FINAL EXAMINATION. Special Instructions: Date: DECEMBER 15, 2000 School Year: Course and No.: ECON1006EA Time: 1:30 PM- 3:30 PM

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1 FINAL EXAMINATION Date: DECEMBER 15, 2000 School Year: Course and No.: ECON1006EA Time: 1:30 PM- 3:30 PM Professor: SARLO, C Department: Arts & Science Number of Pages: 11 + cover Time Allowed: 2 Hours Special Instructions:

2 Final Examination ECON1006EA Page 1 Part I Multiple Choice 54 Marks Please circle the letter beside the best answer 1. All of the following are examples of opportunity cost, except: a) the study time given up to attend a film b) the price of a ticket to attend a concert c) income one could have earned if she did not attend university d) the steel that could have been produced if greater air pollution were allowed 2. Which of the following is a positive statement? a) Capitalism is the fairest economic system. b) Democracy is the best form of government. c) Abortion must be legalized. d) Human behavior is predictable. 3. Markets in which firms sell their output of goods and services are called: a) factor markets b) product markets c) command markets d) mixed markets 4. Which of the following is not classified as a factor of production? a) food b) labor services c) land d) capital equipment 5. If a 12 month subscription to a fitness club costs as much as tickets for 24 Toronto Blue Jay baseball games, then the opportunity cost of a baseball game is: a) a 1 year subscription b) 2 months of membership or 1/6 of a subscription c) 1 month of membership or 1/12 of a subscription d) 1/2 month of membership or 1/24 of a subscription

3 Final Examination ECON1006EA Page 2 6. What phrase best describes Adam Smith's philosophy: a) dictatorship of the proletariat b) planned economy c) "mixed" economy d) laissez-faire 7. A movement along a demand curve can be caused by a: a) change in population b) change in the average income c) change in tastes d) change in the price of the item 8. To say that the supply curve is upward sloping to the right means: a) as price goes up, quantity supplied will decrease b) consumers will want to buy less at higher prices c) producers will supply more at higher than at lower prices d) that if the costs of production increase, the quantity supplied will have to increase also 9. Suppose that a more efficient way to produce a good is discovered, thus lowering production costs for the good. This will cause: a) an increase in supply, or a rightward shift of the supply curve b) a decrease in supply, or a leftward shift of the supply curve c) an increase in quantity supplied, or a movement up the supply curve d) a decrease in quantity supplied, or a movement down the supply curve 10. A perfectly horizontal demand curve has a price elasticity of: a) zero b) unity c) less than one d) infinity 11. If the household expenditures on electricity remain constant when the price of electricity increases, then the price elasticity of electricity is: a) elastic b) inelastic c) unity d) cannot be determined from the information given

4 Final Examination ECON1006EA Page Income elasticity of demand measures the extent to which: a) the price of a good will change when there is a change in income b) the quantity demanded of a good will change when income changes c) revenue will change when there is a change in income d) income will change when the price of a good increases or decreases 13. If a linear demand curve shifts rightwards parallel to itself, then at every price the price elasticity of demand: a) will rise b) will fall c) will stay the same d) cannot be determined from the information given 14. If the price elasticity of demand for an agricultural product is 0.5, a decline in output from 100 tons to 80 tons will a) increase the price of the product by exactly 20 percent b) reduce total receipts c) increase total receipts d) increase the price by more than 50 percent 15. The consumption of a free good will cease when: a) its marginal utility begins to fall b) its marginal utility is negative c) its marginal utility is zero d) it total utility is zero 16. The price-consumption line shows how: a) consumption bundles change as money income and relative prices change b) consumption bundles change as relative prices change, with money income held constant c) the purchase of a good will increase as its price increases d) changes in relative prices will cause parallel shifts in the budget line 17. The slope of the budget line with commodity Y on the vertical axis and commodity X on the horizontal axis is a) -(Py/PX) b) -(X/Y) c) -(Y/X) d) -(PX/Py)

5 Final Examination ECON1006EA Page The indifference curve refers to combinations of the two goods a) that the consumer prefers b) that the consumer can afford c) that the consumer cannot afford d) which give the consumer equal utility 19. The statement: "The most important goal of firms is to maximize profits". a) has been proved by empirical testing to be always true b) is a hypothesis which has yielded accurate predictions c) is a normative statement; i.e., cannot be tested d) applies only to corporations 20. Given the economist's concept of profits, when profits are zero, you: a) can only do better b) can do no better, although you might do worse c) are not making a return on your investment d) should reallocate your resources to other lines of production 21. Economic profits greater than zero: a) imply that there is no incentive for resources to move into or out of the industry b) imply that the opportunity costs exceed revenues in that particular industry c) provide an incentive for owners of factors of production to move resources into the industry d) imply that some people are being exploited 22. In the very long run: a) all factors are fixed; however, technology can be changed b) both technology and factors of production can be changed c) technology is fixed but the factors of production can be varied d) both technology and factors of production are fixed 23. If the average-product curve is rising, then the marginal-product curve: a) must lie above the average-product curve and must also be rising b) must be above the average-product curve c) can be either above or below the average-product curve, although it must be rising over the entire range d) must lie below the average-product curve

6 Final Examination ECON1006EA Page One of the following declines continuously: a) average variable cost b) marginal cost c) total fixed cost d) average fixed cost 25. As the firm's output increases, in the short run: a) average variable cost approaches average total cost b) average fixed cost increases continuously c) marginal cost reaches a maximum, then decreases d) average variable cost reaches a maximum, then decreases 26. Increasing returns (to scale) to a firm are shown graphically by: a) a downward-sloping long-run average-cost curve b) an upward-sloping long-run average-cost curve c) a horizontal long-run average-cost curve d) none of the above 27. The theory of perfect competition is built on critical assumptions, one of which is a) the individual firm can affect the price of the product it sells. b) the individual firm can influence demand by advertising. c) the firm can easily enter or leave the industry. d) there are few producers of an identical product. 28. The competitive firm's total-revenue curve a) is a straight line sloping upward to the right. b) moves upward to the right and then declines when MC=MR. c) is a straight line that coincides with the market-demand curve. d) is the same as the firm's demand curve. 29. A profit-maximizing firm in the short run will expand output a) as long as marginal revenue is greater than marginal cost. b) until marginal cost begins to rise. c) until marginal revenue equals average variable cost. d) until total revenue equals total cost. 30. A price-taking firms supply curve in the short run is a) the entire marginal cost curve. b) the rising portion of the average variable cost curve. c) the average revenue curve. d) the marginal cost curve at and above the average variable cost curve.

7 Final Examination ECON1006EA Page The predictions for the firm's long-run competitive equilibrium include all of the following, except a) price = average fixed cost. b) price = marginal cost. c) price = minimum short-run average total cost. d) price = minimum long-run average cost. 32. The demand curve of the monopolist a) is the market-demand curve and slopes downward to the right. b) slopes upward to the right. c) is a perfectly horizontal line. d) can be anywhere the monopolist wishes because of his economic power 33. At the profit maximizing output for a monopolist a) price always exceeds average total cost. b) price equals marginal cost. c) price exceeds marginal cost. d) price equals marginal revenue. 34. If the monopoly is to persist in the long run a) there must be barriers to the entry of other firms. b) its MR curve must be positive over its entire range of production. c) its AC must decline indefinitely. d) it must be able to take advantage of economies of scale. 35. Of the following, which could most easily practice price discrimination? a) a gas station b) a dentist c) a restaurant d) a grocery store 36. Which of the following is the most formidable barrier to entry in Canada? a) advertising creating product differentiation b) cost c) legal restrictions d) religious views of the owners

8 Final Examination ECON1006EA Page 7 Part II Problems 46 Marks 1. Consider the following demand and supply equations: P = 15-3Q P = 5 + 2Q a) Determine the market equilibrium price and quantity. [2] b) Suppose supply shifts to: P = 2Q. What, exactly, is the nature of this shift? [2] c) What is the new market equilibrium price and quantity? [2] d) What is the price elasticity of demand between the two equilibrium points? [2] e) What is the gain/loss of consumers surplus in this case? [2] 2. a) Draw a graph showing a perfectly competitive firm in its LR equilibrium position. [2] b) What economic forces ensure this result? [2]

9 Final Examination ECON1006EA Page 8 c) Draw a graph showing a monopoly firm earning profits. Shade in the profit.[2] c) Use a graph to show the deadweight loss of welfare due to monopoly. [4]

10 Final Examination ECON1006EA Page 9 3. Consider a firm that experiences diminishing returns right away. In the top graph, show the corresponding TVC, TFC and TC curves. Directly below, diagrammatically derive the AVC, ATC and MC curves. You must line up the relevant key points on both graph. Use trace lines. Be neat and label fully. No explanation is required. [8]

11 Final Examination ECON1006EA Page Diagrammatically derive and engel curve for an inferior good. Please assume that indifference curves are convex to the origin. Be neat and label all parts of the graph. [6]

12 Final Examination ECON1006EA Page Imagine a monopoly firm with fixed costs but no variable costs; for example, a firm owning a spring of water that produces indefinitely, once certain pipes are installed, in an area where no other source of water is available. a) What would be the firm's profit maximizing price? (Show in a diagram) [6] b) What price elasticity of demand would you expect at that price? [2] 6. Clearly but briefly explain the difference between the law of diminishing returns and decreasing returns to scale. [4] HAVE A SAFE AND HAPPY HOLIDAY END OF EXAMINATION