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2008 midterm with answers.doc

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Raymond Grinnell

Question 1 (Chapter 1 Sunny was finishing high school in Ontario. During Grade 12, she had learned a little bit about different “degrees of competition”. One day, Sunny was talking to her Guidance Teacher about her choices of which university she might attend. “Mrs. Singh” she asked her teacher “is the market for University education perfectly competitive, monopolistically competitive, an oligopoly or a monopoly?” “Well” her Guidance Teacher replied “it all depends…..” Why did Mrs. Singh tell Sunny that “it all depends….”? Answer 1 Sunny’s high school guidance teacher said that the type or degree of competition for University education “depends….”. The reason she could not give Sunny a clear and definitive example is that the degree of competition for most products depends on the perception of the buyer, and on the buyer’s ability to find alternatives. If Sunny was an A+ student, and a Scholarship winner, and her family could give her generous financial support, and she didn’t care whether she lived at home, she could get into, and afford to attend, any University she wanted to. There are several dozen Universities in Canada, and hundreds more around the rest of the word. In this case, Sunny could consider the market to be perfectly competitive. All universities were available to her, they all offered undergraduate degrees, and she would have huge choice. If Sunny thought that only a small number of universities had the international reputation, and the name recognition that would help her get the best jobs and into the best graduate schools, she might limit her choices to a small number of Canada’s larger, better known and better reputed universities. For example, a recent international survey named McGill as Canada’s top ranked University. It would be expensive to live in Montreal for four years, but Sunny might perceive the additional cost to be worth it. If this was Sunny’s perception, she might consider the market to for education to be monopolistically competitive. Suppose Sunny wanted to go into an engineering program, and that- having lived at home all her life - she wanted a chance to live in a new city, and make new friends. That would rule out the University of Toronto, and Ryerson University. At the same time, she didn’t want to move too far away, since it would be nice to come home on week-ends, to do her laundry and eat her Mom’s cooking. In this case, Sunny’s options were now reduced to Queen’s, Waterloo, Western and perhaps a couple of others. With only 4 or 5 out-of-town choices available, Sunny was looking at an oligopoly. Finally, suppose Sunny’s grades out of high school were in the 60s. She was a decidedly mediocre student, who had not lived up to her academic potential. After applying for University, the only place she could get accepted was into the undergrad business program at Schulich. Poor Sunny, she was dealing with a monopoly! Question 2 (Chapter 2) Over the past month, three or four major American financial institutions (large banks, the world’s biggest insurance company, and the United States’ largest mortgage lenders) have either failed or needed to be taken over by the US Government. These events have shaken the American people’s confidence in the integrity of American business executives, the competence of US politicians and regulators, and in the value of their homes and pensions. It has probably affected the United States’ GDP. a) Explain what GDP is, and what it measures. b) How do you think these recent events will affect the USA’s GDP. Explain and justify your answer. c) How do you think these events will affect Canada’s GDP. Part 1) GDP is defined as the total $ value of all goods and services produced in a country in a year. GDP is a measure of the level of economic activity in a country. Part 2) The global “credit crunch” which began in the United States of America has caused many people to worry whether the banks into which they deposit their savings are secure. It has caused the banks themselves to worry as to whether they should lend money to each other. It has caused the banks to withdraw from lending to businesses and consumers for fear that these businesses and con summers may not be able to pay them back. Businesses need money to buy raw materials, to pay their rent, to pay the wages of their employees. The ability to lend and borrow money is the “grease” that allows all of these businesses to run from one month to the next. If businesses can’t borrow money to buy raw materials, then there may be nothing g for their employees to do. So, they start laying people off. People who have lost heir jobs or people who fear that they might soon lose their jobs, can no longer afford to buy the cars, do the home renovations, and take the family vacations that they once could. Even when people are in employment, fears that they MIGHT soon lose their jobs prompts them to be more cautious about their spending, and to cut back on purchased that they otherwise might have made. All of this leads to a lowering of the level of economic activity. Market economies thrive when consumers buy things.
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