MGEA02H3 LEC01/LEC02/LEC03

Final Exam - December 15, 2014

Profs. Gordon Cleveland and Jack Parkinson
THIS IS VERSION A OF THE EXAM - MAKE SURE TO INDICATE THIS
VERSION ON YOUR SCANTRON SHEET, AND ON YOUR ANSWER
BOOKLET, BOTH OF WHICH ARE TO BE TURNED IN AT THE END OF
THE EXAM. YOU CAN TAKE YOUR QUESTION SHEETS.

INSTRUCTIONS

1. This exam consists of 16 numbered pages, including this one. Please check that you have all the pages.
There is also an answer booklet in which you will answer two short answer questions.

2. On the Scantron answer sheet, you must

 PRINT your last name and first name
 enter your student number as the identification number
 FILL IN THE BUBBLES under your name and student number
 FILL IN THE BUBBLE ASSOCIATED WITH YOUR TEST VERSION
NOTE - THIS IS VERSION A

3. On the answer booklet, you must fill in your name and student number. DO NOT REMOVE THE
STAPLE FROM THE ANSWER BOOKLET.

4. If you fail to carry out all the tasks indicated in parts 2 and 3, 4 marks will be deducted from your final
score.

5. This final exam consists of 40 multiple choice questions (and a 41st which simply confirms your exam
version), as well as two short answer questions (with multiple parts). For the multiple choice questions,
choose the correct answer. If two multiple choice answers both seem to be approximately correct, choose
the best of the two answers. Enter the answers to the multiple choice questions on the Scantron sheet
provided to you by filling in the appropriate bubble. If answers are not written on this sheet, there
will be no marks given for answers. Each correct answer is worth 2 marks (except for question 41, which
simply confirms your exam version); incorrect answers receive 0 marks. Short answer questions 42 and
43 are to be answered in the answer booklet.

6. When entering your answers on the Scantron sheet:

 Use a medium (HB) pencil
 Fill in the bubbles neatly and completely
 Erase any changes as completely as possible
 Be very careful to place each answer in the correct place

Management, 1265 Military Trail, Toronto, ON, M1C 1A4, Canada

www.utsc.utoronto.ca/mgmt
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7. Total time for the exam is 3 hours. You may leave early, but not before one-half hour has passed,
and you may not leave in the last five minutes of the exam. At the end of the exam, remain in your
seat and wait until you have been given permission to leave. The exam will be collected from you.
Wait until you are given permission to leave.

8. Use only approved calculators. Graphing calculators will be confiscated. Calculators which can be pre-
programmed to store information will be confiscated. If the confiscated calculator is found to contain notes
of any kind, academic consequences will ensue.

9. HINT: You will have to work quickly on this exam, so do not spend too much time on any single
question. You will not have to provide a longer answer than is allowed for in the answer booklet.

10. Cheating will be dealt with to the fullest extent possible under University rules.

11. Good luck. Have an enjoyable holiday.

VERSION A

Management, 1265 Military Trail, Toronto, ON, M1C 1A4, Canada

www.utsc.utoronto.ca/mgmt
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This final exam consists of 40 multiple choice questions (plus a 41st identifier question). Answer
each question by choosing the best alternative and indicating your choice in the appropriate place on
the Scantron sheet provided with this exam (you will turn it in at the end of the exam). Questions
42 and 43 are to be answered in the Answer Booklet (which you will also turn in at the end of
the exam). You may take the question sheets away with you, so you can use the fronts and back of
these pages for your rough work. If you wish to keep a record of your answers, make a note of them
on the question sheets.

Each correct answer to questions 1 through 40 is worth 2 marks (there is no deduction for wrong
answers).

PART I: MULTIPLE CHOICE QUESTIONS (80 marks)

1-4. The perfectly competitive market for tropical fish (a popular pet for children & some adults) is
in equilibrium, and its demand and supply curves have the usual shapes (positively sloped supply
and negatively sloped demand). Tropical fish are a normal good. Virtual pet applications (computer
programs) on cellphones, tablets and other wireless devices are a substitute for (actual) pet fish as
far as consumers are concerned. Fish tanks are a complement in consumption of tropical fish as pets.
Fish food is also a complement in consumption of tropical fish as pets. Questions 1 to 4 refer to the
effects of various events on the market for tropical fish as pets; each question should be taken as
separate.

1. Suppose that as the population ages, virtual pet (computer) applications become more popular,
increasing their prices. At the same time, new government rules requiring that imported and
domestically-raised tropical fish be certified increases the marginal cost of selling tropical fish.
What happens to the equilibrium market price and quantity of tropical fish?

A) equilibrium price and quantity will both fall

B) equilibrium price will fall and equilibrium quantity will rise
C) equilibrium price will rise and equilibrium quantity will fall
D) equilibrium price and quantity will both rise
E) equilibrium price will rise but equilibrium quantity may rise or fall depending on the relative size
of the shifts of supply and demand
F) equilibrium price will fall but equilibrium quantity may rise or fall depending on the relative size
of the shifts of supply and demand
G) equilibrium quantity will rise but equilibrium price may rise or fall depending on the relative size
of the shifts of supply and demand
H) equilibrium quantity will fall but equilibrium price may rise or fall depending on the relative size
of the shifts of supply and demand
I) the equilibrium price and quantity either both fall OR both rise depending on the relative size of
the shifts of supply and demand
J) we have insufficient information to determine the effect on price or quantity

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2. A large tax cut by the finance minister increases the effective amount of consumer incomes. At
the same time, fish tanks become more expensive. What happens to the equilibrium price and
quantity of pet tropical fish?

A) equilibrium price and quantity will both fall

B) equilibrium price will fall and equilibrium quantity will rise
C) equilibrium price will rise and equilibrium quantity will fall
D) equilibrium price and quantity will both rise
E) equilibrium price will rise but equilibrium quantity may rise or fall depending on the relative size
of the shifts of supply and demand
F) equilibrium price will fall but equilibrium quantity may rise or fall depending on the relative size
of the shifts of supply and demand
G) equilibrium quantity will rise but equilibrium price may rise or fall depending on the relative size
of the shifts of supply and demand
H) equilibrium quantity will fall but equilibrium price may rise or fall depending on the relative size
of the shifts of supply and demand
I) the equilibrium price and quantity either both fall OR both rise depending on the relative size of
the shifts of supply and demand
J) we have insufficient information to determine the effect on price or quantity

3. Suppose a new remote web operated camera makes pet tropical fish a much more popular choice
as consumers can now view their pets in real time anytime from any place on the planet. At the same
time global warming causes the population of jellyfish (a key ingredient in the manufacture of fish
food) to increase dramatically in the world’s oceans, lowering the price of fish food. What happens
to the equilibrium price and quantity of pet tropical fish?

A) equilibrium price and quantity will both fall

B) equilibrium price will fall and equilibrium quantity will rise
C) equilibrium price will rise and equilibrium quantity will fall
D) equilibrium price and quantity will both rise
E) equilibrium price will rise but equilibrium quantity may rise or fall depending on the relative size
of the shifts of supply and demand
F) equilibrium price will fall but equilibrium quantity may rise or fall depending on the relative size
of the shifts of supply and demand
G) equilibrium quantity will rise but equilibrium price may rise or fall depending on the relative size
of the shifts of supply and demand
H) equilibrium quantity will fall but equilibrium price may rise or fall depending on the relative size
of the shifts of supply and demand
I) the equilibrium price and quantity either both fall OR both rise depending on the relative size of
the shifts of supply and demand
J) we have insufficient information to determine the effect on price or quantity

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4. Suppose a new hit children’s movie makes the ownership of genuine (living) pet tropical fish
much more popular with younger people. At the same time, consumers come to believe that the
price of tropical fish will fall in the near future (although suppliers of tropical fish do not share this
belief). What happens to the equilibrium price and quantity of pet tropical fish?

A) equilibrium price and quantity will both fall

B) equilibrium price will fall and equilibrium quantity will rise
C) equilibrium price will rise and equilibrium quantity will fall
D) equilibrium price and quantity will both rise
E) equilibrium price will rise but equilibrium quantity may rise or fall depending on the relative size
of the shifts of supply and demand
F) equilibrium price will fall but equilibrium quantity may rise or fall depending on the relative size
of the shifts of supply and demand
G) equilibrium quantity will rise but equilibrium price may rise or fall depending on the relative size
of the shifts of supply and demand
H) equilibrium quantity will fall but equilibrium price may rise or fall depending on the relative size
of the shifts of supply and demand
I) the equilibrium price and quantity either both fall OR both rise depending on the relative size of
the shifts of supply and demand
J) we have insufficient information to determine the effect on price or quantity

5-8. The market for widgets has the following supply and demand curves:
Supply: P = 10 + (1/3)Q
Demand: P = 100 – (1/2)Q
Initially, the market is in equilibrium at P = $46, Q = 108. Questions 5 through 8 concern this
market.

5. The government places a $10 per unit tax on the buyers of widgets. At the new equilibrium, the
price received by sellers will be (rounded to the nearest dollar):

A) $45 B) $44 C) $43 D)

$42 E) $41
F) $40 G) $39 H) $38 I)
$37 J) $36

6. Due to the $10 per unit tax on the buyers of widgets (mentioned in Question 5), the change in the
consumer surplus will be (rounded to the nearest dollar):

A) -$60 B) +$60 C) -$324 D) +$324

E) -$612 F) +$612
G) -$960 H) +$960 I) $0 J) None of
the above

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7. After the $10 per unit tax on the buyers of widgets (mentioned in Question 5), the deadweight
loss (or excess burden) created by the tax will be (rounded to the nearest dollar):

A) $60 B) $40 C) $36 D)

$62 E) $96
F) $102 G) $136 H) $152 I) $98
J) None of the above

8. Now suppose that the government alters its policy so that the $10 per unit tax is now placed on
the sellers of widgets instead of on the buyers. Economic theory tells us the following:

A) the buyers’ share and the sellers’ share are not affected by the change in policy
B) the buyers’ share and the sellers’ share are reversed by the change in policy
C) the shares are affected by the change in policy, but exactly how depends on the elasticities
D) the shares are affected by the change in policy, but exactly how depends on excess demand
E) the shares are affected by the change in policy, but exactly how depends on excess supply
F) the shares are affected by the change in policy, but exactly how depends on utility
G) none of the above

9-11. A consumer has a demand curve for a good X given by the following function:

P = 12 - (1/3)X 0X9
= 10 - (1/9)X 9  X  90

where X is the number units purchased each month and P is measured in dollars. The demand
function is shown in the diagram below. The good cannot be stored, but must be used in the month
it is purchased. Questions 9 through 11 are about this consumer.

12

9 90
X
9. If the price of X is set at $2 per unit, the consumer surplus gained by this consumer each month

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through purchasing X will be (rounded to the nearest dollar):

A) $248 B) $234 C) $297 D) $221

E) $284
F) $441 G) $77 H) $63 I) $459
J) none of the above

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10. One month, this consumer receives a special promotional offer through the mail offering a
special deal for one month only: instead of having to pay $2 per unit, the consumer will be allowed
to consume unlimited amounts of this good X if the consumer makes an all-inclusive payment of
$????. Unfortunately, as you can see, the amount of the all-inclusive fee is missing, having been
obscured by a printing error. Intrigued, the consumer decides to call up the company to find out
what the missing all-inclusive payment is. Given what we have learned, we predict that the
consumer will decide to take the special promotional offer only if the fee is less than:

A) $468 B) $248 C) $234 D) $221

E) $180
F) $162 G) $150 H) $144 I) $72
J) $0

11. Now forget about the all-inclusive fee and return to the initial situation in which the consumer is
charged a price of $2 per unit. Suppose that the government imposes a tax of $3 per unit on this
good, and that the effect of the tax falls entirely on consumers (so that the price paid by consumers
rises to $5). The tax revenue raised by such a tax would be:

A) $135 B) $180 C) $216 D) $225

E) $360
F) $90 G) $45 H) $144 I)
$72 J) $114

12-14. This information can be used in questions 12 through 14. Assume that Mary lives in a
single-person economy and is only able to produce juice (Y) and nuts (X). Her Production
Possibilities Frontier for one month's production can be described by the function:

Y = 400 - 30X - X2 0 ≤ X ≤10

12. If we consider the point (5,200) [i.e. X = 5, Y = 200], the most appropriate label we would apply
to this point is:

A) it is unattainable
B) it is unattainable and efficient
C) it is unattainable and inefficient
D) it is attainable and efficient
E) it is attainable but only if less X is produced
F) it is attainable but falls on the PPF
G) it is attainable but too costly to produce
H) it is attainable and inefficient
I) it is sometimes unattainable and sometimes attainable
J) none of the above

13. If we consider the point (8,96) [i.e. X = 8, Y = 96], Mary’s opportunity cost of nuts is equal to:

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A) 48 B) 16 C) 38 D) 46 E) 14
F) (1/30) G) (1/16) H) (1/38) I) (1/46) J) none of the above

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14. According to the information provided, Mary’s production possibilities frontier displays:

A) constant opportunity costs for both X & Y

B) constant opportunity cost for X, but not for Y
C) constant opportunity cost for Y, but not for X
D) opportunity costs for both X & Y that sometimes decrease, increase or stay constant
E) increasing opportunity cost for X, but decreasing opportunity cost for Y
F) increasing opportunity cost for Y, but decreasing opportunity cost for X
G) increasing opportunity costs for both X & Y
H) opportunity costs for X that sometimes decrease, increase or stay constant
I) opportunity costs for Y that sometimes decrease, increase or stay constant
J) none of the above

15-19. A firm produces nails in a perfectly competitive industry. This firm has total costs in the
short run given by:
TC = 4q2 + 24q + 576

where q is the output (in tons) of nails per day and TC is the total cost in dollars. The firm
has fixed costs of $320 (which is already included in the TC equation above). This TC
equation generates its minimum average costs at q = 12. This minimum is also the minimum
average cost of production in the long run. The nail industry is a constant cost industry.
Questions 15 through 19 refer to this industry.

15. Below what price (per ton of nails) will this firm shut down in the short run?
A) $8 B) $16 C) $22 D) $33 E) $44 F) $66
G) $77 H) $88 I) $99 J) $120

16. In the short run, if the firm faces a price of $184, what amount of profit would it earn?
A) $0 B) $576 C) $640 D) $860 E) $960 F) $1024
G) $1360 H) $1440 I) $1576 J) none of the above

17. Now, imagine that in the short run, there are 200 identical firms in the industry, all like this
firm. Demand for the industry's output is given by:
P = 618 - .125Q
where Q is the total tons of nails sold to consumers, and P is measured in dollars per ton.
What is the total amount of output sold by each firm?
A) 8 B) 9 C) 12 D) 15 E) 17 F) 18
G) 20 H) 22 I) 25 J) none of the above

18. In the situation described in question 17, what profit would be earned by each firm?
A) $2304 B) $4770 C) $6400 D) $8600 E) $3024 F) $1240
G) $1360 H) $1440 I) $720 J) none of the above

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19. In the long run, if the demand for nails remains the same as in Question 17, how many firms
would there be in the industry (rounded to the nearest whole number, if necessary).
A) 331 B) 353 C) 332 D) 248 E) 296 F) 312
G) 320 H) 342 I) 346 J) none of the above

20. Consider the following three statements about perfect competition:

I. In the long run, firms enter or exit a perfectly competitive industry in search of
higher profits.
II. In an increasing cost industry in the long run, the average costs of every firm changes
as the industry expands.
III. When demand shifts to the right in the long run, each firm will supply more output to
the market in the new equilibrium.

Which of the above statements are true about a perfectly competitive industry?
A) I only B) II only C) III only D) I and II E) I and
III F) II and III G) I and II and III H) none of the above

21. Consider the following three statements about the short-run equilibrium in a perfectly
competitive firm and perfectly competitive industry:
I. When marginal cost equals marginal revenue, firms maximize profit.
II. Each firm is forced by competitive pressures to produce at the lowest possible
average cost.
III. If the demand curve shifts far enough to the left, so that revenues of firms are not
greater than variable costs, some firms will shut down, but other firms will not.
Which of the above statements are true?
A) I only B) II only C) III only D) I and II E) I and
III F) II and III G) I and II and III H) none of the above

22. Consider the following four statements about perfect competition:

I. There must be so many sellers that each seller is powerless to affect the price at
which the good or service is sold.
II. The good or service must be homogeneous so that all consumers can choose amongst
competing suppliers.
III. There must be freedom of entry and exit in the long run.
IV. Consumers must have perfect information about the characteristics and prices of all
goods available for sale from all sellers.

Which of the above statements are actually conditions necessary for the existence of perfect
competition in an industry?
A) I and II B) I and III C) I and IV D) II and III
E) II and IV F) III and IV G) I, II, III H) I, II, IV
I) I, III, IV J) all of the above

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23. A firm is producing in the short run where average cost is $30, marginal cost is $32, average
fixed cost is $18 and average variable cost is $12. At this level of output, we know that:

A) average cost is falling and average variable cost is flat

B) average cost is rising and average variable cost is flat
C) average cost is rising and average variable cost is falling
D) average cost is falling and average variable cost is rising
E) average cost is flat and average variable cost is rising
F) average cost is flat and average variable cost is falling
G) both average cost and average variable cost are rising
H) both average cost and average variable cost are falling
I) we cannot say for certain which curve is falling or rising

24. Which of the following statements are consistent with what you have learned about
“accounting profits” and “economic profits”?

I) accounting profits are lower than economic profits

II) economic profits are lower than accounting profits
III) when entrepreneurs see positive accounting profits in a sector, they are anxious to enter
that sector
IV) when economic profits in a sector are negative, entrepreneurs in the sector will want to
leave the sector in the long run

A) I and II B) I and III C) I and IV D) II and III

E) II and IV F) III and IV G) I, II, III H) I, II, IV
I) I, III, IV J) all of the above

25-28. A monopolist has a short run cost function given by:

TC = 0.1q2 + 3q + 40 q2

where q is output per day and TC is the total cost per day in dollars. The firm has fixed costs of
$30 (already included in the TC equation above). The TC equation generates minimum average
costs of $7 (per unit) at q = 20. Questions 25 through 28 concern this firm.

25. Suppose that the firm faces an industry demand curve given by the equation

P = 24 - 0.15Q

We know that the number of units produced by the firm per day in the short run is:

A) 17 B
21
C)
26

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D)
32
E)
36
F)
38
G)
42
H) 46 I)
50
J)
none of
the above

26. Continuing question 25, the price charged by the firm in the short run is:

A) $24.00 B) $18.80 C) $17.70 D) $16.80 E) $15.40 F) $14.60

G) $13.20 H) $12.00 I) $11.20 J) none of the above

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27. Imagine now that a tax of $5 per unit is placed on the output in this industry. How much of this
tax will be borne by the monopolist (i.e., what will be the seller’s share)?
A) $1.00 B) $1.50 C) $2.00 D) $2.40 E) $2.50 F) $2.60
G) $3.20 H) $3.50 I) $4.50 J) none of the above

28. The tax discussed in Question 27 will cause excess burden. How much is the excess burden of
the tax on the monopolist?
A) $37.20 B) $118.80 C) $96.70 D) $86.80 E) $80.50 F) $75.60
G) $63.00 H) $36.70 I) $31.20 J) none of the above

29. In a small and isolated cottage community, there are 100 cottagers, each of whom has the following
utility per season for snow plowing during the winter on the private road leading to the community:

U = 16X - .05X2

where X is the number of units of snow-plowing on the road over the winter, and U is the utility
measured in dollars for each member of the community when X units of snow-plowing are
purchased. Cottagers derive the same benefit from the snow-plowing whether or not they participate
in purchasing it. Snow-plowing costs $100 per unit of X plus fixed costs of $10,000 each winter.

The socially optimal number of units of snow-plowing that the community should purchase is:

A) 24 B) 36 C) 96 D) 100 E) 120
F) 142 G) 150 H) 160 I) 180 J) none of the above

30-33. A (typical) firm in a perfectly competitive constant cost industry has total costs in the short
run given by: TC =1200 + 36q + 3q2 , q2
FC = 525

where q is output per day and TC is the total cost per day in dollars. The firm has fixed costs of
$525 (already included in the TC equation above). The TC equation generates minimum average
costs of $156 (per unit) at q = 20. You are also told that this size firm generates minimum long run
average costs (that is, minimum LRAC occurs at q = 20, with min LRAC = $156). There are 200
firms in this industry in the short run.

Suppose that the demand curve facing the industry is given by the equation P = 356 - .02Q

where P is the price per unit and Q is the number of units demanded per day. Presently there is no
international trade in this product. Questions 30 through 33 concern this firm and this industry.

30. Suppose this industry is in short run equilibrium, how much will be the total Gain to Society per
day from production and consumption in this industry (Note: - Answers are in thousands of dollars)?

A) 410 B) 576 C) 614 D) 860 E) 960 F) 1024

G) 1360 H) 1440 I) 1576 J) none of the above

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Now suppose that international trade in this product opens up. As a result a foreign supply of
this product becomes available such that any amount can be imported at the world price of
$126 per unit.

31. As a result of international trade, in the short-run, the quantity of this product imported (per day)
is equal to:
A) 9200 B) 8500 C) 6160
D) 6000 E)
5860 F) 3200
G) 2880 H) 2600 I) 0
J) none of the
above

32. As a result of international trade, compared to the initial short-run equilibrium without trade, the
Gain to Society will increase by (per day):

A) $912,900 B) $512,400 C)
$433,500 D)
$683,500 E)
$258,000
F) $458,600 G) $1,788,000 H)
$1,234,000 I)
$110,200 J) none of
the above

33. Suppose the government decides that it does not like the impact of international trade on this
industry. If the government decides to impose a per unit tariff (a tax) on imports with the intention
of returning the level of output back to the short-run level without trade, the tariff would be equal to:

A) $0 B) $30 C) $62 D) $96 E) $100 F) $102

G) $112 H) $115 I) this is not possible J) none of the above

34-36. Suppose the market for cellphone service is controlled by two separate (or independent)
oligopoly firms - Sellus and Buyus - and that each firm has a constant marginal and average cost of
providing a cellphone call of $0.02 (per call).

Suppose that the demand curve facing the industry is given by the equation P = 3.02 - .005Q

where P is the price per cellphone call in dollars and Q is the number of units demanded. These two
firms engage in competition according to the Cournot model of oligopoly interaction. Questions 34
through 36 concern these firms and this industry.

34. In the Nash-equilibrium, each firm produces an amount of output equal to:

A) 1200 B) 600
C)

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300
D)
400
E)
800
F)
225
G) 200 H)
100
I)
60
J)
none of
the above

35. In the Nash-equilibrium, each firm earns a level of economic profit equal to:

A) $1600 B) $800
C)
$600 D)
$200 E)
$1200 F)
$843.75
G) $300 H) $900
I)
$0
J)
none of
the above

36. In the Nash-equilibrium, the deadweight loss of Oligopoly is equal to:

A) $1600 B) $800
C)
$700 D)
$600 E)
$500 F)
$400
G) $300 H) $200
I)
$100
J)
none of
the above

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37-40. Suppose there are two countries in the world Canada and Adanac. Two goods are produced
Homes (H) and Food (F) using only labour. Canada has 100 workers and Adanac has 200 workers.
The marginal and average products of labour are constant in each country for each good. The
following table contains the marginal product of labour (& average product of labour) in each
industry in each country.

Food (F) Homes (H)

Canada 2 6
Adanac 3 4

Questions 37 to 40 concern these 2 countries & 2 goods.

37. Given the information above we conclude that:

A) Canada has an absolute advantage in food production & Adanac has an absolute advantage in
home production
B) Adanac has an absolute advantage in food production & Canada has an absolute advantage in
home production
C) Adanac has an absolute advantage in food production & no country has an absolute advantage in
home production
D) Adanac has an absolute advantage in home production & no country has an absolute advantage in
food production
E) Canada has an absolute advantage in the production of both food & homes
F) Adanac has an absolute advantage in the production of both food & homes
G) Both countries have an absolute advantage in food production
H) Both countries have an absolute advantage in home production
I) Neither country has an absolute advantage in food production
J) Neither country has an absolute advantage in home production

38. Given the information above we conclude that:

A) Canada has a comparative advantage in food production & Adanac has a comparative advantage
in home production
B) Adanac has a comparative advantage in food production & Canada has a comparative advantage
in home production
C) Adanac has a comparative advantage in food production & no country has a comparative
advantage in home production
D) Adanac has a comparative advantage in home production & no country has a comparative
advantage in food production
E) Canada has a comparative advantage in the production of both food & homes
F) Adanac has a comparative advantage in the production of both food & homes
G) Both countries have a comparative advantage in food production
H) Both countries have a comparative advantage in home production
I) Neither country has a comparative advantage in food production
J) Neither country has a comparative advantage in home production

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39. As a result of what we have learned above if free trade between these countries is allowed, then
we will observe:

A) Canada & Adanac will both specialize in food production

B) Canada & Adanac will both specialize in home production
C) Neither country will specialize in the production of either good, & they will trade with each other
D) Neither country will specialize in the production of either good & they will not trade with each other
E) Canada will specialize in home production & Adanac will specialize in food production, but they will
not trade with each other
F) Canada will specialize in food production & Adanac will specialize in home production, but they will not
trade with each other
G) Canada will specialize in home production & Adanac will produce both products, but they will not
trade with each other
H) Canada will specialize in home production & Adanac will produce both products, & they will trade with
each other
I) Canada will specialize in home production & Adanac will specialize in food production, & they will trade
with each other
J) Canada will specialize in food production Adanac will specialize in home production, & they will trade
with each other

40. Here are several statements about the Ricardian model of international trade:
I. The international terms of trade definitely falls between the two countries opportunity costs.
II. If one country has a comparative advantage in the production of one product (food) then
it must also have a comparative advantage in the production of the second product
(homes).
III. Trade based on specialization in one’s area of comparative advantage definitely improves
the level of welfare of both trading nations.

Which of the above statements are true?

A) I and II and III B) I and II C) I and III D) II and III
E) I only F) II only G) III only H) none of them are true

41. What is the version of the exam that you have just written? Hint - Your correct answer is A.
Please fill in this answer for Question #41 on your Scantron sheet!

A) Version A B) Version B C)
Version C D) Version
D

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PART II: SHORT ANSWER QUESTIONS (20 marks – 10 marks each)

Answer each question in the appropriate place in the ANSWER

BOOKLET. Provide as much detail as possible in the diagrammatic
answers.

(10 marks)

42. A perfectly competitive industry with constant costs is initially in long-run equilibrium as
described by point A in the diagram below (at initial equilibrium price P 0*, equilibrium (market)
quantity of Q0*, and equilibrium output per firm of q0*). Note: For this question we imagine, for
simplicity, that the short-run & long-run average total cost and marginal cost curves are the same.
Further, at the initial long-run equilibrium average fixed costs make up more than half of the typical
firm’s average total cost of production.

Suppose 20% of the consumers of this product suddenly experience allergic reactions when they
consume this product. As a result these consumers (and only these consumers) switch to some
alternative product.

a) On the two diagrams below (in your answer booklet) draw the new short-run equilibrium in
the market and draw the new short-run equilibrium for the typical firm. Label any new
curves with a subscript number “1”. Label the new Short-Run equilibrium in the industry as
point B, the new industry level of output Q1*, the new per firm level of output q1*, and the
new equilibrium price P1*. Use an arrow (numbered with a “1”) to denote the direction of
any curve shift(s) in the short-run.

b) Once the market has settled into the new short-run equilibrium, compared to the initial
long-run equilibrium:

- the level of profit (per firm) has increased, decreased, or stays the same – (pick ONE); and

- the number of firms has increased, decreased, or stays the same – (pick ONE).

c) On the two diagrams above (in your answer booklet) draw the new long-run equilibrium in
the market and the new long-run equilibrium for the typical firm. Label any new curves with
a subscript number “2”. Label the new Long-Run equilibrium position in the industry as
point C, the new industry level of output Q2*, the new per firm level of output q2*, and the
new equilibrium price P2*. Use an arrow (numbered with a “2”) to denote any curve shift(s)
in the longer term.

d) Once the market has settled into the new long-run equilibrium, compared to the initial
long-run equilibrium:

- the level of profit (per firm) has increased, decreased, or stays the same – (pick ONE), and

- the number of firms has increased, decreased, or stays the same – (pick ONE).

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(10 marks)

43. A perfectly competitive Canadian industry produces gasoline. The market demand for
gasoline is given by P = 200 – Q, where Q represents the amount of gasoline purchased
per month, and P represents the price to consumers (in cents). The industry supply curve is
given by P = 20 + 0.2Q, where P represents the price received by sellers and Q represents
the amount of gasoline produced each month.

Unfortunately, the burning of fossil fuels (including gasoline, of course) causes increased
global warming as well as other forms of pollution. The total amount of external costs
caused by this pollution has been measured, and it is related to the quantity of gasoline used;
the external costs are given by TEC = 0.15Q2.

a) Show on the graph provided for you the perfectly competitive quantity (Q 0) and price (P0) in
equilibrium, as well as the optimal quantity (Q1) and price (P1), taking into account external
costs.

b) If the government were to levy a flat-rate excise tax designed to correct for these external
costs, at what rate would it tax the production of gasoline? Write this answer in the space
below the graph.

c) If this tax is levied at the optimal rate, show on the graph (shade it in and indicate clearly)
the consumer surplus after the tax and indicate clearly and shade in the area that shows the
amount of excess burden (deadweight loss) due to the tax. In the space provided below the
graph, write in the amount of the consumer surplus after the tax and the amount of excess
burden caused by the tax.

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