University of Toronto

Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
Term Test 3: 20122013
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complete the FRONT and BACK of the Scantron form.
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Tuesday 10am-11am (BF 323)

Tuesday 11am-12pm (BF 323)

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Tuesday 12pm-1pm (UC 161)
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the tutorial you indicate.)

Wednesday 11am-12pm (MP 137)

Wednesday 2pm-3pm (CR 403)

Wednesday 3pm-4pm (CR 403)

Thursday 2pm-3pm (BA 1220)

Thursday 3pm-4pm (BA 1220)

General Instructions
1. 50 minutes. 100 points. Allocate your time wisely!
2. Aids allowed: a simple (i.e., non-graphing) calculator.
3. Non-Multiple Choice questions: write answers in pen in this test booklet.
Scantron Instructions
Answer MULTIPLE CHOICE questions on supplied Scantron sheet.
Fill in all information on both sides of the form.
Your Form Code is A.
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Mark value for a Multiple Choice question clearly indicated.
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Please Do Not Write in this Space
Part II / 8 Marks Part I / 55 Marks
Part III / 5 Marks
Part IV / 12 Marks
Part V / 20 Marks
Total /100 Marks
20130204A 1 Term Test 3
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
TEST VERSION A
I. [55 Marks] Multiple Choice Questions: Indicate answer on Scantron.
1. [5 Marks] Consider an activity generating a positive externality for all activity levels.
What must be true at the ecient quantity Q
ec
(i.e., the quantity that maximizes total
surplus)?
A. The external benet at Q
ec
must be equal to zero.
B. At Q
ec
, the marginal private cost must be greater than the marginal private benet.
C. At Q
ec
, the marginal private cost must be less than the marginal private benet.
D. At Q
ec
, the marginal private cost must be equal to the marginal private benet.
E. The equilibrium of the perfectly competitive without intervention will be Q
ec
because
either the buyers or the sellers will internalize the externality.
2. [5 Marks] We need to produce 100 units of some good which we call pollution abatement.
Firm 1s production costs are characterized by MC
1
(q
1
) = q
1
, whereas rm 2s costs are
characterized by MC
2
(q
2
) = 4q
2
. (Assume that each rm is currently producing 100 units
of pollution.)
A. Because pollution is a negative externality, each rm should reduce pollution by 100
units.
B. The ecient way to produce 100 units of abatement is {q
1
= 100; q
2
= 0}.
C. The ecient way to produce 100 units of abatement is {q
1
= 80; q
2
= 20}.
D. The ecient way to produce 100 units of abatement is {q
1
= 50; q
2
= 50}.
E. The ecient way to produce 100 units of abatement is {q
1
= 20; q
2
= 80}.
3. [5 Marks] Consider a public good provided at a constant marginal cost equal to $10.
Each of ve community members has the same marginal private benet characterized by
P(Q) = 22 4Q.
A. 3 units is ecient.
B. 5 units is ecient.
C. 6 units is ecient.
D. 15 units is ecient.
E. None of the above.
20130204A 2 Term Test 3
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
4. [5 Marks] Florence responds to a decrease in her tax rate by reducing the number of
hours she works. Which of the following is an explanation consistent with the standard
model of labour-leisure choice?
A. Leisure must be an inferior good for Florence.
B. Florence must be on the upward sloping portion of her labour supply curve.
C. The substitution and income eects both pushed her towards working fewer hours.
D. The substitution eect pushed her towards working fewer hours, and this substitution
eect was larger than the income eect which pushed her towards working more hours.
E. The substitution eect pushed her towards working more hours, and this substitution
eect was smaller than the income eect which pushed her towards working fewer hours.
5. [5 Marks] One policy to lessen after-tax income inequality is a negative income tax, such as
the Earned Income Tax Credit in the US. Colbert is a worker in Boblandia who can choose
the number of hours he works and whose eective hourly wage rate would be aected by
the introduction of a negative income tax.
A. He works more hours as both the income and substitution eects push him to working
more hours.
B. He works more hours because the substitution eect must dominate the income eect.
C. He may either increase or decrease hours worked. The substitution eect pushes him to
work more hours, the income eect pushes him to working fewer hours.
D. He may either increase or decrease hours worked. The substitution eect pushes him to
work fewer hours, the income eect pushes him to working more hours.
E. He will work fewer hours as he can earn the same income with fewer hours of work.
6. [5 Marks] Assume a perfectly competitive labour market. Which of the following is con-
sistent with an increase in equilibrium wages coupled with an increase in number of workers
employed.
A. A loosening of occupational safety rules makes this job a little more dangerous.
B. Increased immigration to the geographical area.
C. An increase in the price of a raw materials necessary for the production of the nal
product.
D. An increase in the price of the nal product.
E. None of the above.
20130204A 3 Term Test 3
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
7. [5 Marks] Consider the ratio of
Earnings
university graduates
Earnings
high school graduates
. Consider this ratio for both the
U.S. and for Canada, and consider how each of these ratios has changed over the last 20
years of the 20th century (19802000).
A. This ratio has increased by about the same amount in the U.S. and in Canada.
B. This ratio has remained constant in both the U.S. and in Canada.
C. This ratio has increased more in the U.S. than in Canada.
D. This ratio has increased more in the Canada than in U.S.
E. None of the above are true.
8. [5 Marks] Geraldo loaned Esperanza $100 for 1 year at 10% nominal interest rate. Both
expected 4% ination. Instead, the CPI increased from 60 to 63.
A. Both Geraldo and Esperanza are better o than expected because ination was lower
than expected.
B. Esperanza was better o than expected and Geraldo worse o than expected because
ination was higher than expected.
C. Esperanza was worse o than expected and Geraldo better o than expected because
ination was higher than expected.
D. Esperanza was better o than expected and Geraldo worse o than expected because
ination was lower than expected.
E. Esperanza was worse o than expected and Geraldo better o than expected because
ination was lower than expected.
9. [5 Marks] See Table 1. What is the GDP deator for 2027?
GDP
Year Nominal Real
2026 150 125
2027 180 140
Table 1: Some GDP numbers.
A.
180150
150
=
1
5
= 20%, therefore deator equals 120.
B.
140125
140
= 10.7%, therefore deator equals 110.7.
C.
180
140
= 1.286, therefore deator equals 128.6.
D.
140
180
= 0.778, therefore deator equals 177.8.
E.
140
180
= 0.778, therefore deator equals 77.8.
20130204A 4 Term Test 3
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
10. [5 Marks] See Table 2. What is this rms contribution to GDP?
Item Amount
Prots $100,000
Taxes paid on prots $10,000
Salaries (wages) $200,000
Non-salary benets $25,000
Taxes paid on salaries and benets $50,000
Depreciation $15,000
Other expenses paid by rm $500,000
Table 2: Some more GDP numbers.
A. $810.
B. $815.
C. $840.
D. $870.
E. $900.
11. [5 Marks] Why did Elinor Ostrom win the 2009 Sveriges Riksbank Prize in Economic
Sciences in Memory of Alfred Nobel ?
A. She established the Coase Theorem.
B. She established the Tragedy of the Commons: that rival and non-excludable resources
will be over-exploited.
C. She demonstrated that when a community has ownership of a common-pool resource,
social norms may lead to better than predicted outcomes.
D. She showed that risk averse agents will purchase insurance even when the premium is
greater than the actuarially fair premium.
E. She demonstrated that an insurance company insuring a portfolio of independent risks
is exposed to less risk than an individual facing one risk.
20130204A 5 Term Test 3
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
USE A PEN FOR THE FOLLOWING SECTIONS
II. [8 Marks] Briey explain the logic of eciency wages. An answer earning full marks includes
an explanation why we are unlikely to see eciency wages in a workplace without moral hazard.
III. [5 Marks] Assume a public good whose provision costs $40. There are 4 beneciaries: Ryan,
Meb, Abdi and Fernando. Ryan values the good at $14, Meb at $13 and Abdi at $12. If the
public good is provided, each of the beneciaries will pay a tax where each beneciary pays
the same tax and total tax receipts are exactly equal to the cost of provision.
Give me one number for Fernandos willingness to pay that satises both: a) providing the
public good is ecient; AND b) Fernando prefers no tax and no public good over paying the
tax and having the public good provided. YOU MUST SHOW YOUR NUMBER SATISFIES
BOTH CONDITIONS.
20130204A 6 Term Test 3
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
IV. [12 Marks] There is a 40% chance that your income will be 100, a 40% chance your income
will be 150 and a 20% chance your income will be 200. Table 3 shows your utility across
various levels of income.
Total Marginal
Income Utility Utility
100 900
110 950 50
120 995 45
130 1035 40
140 1070 35
150 1100 30
160 1125 25
170 1145 20
180 1160 15
190 1170 10
200 1175 5
Table 3: Utility and income
1. [8 Marks] Showing your work, calculate your expected income AND your expected utility.
2. [4 Marks] Consider wage insurance: you pay a premium, and you are guaranteed to receive
in every period the expected income you just calculated. What is the most you are willing
to pay for wage insurance? Briey justify. (N.B. It is possible to receive full marks without
having completed the previous question.)
20130204A 7 Term Test 3
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
V. [20 Marks] Two consumers of a rival and excludable good, with demands characterized by:
MWTP
1
(q
1
) = 30 3q
1
MWTP
2
(q
2
) = 30
3
2
q
2
Supply is characterized by MC(Q) =
Q
2
, where Q is the total quantity supplied. Each unit
transacted imposes a cost equal to $6 on other members of the community.
1. [7 Marks] Calculate Q

, the total quantity transacted in a market without intervention.

2. [5 Marks] Calculate Q
ec
, the quantity maximizing total surplus.
20130204A 8 Term Test 3
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
QUESTION CONTINUED FROM PREVIOUS PAGE
3. [4 Marks] Modify the graph below so that you can clearly identify the deadweight loss
induced by the perfectly competitive market without intervention, then clearly identify the
deadweight loss. (You do NOT need to calculate deadweight loss, but you MUST label
your MSB and MSC curves.)
4. [4 Marks] To correct the externality problem, the government correctly calculated Q
ec
,
and randomly allocated Q
ec
permits to the two consumers. Assuming a competitive market
in permits, what is the equilibrium permit price? (N.B. It is possible to receive full marks
without having completed the previous questions.)
20130204A 9 Term Test 3