Page 1 of 7

Last Name: ____________________

First Name: ____________________
Student Number: ________________


Economics 100
Professor James E. Pesando

ANSWERS

Term Test 1 November 29, 2013

Length: 1 hour


Answer ALL questions in the space provided

Permitted Aids: Pen/Pencil and non-programmable calculator. Any non-permitted
aid can and will be confiscated at the invigilators discretion.

________________________________________________

Please enter the multiple choice answers in the box below:
________________________________________________

Examiners report:
Question
Marks
Awarded
Marks
Available
1


18
2


14
3


12
4


12
TFU


24
MC


20
Total


100



Please check the Tutorial you ATTEND (Your exam will be handed back to you in the
indicated tutorial):

Tuesday, 2:10pm-3:00pm SS2105 TA: Jessica
Tuesday, 3:10pm-4:00pm GB119 TA: Steven
Tuesday, 4:10pm-5:00pm SS1069 TA: Jessica
Wednesday 1:10pm-2:00pm UC 163 TA: Yang
Wednesday 4:10pm- 5:00pm SS1085 TA: Yang
Thursday 11:10am-12:00pm BA1220 TA: Steven
Thursday 1:10pm-2:00pm UC52 TA: Steven











MC1

MC2

MC3

MC4 MC5


Page 2 of 7
Question 1 (18 points)

Beer is a perfectly competitive, constant cost industry in long-run equilibrium. Each
firm is identical and its cost curves have their usual shapes. The demand curve is
downward sloping.

(a) Show with the appropriate diagrams the long-run equilibrium for the industry and
a representative firm. Be sure to include market output (Q0), market price (P0),
and the output (q0) and profits (0) of each firm.






(b) Suppose there is reduction in wages for all workers in the beer industry, such
that the cost per unit of output falls by $2. Show on the previous diagram what
happens in the short-run to market output (Q1), market price (P1), and the output
(q1) and profits (1) of a representative firm.

(c) Will market price remain at the level in part (b) in the long-run? Explain your
answer. Do not show in diagram.





(d) Return to part (a). If one firm decides to advertise (a fixed cost), what will




Page 3 of 7
Question 2 (14 points)

A monopolistically competitive firm has the usual shaped cost curves and faces a
downward sloping demand curve. The monopolistically competitive firm is in long
run equilibrium.

(a) In an appropriate diagram, show the price (PM), output (QM), and profit (M).
Show, also, the allocatively efficient level of output (QAE).



(b) Suppose this firm is able to practice perfect price discrimination. In the previous
diagram, clearly label the marginal revenue curve (MRPD), the marginal cost
curve (MCPD) and the quantity of output (QPD).


(c) If the monopolistically competitive firm were able to engage in perfect price
discrimination, all else equal, what would happen to:








i. Total Surplus?

ii. Producer Surplus?
iii. Consumer Surplus?



iv. Efficiency?




Page 4 of 7

Question 3 (12 points)

Firm A and Firm B are the only two firms that produce cigars. If both advertise, each
earns a profit of $40 million. If neither advertises, each earns a profit of $120 million. If
one firm advertises but the other does not, the firm that advertises earns $150 million,
while the firm that does not advertise earns $30 million.

(a) Draw the payoff matrix that describes this situation and briefly explain what a
payoff matrix is.








(c)If these oligopolists formed a cartel, what actions would they choose? Why?








(b) In the absence of a cartel, what will the level of profits be for each firm? Why?





Page 5 of 7

Question 4 (12 points)

Consider a drug company that is a monopoly because of a patent. The demand
curve is downward sloping, marginal cost is $3 for all levels of output, and there are
no fixed costs.

(a) Show the short run equilibrium in an appropriate diagram. Be sure to include
market output (Q0), market price (P0), profits (0) and clearly label the average
total cost (ATC0) and marginal cost (MC0) curves.





(b) Show on the above diagram the market output (Q1) and Price (P1) if the patent




were removed. Is Q1 allocatively efficient? Explain.



TFU: Explain whether the following statements are true, false, or uncertain. All
marks are awarded for the explanation. (24 marks)

TFU1: The hot dog industry is perfectly competitive and in short run equilibrium. One
hot dog vendor did not complete high school and another hot dog vendor has an MBA
from UofT. The accounting profits are the same for each hot dog vendor. The vendor
with the MBA is more likely to remain in business in the long run.








Page 6 of 7


TFU2: In a perfectly competitive industry with identical firms, the full benefit of a
permanent $10 subsidy per unit of output will fall on producers in the long run.













TFU3: If a monopolistically competitive firm is operating on the inelastic portion of its
demand curve, it could increase profits by decreasing output.














TFU4: A bookseller is a monopolist, is profit maximizing, and is suffering economic
losses. The monopolist decides to switch strategies and to maximize total sales. As a
result, the bookseller will become profitable.




















Page 7 of 7

MC. Identify the correct answer on the front cover. (20 points, 4 each)

MC1: If there are diminishing marginal returns in the
production of tea, then in the long run tea must be:




MC2: If a firm has high fixed costs and a low and constant
marginal cost, and is in long run equilibrium, that firm is:




MC3: A perfectly competitive firm is producing a quantity of
100 at price $10. The demand curve is downward sloping.
At that quantity, its total cost is $140, its fixed cost is $20,
and its marginal cost is $10. To maximize profits, this firm
should:
a) Increase output
b) Leave output unchanged
c) Decrease output
d) Shut down
e) Not enough information to determine




MC4: A monopolist is producing a quantity of 100 at price
$10. The demand curve is downward sloping. At that
quantity, its total cost is $140, its fixed cost is $20, and its
marginal cost is $10. To maximize profits, this firm should:
a) Increase output
b) Leave output unchanged
c) Decrease output
d) Shut down
e) Not enough information to determine




MC5: A perfectly competitive firm is earning zero accounting
profits. Thus:
a) The firm is earning positive economic profits
b) The firm will remain in the industry in the long run
c) Marginal costs are zero
d) The firm may exit the industry in the long run
e) None of the above


a) A decreasing cost industry
b) A constant cost industry
c) An increasing cost industry
d) Not enough information to determine
e) None of the above
a) A perfectly competitive firm
b) A monopolist
c) An oligopolist
d) Not enough information to determine
e) None of the above