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ECO100Y5 Study Guide - Final Guide: Marginal Revenue, Equilibrium Point, Economic Equilibrium


Department
Economics
Course Code
ECO100Y5
Professor
Kalina Staub
Study Guide
Final

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I. Multiple Choice (10 marks total)-Choose the single best answer and write it on
the blank provided.
___C____1) Suppose that the demand curves for goods A, B, and C have the following functional
forms, where Q denotes quantity demanded and P denotes price:!
!
QA = 120 - 3.5PA - 6PB —> Complements !
QB = 100 - 2PB + 3PC —> Substitutes !
QC = 1500 - 0.5PC. !
Based on these demand curves, which of the following pairs of goods are known to be substitutes? !
!
A) A and B !
B) A and C !
C) B and C !
D) A and C, and B and C !
E) None of the pairs are substitutes !
Substitutes: prices of one good increases, other good will increase in Qd!
Compliment: price of one good goes up,demand of compliment decrease !
*look for positive relationship between one good and other* !
!
!
___B____2) If the total expenditure on perfume increases when the price of perfume falls, the price
elasticity of demand is! !
!
A) unity (demand is unit elastic).!
B) greater than one (demand is elastic).!
C) not determinable from the information given.!
D) exactly zero.!
E) less than one (demand is inelastic).!
TE = PxQ !
%changeQd!
%changeQp!
%change Qd>%Change Ap!
!
___A____3) Which of the following statements most accurately describes the concept of deadweight
loss?! !
!
A) the overall loss of economic surplus that occurs when a market is inefficient!
B) the total market value of the goods no longer produced when quantity exchanged is below the
equilibrium quantity!
C) the loss of economic surplus to consumers!
D) the loss of production that occurs when a binding price floor or ceiling is imposed!
E) the loss of consumption that occurs when a binding price floor or ceiling is imposed!
!
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___A____4) Assume a firm is using 10 units of capital and 10 units of labour to produce 10 widgets
per hour. By doubling both inputs the result is a doubling of output. This firm is experiencing!!
!
A) constant returns to scale.!
B) economies of scale.!
C) decreasing returns.!
D) increasing costs.!
E) diseconomies of scale.!
!
Q=f(K,L)!
Q=f(2K,2L)!
2Q=2(2K,2L)!
if 1.5 decreasing !
if increasing greater than two, increasing !
exactly its number = constant !
!
!
___B____5) Suppose a typical firm in a competitive industry has the following data in the short run:
price = $10; output = 100 units; ATC = $8; AVC = $7. What will likely happen in the long run?! !
!
A) The typical firm would shut down, until the remaining firms have a higher price.!
B) In the long run the industry will expand because firms are earning economic profits.!
C) The size of the industry will remain the same in the long run.!
D) In the long run the industry will contract because firms are suffering losses.!
E) There is not enough information to formulate an answer.!
!
Short run - consider variable costs !
Long run - think about average total cost , making profits -firms will enter or losses - firms will leave? !
-prices versus total cost, greater than average total cost, in the LR, firms will enter industry, and
drive economic profits to “0”. !
!
!
!
!
!

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"!
FIGURE 6-4!
!
____E__6) Refer to Figure 6-4. For both goods, the price falls from P0 to P1. The substitution effect is
illustrated by the change in quantity demanded from A to B; the income effect is illustrated by the
change in quantity demanded from B to C. Good X is certainly a (n) ________ good.! !
!
A) luxury!B) Giffen !C) normal!D) necessity!E) inferior!
-don’t care about graph for good y, just good x. !
-from A—>B Substitution!
-from A—>C income effect !
-we want to look at income effect. !
-income is increasing!
-When price falls : lower price (higher relative income, buy more good) - income !
-When price falls: we should be buying more than total effect (more income, leading us to purchase
good x, which means it’s inferior) !
!
!
Consider the following information describing a closed economy with no government and where aggregate
output is demand determined. All dollar figures are in billions. !
!
! " !
!
____C___7) Refer to information above. The equilibrium level of national income will be ! !
!
A) $3600.!B) $3000.!C) $4000.!D) $4400.!E) $3900.!
-No gov’t , no grade!
-AE = C + I !
-C = 0.9Y + 300 , I = 100!
-Y = 0.9Y + 300 + 100!
-0.1 Y = 400 , y = 4000!
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