# 2010 Final Exam Multiple Choice

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University of Toronto Scarborough

Economics for Management Studies

MGEA02H3

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Summer

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ECMA04H
Final Exam, December 2010 Time: 3 hours
Professor Gordon Cleveland
THIS IS VERSION A OF THE EXAM - MAKE SURE TO INDICATE THIS
VERSION ON YOUR SCANTRON SHEET, AND ON YOUR ANSWER
BOOKLET, BOTH WHICH ARE TO BE TURNED IN AT THE END OF THE
EXAM. YOU WILL TAKE THE QUESTION SHEETS AWAY WITH YOU.
INSTRUCTIONS
1. This exam consists of 13 numbered pages, plus a “short answer” booklet with 4 pages. Please check that
you have all the pages.
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. This exam consists of 40 multiple choice questions (and a 41 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. Questions 42 and 43 are to be
answered in the answer booklet.
5. 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.
6. Use only approved calculators. Calculators which can store information will be confiscated. If the
confiscated calculator is found to contain notes of any kind, academic consequences will ensue.
7. Cheating will be dealt with to the fullest extent possible under University rules.
8. Good luck. Have an enjoyable holiday.
VERSION A st
This term test consists of 40 questions (plus a 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 on the Answer
Sheet (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 ro ugh 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)
1-3. A country produces g3ods X2and Y and has the following3 ½uation for its production
possibilities frontier: X + Y = 280 or Y = (280 - X )
Questions 1 through 3 concern this country.
1. The point X = 6.5, Y = 0 is:
A) attainable and efficient B) attainable and inefficient
C) unattainable D) unattainable and efficient
E) imaginable and infeasible F) none of the above
2. You are told that the economy is producing efficiently and has chosen to produce and consume 6
units of X. At this point on the production possibilities frontier, you would use calculus to obtain the
opportunity cost of X (correct to two decimal places) as:
A) 0.15 B) 0.25 C) 0.5 D) 0.75 E) 1.0 F) 2.25
G) 4.50 H) 5.85 I) 6.75 J) none of the above
3. You are told that the consum2rs in this economy value goods X and Y according to the following
value function: V = 54X + 2Y . If consumers are able to reach the point on the production
possibilities frontier that gives them the highest attainable value, what will be the amount of X they
will consume (correct to two decimal points)?:
A) 1.15 B) 2.5 C) 3.0 D) 3.75 E) 4.0 F) 4.25
G) 4.50 H) 6.0 I) 9.0 J) none of the above
2 4-7. The market for beer (a perfectly competitive industry) is in equilibrium, and its short run supply
and demand schedules have the usual shapes. Beer is a normal good (and you can safely ignore any
effects of income on the demand for other related goods). Pizza is a complementary good to beer,
and wine is a substitute in consumption for beer. Questions 4 through 7 concern the market for beer
in the short run, and each question should be considered in isolation from the others (that is, in each
question assume that the changes described in the other questions have not occurred).
4. The price of pizza rises. As a result, in the beer market:
A) P and Q both rise B) P and Q both fall C) P rises and Q falls
* * * *
D) P falls and Q rises E) P rises, but we do not know exactly what happens to Q
F) P falls, but we do not know exactly what happens to Q *
* *
G) Q rises, but we do not know exactly what happens to P
H) Q falls, but we do not know exactly what happens to P *
* * * *
I) either P and Q both rise, or P and Q both fall, or neither changes
J) either P rises and Q falls, or P falls and Q rises, or neither changes
5. The price of wine falls and the price of pizza falls too. As a result, in the beer market:
A) P and Q both rise B) P and Q both fall C) P rises and Q falls
* * * *
D) P falls and Q rises E) P rises, but we do not know exactly what happens to Q
F) P falls, but we do not know exactly what happens to Q *
* *
G) Q rises, but we do not know exactly what happens to P
H) Q falls, but we do not know exactly what happens to P *
* * * *
I) either P and Q both rise, or P and Q both fall, or neither changes
J) either P rises and Q falls, or P falls and Q rises, or neither changes
6. Consumers read an article suggesting that the ads are correct and that beer drinking actually does
make you smarter, richer, and more attractive to members of the opposite sex; at the same time,
tighter environmental regulations force changes so that companies need more labour and more
capital equipment to produce the same amount of beer. As a result, in the beer market:
A) P and Q both rise B) P and Q both fall C) P rises and Q falls
* * * *
D) P falls and Q rises E) P rises, but we do not know exactly what happens to Q
F) P falls, but we do not know exactly what happens to Q *
* *
G) Q rises, but we do not know exactly what happens to P
H) Q falls, but we do not know exactly what happens to P *
* * * *
I) either P and Q both rise, or P and Q both fall, or neither changes
J) either P rises and Q falls, or P falls and Q rises, or neither changes
3 7. Consumers’ incomes rise. At the same time, changes in labour relations law result in
deunionization in the beer industry, and as a result the wages earned by beer workers fall. As a
result, in the beer market:
* * * * * *
A) P and Q both rise B) P and Q both fall C) P rises and Q falls
D) P falls and Q rises E) P rises, but we do not know exactly what happens to Q *
* *
F) P *alls, but we do not know exactly what happens to Q *
G) Q rises, but we do not know exactly what happens to P
H) Q falls, but we do not know exactly what happens to P *
* * * *
I) either P*and Q both r*se, or P an* Q both fall* or neither changes
J) either P rises and Q falls, or P falls and Q rises, or neither changes
8-11. A typical consumer has a uti2ity function for cable movies given by the following function:
U = 72X – 0.15X
where X is the number of cable movies viewed per year and U is measured in dollars. Questions 8
through 11 concern this consumer.
8. If the price of cable movies is set at $12 per movie, the consumer surplus gained by this typical
consumer each year through purchasing cable movies will be:
A) $1200 B) $2400 C) $3600 D) $4800 E) $6000
F) $6400 G) $7200 H) $7800 I) $8200 J) none of the above
9. Imagine that the cable company is trying to boost sales. It offers this consumer the following
alternative to a price of $12 per movie: the consumer would pay a nominal fee of only $3.00 per
movie plus a yearly access charge that would permit the consumer to view as many movies as he or
she liked, at no additional charge. The maximum yearly access charge that this consumer would be
willing to pay (as an alternative to the $12 per- movie fee) would be:
A) $120 B) $240 C) $360 D) $800 E) $1760
F) $1935 G) $2400 H) $2640 I) $3200 J) none of the above
4 10. Now forget about the yearly access charge and return to the initial situation in which the
consumer is charged a price of $12 per unit. Suppose that the government imposes a tax of $12 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 $24). The value of the utility loss for this consumer associated with such a tax
(compared to the situation with a price of $12 per unit) would be:
A) $120 B) $240 C) $360 D) $480 E) $760
F) $960 G) $2120 H) $2240 I) $3200 J) none of the above
11. In your judgement, what is the elasticity of the industry supply curve at the new equilibrium after
the tax?
A) zero B) 0.25 C) 0.5 D) 0.75 E) 1.0 F) 2.25
G) 4.50 H) perfectly elastic I) it is not possible to tellJ) none of the above
12-17. A firm in a perfectly competitive constant cost industry has total costs in the short run given
2
by: TC = 2q + 2q + 72 q ≥ 2
where q is output per day and TC is the total cost per day in dollars. The firm has fixed costs of $54
(already included in the TC equation above). The TC equation generates minimum average costs of
$26 (per unit) at q = 6. You are also told that this size firm generates minimum long run average
costs (that is, minimum LAC occurs at q = 6, with min LAC = $26). Questions 12 through 17
concern this firm and this industry.
12. If this firm faces a price of $38, the number of units it will produce per day in the short run is:
A) 4 B) 5 C) 6 D) 7 E) 8 F) 9
G) 10 H) 11 I) 12 J) none of the above
13. This firm’s shut down price is:
A) $3 B) $8 C) $10 D) $11 E) $12 F) $13
G) $14 H) $15 I) $16 J) none of the above
14. Now you are told that in the short run there are 400 firms, including this one, in the industry, all
with the same cost curves described above. Suppose that the demand curve facing the industry is
given by the equation P = 44 - .002Q where P is the price per unit and Q is the number of
units demanded per day. The equilibrium price in the short run is:
A) $14 B) $24 C) $26 D) $30 E) $33 F) $35
G) $36 H) $37 I) $38 J) none of the above
5 15. Given the demand curve described in question 14, suppose that we are now in the long run.
The number of firms in the industry, rounding to the nearest integer, is:
A) 400 B) 500 C) 600 D) 700 E) 800 F) 900
G) 1000 H) 1250 I) 1500 J) none of the above
16. Now return to the situation described in question 14, in which there are 400 identical firms in
the industry in the short run, all with the same cost curves described at the beginning of the problem,
and with an industry demand curve of P = 44 - .002Q. Suppose that the government imposes a
$12 per unit tax on producers (sellers). The fraction of the tax that falls on consumers (buyers) in the
short run will be:
A) 0 B) 1/12 C) 1/6 D) 1/4 E) 1/3 F) 1/2
G) 7/12 H) 2/3 I) 5/6 J) none of the above
17. What will be the excess burden of the tax described in Question 16?
A) $1200 B) $2400 C) $3600 D) $4800 E) $6000
F) $6400 G) $7200 H) $7800 I) $8200 J) none of the above
18-21. A single firm owns the only subway system in a large city. The firm has total costs in the
short run given by:
2
TC = 0.005q + q + 32 q ≥ 2
where q is the number of riders per minute using the subway and TC is the total cost per minute in
dollars. The demand for subway rides is given by:
P = 3.10 - 0.02q
where q is the number of riders per minute using the subway and P is the price charged to each
consumer in dollars. Questions 18 through 21 concern this subway system.
18. To maximize profit, what price will the firm charge?
A) $1.00 B) $1.32 C) $1.56 D) $1.64 E) $1.70
F) $1.82 G) $1.96 H) $2.00 I) $2.26 J) none of the above
19. If the government decides to regulate the subway and requires the firm to charge a price that
reduces economic profits to zero, what price will be charged?
A) $1.00 B) $1.32 C) $1.56 D) $1.64 E) $1.70
F) $1.82 G) $1.96 H) $2.00 I) $2.26 J) none of the above
6 20. When the government regulates the subway as described in Question 19, what is the change in
the total gain to society (per minute) in moving from a profit-maximizing monopoly to a regulated
monopoly?
A) $2.10 B) $11.22 C) $12.10 D) $17.64 E) $18.72
F) $21.82 G) $22.96 H) $32.00 I) $40.96 J) none of the above
21. Now the government decides to take over the subway and operate it at a loss by charging price
equal to marginal cost. What price will be charged (to the nearest penny)?
A) $1.00 B) $1.32 C) $1.56 D) $1.64 E) $1.70
F) $1.82 G) $1.96 H) $2.00 I) $2.26 J) none of the above
22-24. In a small and isolated cottage community near a lake in northern Ontario, there are 40
cottagers, each of whom have the following utility for snow plowing during the winter on the private
road leading to the community: U = 60X - X 2
where X i

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