ECO101 2019 Summer Exam PDF

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ECO101 2019 Summer Exam for Past Paper Practice preparation exam....

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June 2019 Examinations UNIVERSITY OF TORONTO Faculty of Arts and Science ECO101H1F: Principles of Microeconomics Duration: 3 hours Examination Aids: Non-programmable calculator; Ruler

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General Instructions 180 minutes. 180 marks. Allocate your time wisely! OTHER test booklet: Multiple choice questions. 90 marks. THIS test booklet: Short answer and calculation questions. 90 marks. THIS test booklet: Record multiple-choice answers on last page. Aids allowed: a non-graphing, non-programmable calculator; a straight edge (i.e., ruler). Show your work. No work, no partial marks. When explanations are needed, be clear, accurate, and concise. Avoid the temptation to write too much. There is a blank page at the end of this booklet. If you need to continue an answer on this page, you must write “Continued on final page” in the question’s answer space.

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I. [8 Marks] In this section, I tell you what happened, you tell me what we can infer and concisely explain why. For full marks, you must be as precise as possible given the provided information. Clearly labelled figures can be perfect explanations. (1) [4 Marks] A local government implemented a tax of $2 for each Uber pickup at the airport. As a result, consumers pay $2 more for an Uber from the airport. What do we know about the Uber market?

(2) [4 Marks] A profit-maximizing single-price monopolist chose a price where demand is unit elastic. What do we know about the monopolist’s costs?

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II. [15 Marks] TFU means “True, False or Uncertain?”. All marks are earned for the explanation. If uncertain, be precise about when true and when false in order to earn full marks. (1) [5 Marks] You can sell as many ties as you like at the world price of $100. In 2028, you produced and sold 200. The only change in 2029: producers in your country have to pay a tax of $1 per tie produced. TFU: If the world price remains $100, your profits decrease by $200.

(2) [5 Marks] It costs you $100 to produce the bag you sold on Etsy for $125. TFU: If the production of the bag created a $30 external cost, then this transaction decreased total surplus.

(3) [5 Marks] TFU: If a profit-maximizing firm is producing at a quantity where AT C is decreasing, then firm is earning negative economic profit.

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III. [9 Marks] Per-period market demand for econ-graph apps is M W T P = 10 − Q. Alpha and Beta are duopolists in the market, and consumers view each firm’s app to be a PERFECT substitute for the other. Each period, each chooses its price, and each firm can sell as many copies as are demanded without incurring any additional costs. (1) [3 Marks] If this market was served by a monopoly, what action would the monopolist choose? Monopolist’s Action =

(2) [2 Marks] Assume Alpha and Beta compete for one and only one period. Alpha proposes colluding on the Monopolist Action. What is Beta’s best response? Best Response to Monopolist’s Action = (3) [4 Marks] Assume instead Alpha and Beta compete repeatedly. Explain why collusion on the Monopolist’s Action is a Nash equilibrium of the repeated interaction only if both are sufficiently patient.

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IV. [12 Marks] Assume the Uber market is a perfectly competitive, constant-cost industry. In April, it is at long-run equilibrium. Starting in May, the government requires each driver to pay a fixed monthly fee that does not depend on the number of hours worked (or rides provided). In June, the market returns to long-run equilibrium. In this time period, there is no change in demand.

n (1) [2 Marks] In the graph, identify a plausible Pbe , the price at which Uber drivers break even with the introduction of the fee.

(2) [5 Marks] In the graph, show SM , the short-run supply curve in May. Briefly explain how rational driver decisions caused you to depicted SM as you did.

(3) [5 Marks] In the graph, show SJ , the short-run supply curve in June. Briefly explain how rational driver decisions caused you to depicted SJ as you did.

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V. [10 Marks] Assume quantities must be integers. Animal likes to drum. The following table gives his TOTAL benefit (accounting for any all opportunity costs) for up to five hours of drumming. Each hour he actually drums imposes a $5 cost on his neighbour. Hour TOTAL Benefit

1 $9

2 $15

3 $19

4 $21

5 $18

(1) [2 Marks] If the externality problem is not corrected, how many hours does Animal drum?

(2) [3 Marks] If the externality problem is not corrected, what is the resulting deadweight loss?

(3) [5 Marks] Assume the Coase Theorem holds and the neighbour owns the right to peace and quiet. • How many hours will Animal drum? • As precisely as possible, how much money will Animal either get or pay?

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VI. [14 Marks] Assume a competitive market where quantities need not be integers. Demand is P (QD ) = 200 − 2QD and supply is P (QS ) = 50 + QS . Each unit produced creates a $30 external cost. (1) [3 Marks] What is the equilibrium quantity?

(2) [3 Marks] What is the efficient quantity?

(3) [3 Marks] What is the deadweight loss in a perfectly competitive market?

(4) [5 Marks] The government imposes a $110 price floor. What is the resulting deadweight loss?

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VII. [13 Marks] Assume quantities need not be integers. A profit-maximizing monopolist faces demand that can be characterized either by M W T P (Q) = 10 − Q4 or Q(P ) = 40 − 4P . It incurs a marginal cost of $2 per unit and a per-period fixed cost of $5. Each item consumed creates a $4 external cost. (1) [3 Marks] If the monopolist sells all units at the same price, what is the equilibrium quantity?

(2) [3 Marks] What is the efficient quantity?

(3) [7 Marks] Modify the graph below so that you can correctly label (or identify) the following. Pm The monopolist’s price. Qm The monopolist’s quantity. MSB Marginal societal benefit. MSB Marginal societal cost. Qeffic The quantity maximizing total surplus. DWL The deadweight loss resulting from the monopolist’s price and quantity.

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VIII. [9 Marks] Assume quantities need not be integers. Your per-period demand for public transportation d trips is M W T P (Qd ) = 20 − Q2 . You have 2 options. • Pay $5 for each trip you take. • Purchase a MetroPass which will allow you to take as many trips as you would like with no additional payments. (1) [2 Marks] How many trips do you take per period if you do not purchase a MetroPass?

(2) [2 Marks] How many trips do you take per period if you do purchase a MetroPass?

(3) [5 Marks] What is the most you are willing to pay for a MetroPass?

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