparative advanta7e in prod+cin7 oi*, +) Can#la(esh has comparati-e a(-anta#e in pro(ucin# coal an( also has the comparati-e a(-anta#e in pro(ucin# oil. c)!ana(a has comparati-e a(-anta#e in pro(ucin# coal an( Can#la(esh has the comparati-e a(-anta#e in pro(ucin# oil. 5

() !ana(a has comparati-e a(-anta#e in pro(ucin# +oth coal an( oil. 3.. 0ssume that the (omestic (eman( for mp3 pla&ers is #i-en +& P A <4 - D. The suppl& of (omestic pro(ucers is #i-en +& P A 14 I D' an( the international suppl& +& P A 15. If this is an open econom& then the num+er of quantities of import of mp3 for this econom& is: a)54 96 <0 c).4 () $4 35. Two !ana(ian workers' 0lan an( >essica' can each pro(uce sto-es or coffee. 0lan can pro(uce either 154 k# of coffee or 1 sto-e per month. >essica can pro(uce either "4 k# of coffee or 1 sto-e per month. 7ow much of each #oo( is pro(uce( if each worker speciali=es accor(in# to comparati-e a(-anta#e8 a)$ sto-es an( "4 k# coffee +) 1 sto-e an( "4 k# coffee c)$ sto-e an( $14 k# coffee d6 None of t.e a9ove )art II& "ns0er !I%E of t.e fo**o0in7 SI$ C+estions, If more [Link] five C+estions are ans0ered: on*y t.e first five attempted 0i** 9e mar5ed 1Tota*2<4 mar5s6, /+estion K 1 113 mar5s6 5uppose the prices of (ou#hnuts (() an( coffee (c) are P( A 3. an( Pc A 3$' an( we o+ser-e the consumer to purchase exactl& three (ou#hnuts an( two cups of coffee e-er& (a&. (i) Nraph the resultin# +u(#et constraint on a (ia#ram ((ou#hnuts on the -ertical axis an( coffee on the hori=ontal axis)' with intercepts clearl& marke(' explainin# how &ou arri-e at the answers. %hat is the consumerJs total income8 (3 marks) "ns& Income 2 3L;M N 2L;2 2 ;1<, Intercepts are& d 2 1<OM 2 M 1on t.e vertica* a>is6 G c 2 1<O22@ 1on t.e .oriIonta* a>is6 (ii) !alculate the slope of the +u(#et line an( explain what it stan(s for. If the H: from coffee consumption at the chosen +un(le is equal to 144' fin( the utilit& o+taine( from consumin# the thir( (ou#hnut. (3 marks) "ns& s*ope 2 B )cO)d 2 B 2OM 2 B 1O2 2 B 0,4 It means [Link] to p+[Link] one more c+p of coffee t.e cons+mer needs to 7ive +p .a*f a do+7.n+t, "t t.e optima* 9+nd*e& 1MUdO)d621MUcO)c6 MU of t.e 3rd do+7.n+t 2 1100LM6O22 200 (iii) Gow suppose the #o-ernment su+si(i=es coffee pro(ucers such that the new market price of coffee is 31 per cup. Illustrate #raphicall& an( explain what happens to the HO5' quantit& consume( of coffee an( quantit& consume( of (ou#hnuts. (. marks). "ns& "s a res+*t of t.e s+9sidy: t.e 9+d7et *ine rotates o+t0ard aro+nd t.e vertica* intercept, T.e 9+d7et *ine is no0 f*atter P .as a s*ope eC+a* to 0,24 T.e ne0 MRS is: 1OM 2 0,24, T.e C+antity cons+med of coffee 0i** increase 1since it is no0 re*ative*y c.eaper6: and t.e C+antity cons+med of do+7.n+ts 0i** increase as 0e** 1since itJs a comp*ement for coffee in cons+mption6, T.e ne0 optima* 9+nd*e 0i** comprise more of 9ot. 7oods after t.e s+9sidy, (i-) Instea( of the su+si(& in (iii)' assume now that the consumer loses his 1o+ an( thus experiences a (rop in income to 3< per (a&. Illustrate the new +u(#et constraint an( the new optimal +un(le on a (ia#ram. 0ssume that +oth #oo(s are normal. (3 marks). "ns& ne0 eC+i*i9ri+m s.o+*d 9e positioned 9e*o0 and to t.e *eft on a *o0er indifference c+rve, Income no0 is ;@: 9+t prices are +nc.an7ed, T.+s t.e ne0 9+d7et *ine is para**e* and to t.e *eft of t.e o*d one, /+estion K2 113 mar5s6 !onsi(er the Harket for milk in 5askatchewan. If P is the price of milk (cents per litre) an( D is the quantit& of litres (in millions per month)' suppose that the (eman( an( suppl& cur-es for milk are #i-en +&: "

)eman(: 5uppl&: (i) 0ssumin# there is no #o-ernment inter-ention in this market' what is the equili+rium price an( quantit&8 ($ marks) ) 2 1<4 cents per *itre 12 ;1,<4 per *itre6 and / 2 M mi**ion *itres O mont. (ii) *in( consumer surplus' pro(ucer surplus an( the total social surplus. ($ marks) CS 2Q1224B1<46LMRO22120 )S 2Q11<4B246LMRO222@0 TS 2M00 Gow suppose the #o-ernment #uarantees milk pro(ucers a price of 3$ per litre an( promises to +u& an& milk that the pro(ucers cannot sell. (iii) *in( the new quantit& tra(e( on the market' the price pai( +& consumers' the price recei-e( +& pro(ucers an( the quantit& of milk the #o-ernment woul( +e +u&in# (per month) with this s&stem of price support. Ooun( all (ecimals to the nearest hun(re(th. ($ marks) / 2 1224B2006O14 2 1,<<<< 1,<A mi**ion *itres O mont.

)rice paid 9y cons+mers 2 price received 9y se**ers 2 ;2 O *itre of mi*5 /+antity 9o+7.t 9y t.e 7overnment 2 1200B246O34 1200B2246O14 2 4 B 1,<A 23,33 mi**ion *itres (i-) Ni-en this polic& of price control' fin( the new consumer surplus' pro(ucer surplus' the cost to the #o-ernment an( the (ea(wei#ht loss. (. marks)

CS 2 Q1224B2006L1,<ARO22 20,@A4 )S 2 Q1200B246L4RO22M3A,4

20,@@

Costs to t.e 7overnment 2 14 1,<A6 L 2 2 ;<,<< mi**ion D # 2 c.an7e in cons+mer s+rp*+s N c.an7e in prod+ce s+rp*+s N c.an7e in 7overnment f+nds2 120,@@ B 1206 N 1M3A,4B2@06 B <<< 2 B??,12 N 14A,4 B <<< 2 B<0A,<2, D #2TSJBTS2120,@@NM3A,4B<<<6BM002B<0A,<2, (-) Gow assume that instea( of price control' the #o-ernment imposes a specific tax to +e pai( +& the suppliers. The tax shoul( result in an equili+rium price equal to 3$ per litre of milk. *in( the ma#nitu(e of this tax. (3 marks) t 2 specific ta> 1in cents O *itre of mi*56 "t ;2 per *itre cons+mer is 0i**in7 to p+[Link] 2 1224B2006O14 2 1,<A mi**ion *itres T.e ta> inc*+sive S+pp*y& ) 2 24 N 34/ N t Since 1/21,<A: )2 2006 *ies on t.e ta>Binc*+sive s+pp*y 200 2 24 N 34L1,<A N t t 2 11<,44 cents per *itre 2 ;1,1A per *itre /+estion K3 113 mar5s6 5uppose that the resi(ents of a traffic con#este( area (eman( that their municipalit& works on re(ucin# noise an( traffic pollution in their nei#h+ourhoo(. The municipalit& cooperates with the resi(ents an( con-e&s their request to the 9

#o-ernment as their (eman( a#rees with the #o-ernmentJs en-ironmental o+1ecti-e of pollution re(uction throu#h the facilitation of access to pu+lic transportation. The pri-ate mar#inal +enefit from consumin# pu+lic transport is: P=30-QD an( the mar#inal cost of pu+lic transport pro-ision is: P=10+0.5QS' where P is the price per trip an( Q measures the num+er of trips ma(e per month. The mar#inal external +enefit (HMC) of pu+lic transportation is: MEB=0.5QD' so the social +enefit (eman( cur-e is )230B 0,4/D, (i) %hat shoul( +e the quantit& of trips that achie-es allocati-e efficienc&8 (3 marks) To [Link] a**ocative efficiency& 130B/6N10,4/6210N0,4/ 30B0,4/210N0,4/ /220 trips, (ii) %hat shoul( +e the amount of the specific su+si(& to achie-e the efficient quantit&8 (. marks) "t t.e a**ocative*y efficient C+antity 2 20 trips& )rice on socia* demand 2 30B0,4L20230B102 ;20 )rice on private demand 2 30B202;10 S+9sidy per trip 2 ;20B;102 ;10 O trip (iii) %hat is the cost of the su+si(& to #o-ernment8 (3 marks) Tota* cost of s+9sidy pro7ram 2 1s+9sidy per pass6 L 1a**ocative*y efficient C+antity6 2 ;10 L 20 2;200 (i-) The lower price an( increase( quantit& (eman(e( of pu+lic transport resultin# from the su+si(& lea-es +oth pu+lic transport passen#ers an( the nei#h+ourhoo(Js resi(ents happier than +efore. %hat coul( +e sai( a+out the nature of pu+lic transportation8 %as pu+lic transportation un(er-pro(uce( or o-er- pro(uce( +efore the su+si(& was applie(8 (3 marks) "ns& since more p+9*ic transport cons+mption 9y passen7ers .as 9ot. a private and e>terna* mar7ina* 9enefit p+9*ic transport is a 7ood [Link] 7enerates a positive e>terna*ity fa**in7 +pon t.e residents of t.e traffic con7ested area, (efore t.e s+9sidy 0as app*ied and 0it. no 7overnment intervention: t.e positiveB e>terna*ity prod+cin7 7ood 0as +nderBprod+ced *eavin7 dead 0ei7.t *oss in t.e mar5et for p+9*ic transportation,

/+estion KM 113 mar5s6 There is a sin#le mo-ie theatre in the town of *rien(l& Ca&. There are two (istinct #roups of mo-ie #oers. Nroup one has a (eman( cur-e #i-en +& P A 1$ P 1E$D an( #roup two is compose( of 34 in(i-i(uals each willin# to pa& 31$. The owner incurs a fixe( cost each time he shows the mo-ie of 334 an( a cost of 3$ per in(i-i(ual who pa&s to enter. (i) Illustrate #raphicall& the two (eman( cur-es' la+elin# the intercepts carefull&. ($ marks) Do0n0ard s*opin7 D intercepts 12: 2MG .oriIonta* *ine at ) 2 ;12 +p to C 2 30 . (ii) Illustrate #raphicall& the market (eman( cur-e P that is the total of these two #roups to#ether. ($ marks) HoriIonta* +p to 30 at )212: [Link] s*opes do0n fo**o0in7 t.e do0n0ard s*opin7 demand. (iii) !ompute the profit that the owner woul( make if he char#e( a price of 3< to e-er&+o(&. ($ marks) 30 L ;< N @ L ;< B ;30 2 ;1?@. <

(i-) 5uppose now that he can separate the two #roups an( can therefore char#e them each a separate price. 5o he is now a monopolist an( will maximi=e his profit +& choosin# a quantit& in each #roup that he shoul( sell tickets to' correspon(in# to the rule H! A HO. 5o (raw the HO an( H! for each of the two su+markets an( illustrate #raphicall& the num+er of people from each #roup he shoul( sell tickets to. (. marks) MR is same as D in t.e case of t.e .oriIonta* demandG so .e s.o+*d s+pp*y every9ody .ere, In t.e do0n0ard s*opin7 case MR 2 12 1/ .ence [Link] MC 2 MR [Link] / 2 10: ) 2 ;A, (-) !ompute his total profit in this situation. (3 marks) 30 L ;10 N 10L;4 B ;30 2 ;320.

/+estion K4 113 mar5s6 Peter pro(uces to&s accor(in# to the pro(uction function D A Q I .Q $ P R Q3' where D is output an( Q is la+or. The mar#inal pro(uct cur-e is #i-en +& HPQ A 1 I <Q P S Q$. (i) )eri-e an expression for the a-era#e pro(uct of la+or. ($ marks) ") 2 1N M# 1OM#2. (ii) These are re#ular shape( a-era#e an( mar#inal pro(uct cur-es. Illustrate them on a #raph' an( compute the -alue of their intercepts on the -ertical axis. ($ marks) Intercepts are 1 for ") and M). (iii) %hat is the -alue of Q where the 0PQ is at its maximum8 (3 marks) .ere ") 2 M): # 2 @, (i-) 5ince we know that the a-era#e cost cur-e 0! can +e written as 0! A %a#eE0P Q ' if the wa#e is % A 3"<' what is the -alue of the 0! at its minimum8 ($ marks) "C 2 <@O1A 2 M. (-) If this firm is a perfect competitor' what price will it char#e for its output in the lon# run8 ($ marks) ) 2 min "C& ) 2 ;M. (-i) If this firm is a monopolist in the market' can we sa& how much hi#her its price will +e relati-e to the perfect competitor8 ($ marks) No& 0e do not 5no0 t.e D c+rve: .ence 0e donJt 5no0 t.e MR c+rve .

/+estion K< 113 mar5s6 The (omestic market for cheese is #i-en +& P A 14< P $D an( P A 1" I 1E.D. These are the (eman( an( suppl& con(itions. The #oo( can +e supplie( internationall& at a constant price P A $..

(i)

Illustrate the (omestic market in the a+sence of tra(e an( sol-e for the equili+rium price an( quantit& ((onJt +e concerne( if &ou #et a fraction in &our answer). ($ marks) )22<,22: / 2 M0,@?.

(ii)

%ith free tra(e illustrate the market #raphicall& an( compute the total amount purchase(' an( compute the amount supplie( +& (omestic an( international suppliers each. ($ marks) Tota* amo+nt p+rc.ased2M2: amo+nt s+pp*ied domestica**y232: amo+nt s+pp*ied internationa**y: i,e, imports2M2B32210,

(iii) 5uppose now that the #o-ernment implements a price floor in the (omestic market equal to 3.<. Illustrate the market outcome #raphicall&. (3 marks) )rice f*oor *ine is .oriIonta* at )2M@, (i-) *or the outcome with a price floor' compute the quantit& supplie( +& (omestic an( international suppliers respecti-el&. (3 marks) "mo+nt p+[Link] and s+pp*ied domestica**y230: imports20. (-) Illustrate #raphicall& the total supplierEpro(ucer surplus at the price floor outcome. (3 marks) It is t.e area 9et0een price of M@ and t.e ori7ina* s+pp*y c+rve )21<N/OM: +p to /230,

The Mn(

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