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UNIVERSITY OF TORONTO
DEPARTMENT OF ECONOMICS

INTRODUCTION TO ECONOMICS ECO100Y
LEC0301 & LEC6001

MICHAEL HO

TEST 3
FEBRUARY 15
TH
, 2013



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.
Show your calculations in Question 1 as required in each part of the question.
You must show your step-by-step analysis in Question 2 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

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1. In a private closed economy, the desired consumption expenditure

(where

is
the disposable income) and desired investment expenditure (which does not depend on
income). (45 marks)

1. (a) Assume is the actual income, is the desired savings, is the average propensity to
consume, is the average propensity to save, and is the desired aggregate
expenditure. Use the information provided above to complete the table below. You are
expected to put down three digits after the decimal point. Make sure you check all your
calculations carefully because no step marks will be given in this part of the question. (15
marks)



1. (b) According to the table in part (a) above, determine the equilibrium income

. When this
economy is in equilibrium, compute the levels of autonomous spending

and induced
spending. Show your calculations or a zero will be assigned. (6 marks)

for this private

closed economy. If the desired investment expenditure increases , compute the
change in the equilibrium income . Show your calculations or a zero will be assigned. (6
marks)

: :

1. (d) If the desired consumption expenditure changes to

while the desired

investment expenditure remains unchanged at . Determine for the equilibrium income

and the simple multiplier

. If the desired investment expenditure increases ,

compute the change in the equilibrium income

. Show your calculations or a zero will be

assigned. (6 marks)

:

1. (e) Explain the differences in the size of the multiplier, the change in equilibrium income, and
the speed of adjustment between parts (c) and (d). Hint: You can use the production, desired
inventory, and warehouse example in lecture discussion as well as Tutorial #10. (12 marks)







For Answers To Question 1 Only



: : :

1. (c) Compute marginal propensity to save and the simple multiplier

:
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2. Suppose there are two firms, Firm 1 () and Firm 2 (), and they form a cartel to reduce output
and charge a high-price. The payoff matrix below states the profits for each firm following
different strategies (Cartel or Cheating). (30 marks)

Firm 2
Strategy
High-Price
(Cartel)
Low-Price
(Cheating)
Firm 1
High-Price
(Cartel)

Low-Price
(Cheating)


2. (a) Show your step-by-step analysis following the approach shown in the lecture discussion and
Tutorial #8 to demonstrate if this cartel is stable or not. (24 marks)

2. (b) Is the result from part (a) good or bad to the consumers and the industry?. (6 marks)



































For Answers To Question 2 Only
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Questions 3 to 7 (5 marks each)

3. Which of the following are characteristic of a monopolistically competitive market?
(A) All firms are price takers.
(B) There are many small firms in the industry.
(C) Firms engage in strategic behaviour.
(D) Each firm faces a horizontal demand curve.
(E) Economic profits are often positive in the long run.

Answer:


4. Traditionally, economists have regarded monopoly as an undesirable market structure because
(A) of its ability to minimize costs through large output.
(B) it is allocatively inefficient.
(C) it allows producers to earn large profits.
(D) of its innovative tendencies.
(E) it is usually characterized by wastefully confrontational labour relations.

Answer:


5. Potential or full-employment output is
(A) the maximum that an economy actually achieves throughout its entire history.
(B) the that could be produced if the economy's resources were fully employed at their
maximum intensity of use.
(C) a goal that can never be achieved by the economy.
(D) the that would be produced if the economy's resources were fully employed at a normal
intensity of use.
(E) achieved during periods when all of the labour force is employed.

Answer:


6. All goods and services produced by one firm but used as inputs into a further stage of production
are called
(A) national income goods.
(B) consumption goods.
(C) final goods.
(D) intermediate goods.
(E) value added.

Answer:


7. "The marginal propensity to consume" refers to the additional
(A) desired consumption that occurs out of an additional dollar of disposable income.
(B) desired consumption caused by a change in tastes.
(C) desired consumption that occurs out of an additional dollar of investment.
(D) desired saving that occurs out of an additional dollar of disposable income.
(E) desired consumption that occurs over time.

Answer:


End of Test 3 Total = 100 marks