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UNIVERSITYOFTORONTOMISSISSAUGA
APRIL2012FINALEXAMINATION
EC0100Y5Y
IntroductiontoEconomics
MichaelHo
Duration- 3hours
Aids:CalculatorModel(s):TI-30Series
The University ofToronto Mississauga and you, asastudent, share acommitment to
academic integrity. You are reminded that you may be charged with an academic
offence for possessing any unauthorized aids during the writing of an exam, including
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exam, you may be charged with an academic offence. Atypical penalty may cause
you to fail the course.
Please note, you CANNOT petition to re-write an examination once the exam has
i begun.
I
MARKS SCORE
PART A AI-A30
I
30
PARTB
Bl 18
B2 14
B3 18
B4 20
TOTAL: 100
Page 10/22
PART A: Answer all III"A" multiple-choice questions for a total of 30 marks. The
marker will only check the table below for answers to the . : ~ ~ ~ : ;
_ .._ in this
At A2 A3 A4 AS I A6 A7
!
I
All All At3 I At4 AtS At6 At7
A2t A22 A23 A24 A2S A26
A8 A9 AtO
A8 At9 A20
A29 A30
Al. Most modem economies in the world today
(A) are similar to feudal systems.
(B) are complex systems that defy description and analysis.
(C) have a mix of traditional, command and market elements.
(D) have pure market exchange.
(E) are mostly run by government decree.
A2. Index numbers make it possible to compare
(A) movements in different variables measured in different units.
(B) movements in different variables measured in the same units.
(C) government data with private-sector data.
(D) time-series data with cross-sectional data.
(E) linear and logarithmic data.
A3. With a given upward-sloping supply curve for sirloin steak (a normal good), a rise in
household income will cause the
(A) eqUilibrium price and equilibrium quantity of sirloin steak to both decrease.
(B) equilibrium price and equilibrium quantity of sirloin steak to both increase.
(C) equilibrium price to decrease and eqUilibrium quantity of sirloin steak to increase.
(D) equilibrium price to increase and equilibrium quantity of sirloin steak to remain constant.
(E) equilibrium price to increase and equilibrium quantity of sirloin steak to decrease.
Page2of22
A4. For which of the following pairs of products would we expect the cross-elasticity of
demand to be negative?
(A) Acetaminophen and ibuprofen.
(B) HDTVs and plasma TVs.
(C) iPhones and Blackberries.
(D) Butter and margarine.
(E) Printers and toner cartridges.
AS. Suppose a binding output quota is imposed in a previously competitive market with free-
market equilibrium price and quantity. The result is
(A) lower price and higher quantity exchanged.
(B) higher price and higher quantity exchanged.
(C) higher price and lower quantity exchanged.
(D) lower price and lower quantity exchanged.
(E) no change in price or quantity exchanged.
A6. Any consumption point that is on the budget line
(A) implies that the household is spending all of its income on the goods in question.
(B) implies the household is paying above-market prices for the goods in question.
(C) indicates consumption spending beyond current income.
(D) implies that the household is not spending all of its income on the goods in question.
(E) implies the household is paying below-market prices for the goods in question.
A7. A fIrm that maximizes its profIts by producing a certain level of output must also
(A) maximize its sales.
(B) maximize its revenue.
(C) minimize its variable costs.
(D) maximize its output.
(E) minimize its cost of producing that output.
AS. Assume a fIrm is using 10 units of labour and 10 units of capital and is producing 10
units of output per hour. Now both inputs are doubled, resulting in output rising to 18
units per hour. The firm is experiencing
(A) constant returns to scale.
(B) increasing returns to scale.
(C) decreasing costs.
(D) decreasing returns to scale.
(E) economies of scale.
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A9. Whichofthefollowingconditionsistrueofaperfectlycompetitive whenitisin
long-runequilibrium?
(A) Priceequalsminimumshort-runaveragetotalcostforallfirms.
(B) Firmsareenteringtheindustry.
(C) Firmsareexperiencingincreasingreturnstoscale.
(D) Accountingprofitsforallfirms arezero.
(E) Firmsareexitingtheindustry.
AIO. Onereasonairlineschargeahigherpricetobusinesstravellersisthat
(A) businesstravellersdon'tprofitmaximize.
(B) theyaretherebyabletominimizecosts.
(C) businesstravellershavearelativelyhigherdemandelasticitythanothertravellers.
(D) businesstravellershavearelativelylowerdemandelasticitythanothertravellers.
(E) governmentsetsthepricepolicies.
All. Theprocessof"creativedestruction" inanoligopolisticindustrysuggeststhat
(A) profitsaredriventozerobytheentryofnewfirms.
(B) theprospectofkeepingtheresultingprofitsprovidesanincentiveforfirmstoinnovate.
(C) nofirmcansurviveinthelongrun.
(D) firmscanenterandleavewithoutincurringanysunkcostsofentry.
(E) therearenocostsofexitinoligopoly.
A12. Consider a regulated natural monopoly, suchas anelectricitydistributioncompany, that
faces fallinglong-runaveragecosts. Ifitisforcedto priceitsoutputataveragecostitwill
provide
(A) thesociallyoptimalamountofoutput.
(B) so littleoutputthattherewillbeashortage.
(C) moreoutputthancanbeabsorbedbythemarket.
(D) moreoutputthan- whatissociallyoptimal.
(E) lessoutputthanwhatis sociallyoptimal.
A13. Ifacountryis experiencinginflation,thechangeinthenominalnationalproductwill
(A) overstatethechangeintherealvalueofproduction.
(B) overstatetheinflationrate.
(C) equalthechangeinthereal nationalproduct.
(D) befalling fasterthantherateofinflation.
(E) understatethevalueofnationalincome.
Page 4of22
A14. Measures of GDP may understate the economic well-being ofpeople in developing
countriesifthosecountriestendto
(A) haveahighdegreeofforeigndirectinvestment.
(B) haveveryhighratesofpollution.
(C) havealargeshareofnon-marketactivities.
(D) importmuchmorethantheyexport.
(E) emphasizeagriculturalandresource-basedproduction.
AlS. Suppose aggregate outputisdemand-determined. The simplemultiplierwill increase as
aresultof
(A) adecreaseinautonomousconsumption.
(B) anincreaseinautonomousconsumption.
(C) adecreaseinthemarginalpropensitytoconsume.
(D) anincreaseininvestment.
(E) anincreaseinthemarginalpropensityto consume.
A16. An increase in foreign income, other things being equal, is assumed to cause the net
export(NX) functionto
(A) pivotupward.
(B) shiftparallelupward.
(C) pivotdownward.
(D) remainstationary.
(E) shiftparalleldownward.
AI? Whenthepricelevelvaries,themultiplieris____thesimplemultiplier.
(A) notcomparableto
(B) definitionallythesameas
(C) smallerthan
(D) largerthan
(E) equalto
A18. The growthrate ofpotentialoutputmightbe decreased byan expansionary fiscal policy
if .
(A) thesimplemultiplierissmall.
(B) thecompositionofoutputisnotaltered.
(C) publicinvestmenthashighproductivity.
(D) thebudgetdeficitsarepersistent.
(E) thepolicycrowdsoutprivateinvestment.
Page 5ofll
A19. Long-runincreasesinrealnationalincomecangenerallybetracedto
(A) growingavailabilityof factorsand/orgrowingfactorproductivity.
(B) excessof demandinthelabourmarketthatincreasesemployment.
(C) growingdemandthatleadtoincreasesinoutputandprices.
(D) growingsupplybecausehigherwageswillincreasetheparticipationrate.
(E) growingdemandwhichcausescontinuousgrowthinconsumerspending.
A20. Anestimateforthevalueof potentialGDP canbegeneratedbyobservingandrecording
(A) thetotalavailablecapacityforproductionintheCanadianeconomy.
(B) theeconomy'stotalsupplyof factors, thecostsof thosefactors,andtheirproductivity.
(C) thelevelof actualGDP whentheunemploymentrateiszero.
(D) the economy's total supply of factors, their normal rates of utilization, and factor
productivity.
(E) theeconomy'stotaloutput,itstotalcostanddemandforthatoutput.
A21. Newtheoriesof economicgrowthbasedontheideathatgrowthisendogenous
(A) assumethatthegrowthrateoftechnologyisexogenous.
(B) stresstheroleof knowledgeandlearningintheeconomy'srateofgrowth.
(C) incorporatefactorssuchascentral-bankbehaviour.
(D) ignoretheroleoftechnology.
(E) assumethattherateofgrowthof theeconomyisequaltotherateof popUlationgrowth.
A22. Foragivenlevelof nationalincome,adecreaseingovernmenttaxrevenueswillcause
(A) anincreaseinnationalsaving.
(B) anincreaseinthegrowthrate.
(C) adecreaseinnationalsaving.
(D) adecreaseinconsumption.
(E) noeffectonnationalsaving.
A23. TheCanadianbankingsystemisa
(A) fractional-reservesystem.
(B) treasury-billreservesystem.
(C) target-reservesystem.
(D) gold-reservesystem.
(E) asset-backedreservesystem.
Page6of22
A24. Supposea studentdepositsinto adowntownbanka $200chequethatshereceivedfrom
herparentsinthe suburbs.Thistransactionalonewould
(A) decreasethemoneysupply.
(B) notchangethemoneysupply.
(C) decreasethemoneysupplyby$1,000ifthetargetreserveratiowas 20percent.
(D) increasethemoneysupplyby$1,000if thetargetreserveratio was 20percent.
(E) increasethemoneysupplybyanindeterminateamount.
A25. Suppose changes in the money supply only affected the price level and never affected
real G DP. Ifthiswerethe case,itcouldbeviewedas evidence
(A) thatboththeClassicalandmodemviewsof theneutralityof moneyareincorrect.
(B) thathasnobearing-onthetheoriesofeitherClassicalormodemeconomists.
(C) supportingboththeClassicalandmodemviewsoftheneutralityofmoney.
(D) thattheClassicalviewoftheneutralityofmoneyiscorrect.
(E) thatthemodemviewoftheneutralityofmoneyiscorrect.
A26. Otherthingsbeingequal,areductioninthemoneysupplywillleadto a
(A) riseintherateofinterestandnochangein investmentexpenditure.
(B) riseintherateofinterestandinincreaseininvestmentexpenditure.
(C) fall intherateofinterestandanincreaseininvestmentexpenditure.
(D) fall intherateofinterestandadecreaseininvestmentexpenditure.
(E) riseintherateofinterestandadecreaseininvestmentexpenditure.
A27. Internationaltradepermitsacountryto
(A) shiftitsproductionpossibilitiesboundaryoutward.
(B) produceandconsumebeyonditsproductionpossibilitiesboundary.
(C) lowertheper-unitproductioncostsofallgoodswhichitisproducing.
(D) consumebeyonditsproductionpossibilitiesboundary.
(E) expanditsproductionpossibilitieswhileholdingconstantitsconsumptionpossibilities.
A28. Thehypothesisthatthepriceofsomegiveninternationallytradedproductinonecountry
willbeequaltothepriceofthesameproductinsomeothercountryis knownas
(A) comparativeadvantage.
(B) absoluteadvantage.
(C) gainsfromtrade.
(D) theBigMacindex.
(E) thelawofoneprice.
Page 70J11
A29. Otherthingsbeingequal,adepreciationoftheCanadiandollarleadsto
(A) anegativeeffectonthetradeaccountof Canada'sbalanceofpayments.
(B) adecreaseindesiredmerchandiseexports.
(C) anincreaseinthenumberof foreigntouriststravellingtoCanada.
(D) anincreaseinthenumberofCanadiancitizenstravellingabroad.
(E) anincreaseindesiredmerchandiseimports.
A30. ThesupplyofCanadiandollarstotheforeign-exchangemarket,whichisalsothedemand
forforeigncurrency,willincreaseif
(A) foreigndemandforCanadiangoodsincreases.
(B) importsintoCanadaincrease.
(C) Canadianinflationratesarelow.
(D) tourismtoCanadaincreases.
(E) Canadianinterestratesarehigh.
PageBofll
PARTB: Answer all lID'"questions in this part. You h'IkI'labelyour answer to each
part ofevery question clearly, write your answer to each question only in the
designated page(s), and make sure your handwriting is legible; otherwise, the
markers will not be able to assign marks to your answers. In addition, your
answer/explanation h'I.1' relate to the diagram(s) ortable(s) in order to get full
marks.
B1. Nogoville hasno connectionto the restofthe world and there is no government onthis
isolated island. Suppose the market for eggs in Nogoville is a perfectly competitive
market with positively-sloped supply curve and negatively-sloped demand curve, the
existingeqUilibriumpriceandquantityarePo andQo, respectively.
(i) Now the villagers have decidedto form a government and in order to pay for the
government operations, they have agreed to impose a tax of$t per egg on the
farmers who supplyeggstothemarket. Useaproperlylabeleddiagramtohelpyou
analyzethe impactsofthistaxonequilibriumprice andquantity, the burdenoftax
on consumers and farmers, the amount oftax revenue raised, and how are these
impacts relatedto eachother. (Hint: No needto explainhowthemarketadjuststo
thenewequilibrium)
(ii) Add whatevernecessary to the diagram in part(i) to help you analyzethe impacts
ofthe tax in part (i) ifit is imposed on the consumers instead ofthe farmers.
Compareyourresultstothoseinpart(i).
(iii) Reproducetheimpactsofthetaxinpart(i)inanewdiagram. Supposethedemand
for eggs has become less price elastic, howwould this affect your answers to part
(i)? Anyintuitiveexplanationforthedifferences?
Diagrams:3marks
Explanation:(i)5marks;(ii)5marks;and(iii)5marks
ForAnswertoQuestionBlOnly
Page 90/22
B2. (i) Addwhatevernecessarytothediagramsprovidedbelowtohelpyouexplainhowto
determine the equilibrium ifthis is a perfectly competitive market. State the
equilibriumoutputandprice,andprofit.
(ii) Suppose all the competitive firms in this market collude and form a cartel. Add
whatever necessaryto the diagrams in part (i) to help you explain the three-stage
evolutionofcartelformationandbreakupaccordingto lecturediscussion. Statethe
profit-maximizingoutputandprice,andprofitineachof thethreestages.
Diagrams:3marks
Explanation: (i)2marksand(ii)9marks
p
INDUSTRY
p
FIRM
D
Q
q
ForAnswertoQuestionB2Only
Page12of22
B3. Assume diminishing marginal productivity of capital per worker k = K /L in the
aggregateproductionfunctionexpressedintermsofoutputperworkery =Y/ L.
(i) Useaproperlylabelleddiagramtohelpyouexplainthe"catch-up"effect.
(ii) Use another properly labelled diagram to help you explain why it is typically the
"fall-behind"effectthatweobserveinreality.
Diagrams: 3 marks
Explanation: (i) 7marks and (ii) 8 marks
ForAnswertoQuestionB3 Only
Page 150/22
B4. Supposethereareonlytwocountries,X andY, usingthesamecurrencyandtwogoods,A
andB, intheworld. Thecostof producingoneunitofA is$8inX and$2inY. Thecost
of producingoneunitofB is$4inX and$10inY. Assumethesecostsarefixed.
(i) Organizetheinformationintoamatrixshowingthecostsof producingA andB inX
and Y, explain how to determine which country has absolute advantage in
producingeachof thesegoods.
(ii) Usetheinformationinpart(i)tocomputetheopportunitycostsandputyourresults
in a matrix to determine which country has comparative advantage in producing
each of these goods and explain your recommendation on specialization of
productionforeachcountry.
(iii) AssumeX hasresourcesthatworth$2,400 andY has resourcesthatworth$1,800
in which X produces (A =150,B =300) and Y produces (A =450,B =90)
whenthereisnotrade. Accordingtotherecommendationsinpart(ii), computethe
gains intotal world output due to specializationandgains inconsumptionineach
country due to trade if both countries trade half of their specialized output.
Determinetheequilibriumtermsoftrade.
(iv) Plotthe results from part(ii) andpart(iii) in a properly-labelleddiagramfor each
country.
(v) Explain how to determine the feasible range for the terms oftrade betweenthese
countries.
Explanation: (i)2marks;(ii)3marks;(iii)8marks;(iv)3marks;and(v)4marks
ForAnswertoQuestionB4Only
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