Concordia University Department of Economics ECON 201 INTRODUCTION TO MICROECONOMICS inter 201!

COMMON "IN#$ E%#MIN#TION &ERSION 1

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STUDENT NUM)ER' (((((((((((((((((((((((((((((((((((((((((((((((((( *+ease read a++ instr,ctions caref,++y1. The exam consists of two parts. (i) Part I: 35 multiple-choice questions (35 marks) (ii) Part II: !hoose 5 out of " lon# questions ("5 marks). %rite &our name' stu(ent I) an( answers for the multiple-choice questions on the computer scansheet with a penci+. Please' also write the version of the exam on the computer scan-sheet. *or Part II' write all &our answers on this exam. )o not use a((itional +ooklets. ,ou are allowe( to use a non-pro#ramma+le calculator an( a paper (ictionar&' pro-i(e( that the& are appro-e( +& the in-i#ilator(s). ,ou ma& use either pen or pencil to pro-i(e &our answers for Part II. ,ou are not allowe( to tear an& pa#es out of this exam.

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3. .. .rades' Part I:

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Part II: //////////

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*art I' M,+tip+e C/oice 0,estions- rite yo,r ans1ers on t/e comp,ter s/eet in *ENCI$ 2Tota+3!4 mar5s61. 0m& is thinkin# a+out #oin# to the mo-ies toni#ht. 0 ticket costs 12 an( she will ha-e to cancel her +a+&-sittin# 3o+ that pa&s 134. The cost of seein# the mo-ie is therefore: a. 12. +. 134. c- 7!8(. 132 minus the +enefit of seein# the mo-ie. $. 0ll the followin# con(itions will cause an outwar( shift of the pro(uction possi+ilities frontier except: a. an impro-ement in the o-erall technolo#& of pro(uction. +. existin# factors of pro(uction +ecome more pro(ucti-e. c. the quantit& of the factors of pro(uction increases. d- previo,s+y ,nemp+oyed factors of prod,ction are p,t 9ac5 to 1or5This production possibilities schedule shows how many combines and tractors can be produced in Canada and US with one unit of equivalent resources. Ta9+e 1 !om+ines Tractors !ana(a . . 56 $ " 3. 7efer to Ta+le 1. %ithout tra(e' +oth countries (i-i(e( their resources equall& +etween the pro(uction of tractors an( com+ines. 6uppose that each countr& speciali8es accor(in# to its comparati-e a(-anta#e. !ompare( to the case without tra(e' the pro(uction of tractors will increase +& /////units an( the pro(uction of com+ines will increase +& ///// units (ue to the speciali8ation an( tra(e. a- 1:1+. 1 $. c. $ 1. (. $ $. .. 9ormati-e economics reflect: a. societ&:s laws. +. economic anal&sis +ase( on facts an( e-i(ence. c. empirical an( si#nificant economic o+ser-ations. d- va+,e ;,d<ements5. Time series (ata: a. are use( -er& infrequentl& in economic anal&sis. +. measure (ifferent -aria+les for (ifferent economic units at a point in time. c. measure a #i-en -aria+le for (ifferent economic units at a point in time. d- meas,re a varia9+e or varia9+es at different points in time". If the nominal annual wa#e of a worker has increase( from 134'444 to 154'444 (urin# a fi-e &ear inter-al' an( the consumer price in(ex has risen from a -alue of 134 to 154 for the same perio(' then the real wa#e increase of the worker is approximatel&: a. 4;. +. 15;. c- ==>(. "2;. 2. 0ssume that spinach is a normal #oo(. 0ssume further that me(ical research has pro-en that eatin# spinach will re(uce the risks of cancer. )ue to economic recession: a. there will +e a leftwar( shift of the (eman( cur-e. +. there will +e a ri#htwar( shift of the (eman( cur-e. c- t/e demand c,rve may remain t/e same or may s/ift to t/e ri</t or may s/ift to t/e +eft(. there will +e lower price of spinach.

"i<,re 1

<. *i#ure 1 represents the market for laptops an( the ori#inal equili+rium is at 1. If the price of (esktops (ecreases an( the cost of pro(ucin# laptops increases' what is the new laptop equili+rium' ceteris paribus= a- 2+. .. c. 2. (. >. >. 9anc&:s income has 3ust risen from 1>54 per week to 11'454 per week. 0s a result' she (eci(es to (ou+le the num+er of mo-ies she atten(s each week. 9anc&:s (eman( for mo-ies is a- income e+astic+. price elastic. c. price inelastic. (. income inelastic. 14. 6uppose the per-unit tax on cars (ecrease(. If the (eman( for cars is inelastic an( the suppl& cur-e is upwar( slopin# then this will cause tax re-enue to ///. a. rise. 9- fa++c. sta& constant. (. rise if the suppl& elasticit& is less than one an( fall if the suppl& elasticit& is #reater than one. Ta9+e 2 Price of ?olt Price of !oke Income le-el !oke 6ales $44 11 @can 1$ @can 134'444 14'444 cases < $44 1$ @can 1$ @can 134'444 15'444 cases > $41 1$ @ can 13 @ can 134'444 14'444 cases 4 $41 1$ @ can 13 @can 1.4'444 1$'444 cases 1 11. 7efer to Ta+le $. The arc cross-price elasticit& of (eman( for !oke with respect to the price of ?olt is //. a. -4.". +. -1.2. c. 1.2. d- 0-?1$. *irms will +ear a lar#er +ur(en of a specific tax if a. (eman( is relati-el& inelastic an( suppl& is relati-el& elastic. 9- demand is re+ative+y e+astic and s,pp+y is re+ative+y ine+asticc. +oth (eman( an( suppl& are relati-el& inelastic. 3

(. the tax is collecte( +& firms rather than remitte( (irectl& to the #o-ernment +& consumers. 13. The (ea(wei#ht loss from taxation in the a+sence of externalities can +e (etermine( +& a. su+tractin# the competiti-e le-el pro(ucer surplus from the pro(ucer surplus associate( with less output. +. su+tractin# the consumer surplus from the pro(ucer surplus associate( with less output. c. summin# the consumer an( pro(ucer surplus associate( with less output. d- s,mmin< t/e c/an<e in t/e tota+ cons,mer and prod,cer s,rp+,s@ and t/e c/an<e in <overnment reven,e@ from movin< from t/e competitive +eve+ of o,tp,t to +ess o,tp,t1.. In a free market' #oo(s with positi-e externalities will: a. +e o-erpro(uce( in the market place. +. ha-e the mar#inal -aluation of the externalit& reflecte( in their price. c. +e pro(uce( to the point at which the mar#inal social +enefit equals the mar#inal social cost of the last unit pro(uce(. d- 9e ,nderAprod,ced at t/e mar5et eB,i+i9ri,m"i<,re 2

15. In *i#ure $' the (ollar -alue of the total economic surplus is: a. $.. +. 3". c. .<. d- ?01". 6uppose that ,uri +u&s so& milk an( oran#es an( has not &et exhauste( his +u(#et. Ais B5 of an a((itional carton of so& milk is $4 an( its price is 11.$5' whereas his B5 for an a((itional oran#e costin# 54 cents is 2. *rom this situation' we can (e(uce that he shoul(: a. +u& more oran#es. +. re(uce his consumption of so& milk. c- 9,y more soy mi+5(. (i-i(e his +u(#et equall& +etween so& milk an( oran#es. "i<,re !

12. 7eferrin# to *i#ure 3' if the price of milk is 1$' the price of cookies is 11 an( the +u(#et is 12' how man& will +e purchase( if the consumer wishes to maximi8e total utilit&. a. 4 milk an( 2 cookies. +. 1 milk an( 5 cookies. c- 2 mi+5 and ! coo5ies(. 3 milk an( 1 cookie. 1<. 0 (eman( cur-e slopes (ownwar( +ecause a. since the mar#inal utilit& increases with increase( consumption' people will +e ea#er to +u& more at lower prices. 9- since t/e mar<ina+ ,ti+ity decreases 1it/ increased cons,mption@ t/e price m,st fa++ in order to ind,ce peop+e to 9,y morec. since total utilit& increases with increase( consumption' a lower price is necessar& to encoura#e increase( pro(uction. (. lower prices mean a lower consumer surplus which will encoura#e increase( consumption. 1>.If &ou are a risk-a-erse person an( ha-e the chance to pla& a #ame where the o((s of winnin# 1$.44 are $4; an( the o((s of losin# 11.44 are <4;: a. &ou will +e willin# to pla& the #ame +ecause of the e-en o((s. +. &ou will +e willin# to pla& the #ame +ecause this is a fair #am+le. c. &ou ma& or ma& not pla& the #ame' (epen(in# on how &ou +alance the lo-e of risk with the pro+a+ilit& of loss on a-era#e. d- yo, 1i++ not p+ay t/e <ame as it is not a favora9+e one$4. It is frequentl& (ifficult to +u& natural (isaster insurance +ecause: a. the insurance companies are unfair to people li-in# in areas which are natural (isaster prone. 9- t/e individ,a+ ris5s are not independentc. insurance companies (o not like to (o +usiness with risk a-erse people. (. the in(i-i(ual risks are in(epen(ent. $1. 0 fair coin is to +e tosse(. If it lan(s hea(s up' the pla&er wins 1$ if it lan(s tails up' the pla&er loses 1$. Cut of the three followin# people: D Person 0 is in(ifferent +etween pla&in# an( not pla&in# the #ame. D Person E is willin# to pa& 15 cents to participate in each coin toss. D Person ! must +e pai( 14 cents to participate in each coin toss. %hich person characteri8es a risk-a-erse in(i-i(ual= a. person 0 onl&. +. person E onl&. c- person C on+y(. none of the persons. $$. It is almost alwa&s the case that initial plant si8e expansion lea(s to a (ecrease in cost. This is (ue to: a. technolo#ical impro-ement. +. increase in capital stock. c- economies of sca+e(. none of the a+o-e. $3. %hich of the followin# statements a+out the relationship +etween mar#inal pro(uct an( a-era#e pro(uct is correct= a. when a-era#e pro(uct excee(s mar#inal pro(uct' mar#inal pro(uct must +e risin#. +. when mar#inal pro(uct is fallin#' a-era#e pro(uct is fallin#. c. a-era#e pro(uct equals mar#inal pro(uct at mar#inal pro(uct:s lowest point. d- 1/en mar<ina+ prod,ct eCceeds avera<e prod,ct@ avera<e prod,ct m,st 9e risin<$.. 0ssumin# mar#inal pro(uct increases at the initial le-el of pro(uction an( starts to (ecrease e-entuall& after reachin# its peak implies: a. a-era#e -aria+le cost cur-e increases initiall& then reaches a peak an( after that starts to (ecline. 9- avera<e varia9+e cost c,rve initia++y dec+ines@ reac/es a minim,m and t/en 1i++ steadi+y rise ,pc. a-era#e cost cur-e pattern has nothin# to (o with mar#inal cost cur-e. (. +oth E an( ! are correct. $5. 0 perfectl& competiti-e firm' assumin# all fixe( cost to +e sunk cost' will pro(uce output in the short run e-en if PF0T! +ecause 5

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$2.

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34.

a. as lon# as P B!' it can minimi8e it losses. b. as +on< as * #&Cmin@ it can minimiDe its +ossesc. profits are positi-e. (. none of the a+o-e. If firms enter a competiti-e in(ustr&' the a. the new firms make ne#ati-e profit. 9- ind,stry s,pp+y c,rve s/ifts o,t1ardc. output of the in(ustr& (ecreases. (. profits of the ol( firms sta& the same. Gxcess capacit& in monopolisticall& competiti-e firms is cause( +& a. The fact that ri-al firms enter the in(ustr& an( re(uce the (eman( for the pro(ucts of the firms alrea(& in the in(ustr&. +. !ost cur-es +ein# hi#her than the& are un(er perfect competition. c. The waste associate( with man& sli#htl& (ifferentiate( pro(ucts ser-in# almost the same purpose. d- T/e fact t/at eac/ firm faces a demand t/at is not perfect+y e+astic%hen a-era#e total cost is fallin#' mar#inal cost must +e a. a+o-e a-era#e cost. 9- 9e+o1 avera<e costc. constant. (. +elow -aria+le cost. If a profit-maximi8in# firm:s mar#inal re-enue is #reater than its mar#inal cost' the firm a. must +e makin# an economic@supernormal profit. 9- 1i++ increase its o,tp,tc. must +e experiencin# economic losses. (. will close (own. In the short run' a monopolist with a loss' alon# with mar#inal re-enue of 115' an( mar#inal cost of 114' shoul( a. Gxpan( output an( raise price. 9- ECpand o,tp,t and c,t pricec. !ut output an( raise price. (. !ut output an( price. "i<,re =

31. !onsi(er *i#ure .. If the in(ustr& is operate( +& a sin#le-price monopolist' what area is pro(ucer surplus= a. kea. 9- ieacc. kh(. (. none of the a+o-e. 3$. Cnce a cartel (etermines the profit-maximi8in# price' a- eac/ mem9er 1i++ face t/e temptation to c/eat on t/e carte+ price in order to increase its sa+es and profits+. chan#es in the output of an& mem+er firms will ha-e no impact on the market price. c. entr& into the in(ustr& of ri-al firms will ha-e no impact on the profit of the cartel. (. all mem+ers of the cartel ha-e a stron# incenti-e to a+i(e +& the a#ree(-upon price. "

33.

6uppose that the t&pical firm in a monopolisticall& competiti-e in(ustr& earns an economic@supernormal profit an( new firms enter. This causes: a. the firm:s (eman( cur-e to shift to the ri#ht. +. the in(ustr& (eman( cur-e to shift to the left. c- t/e firmEs demand c,rve to s/ift to t/e +eft(. none of the a+o-e. Ta9+e ! *irm E strate#& How Ai#h *irm 0 strate#& How "44' "44 344' <44 Ai#h <44' 344 .44' .44 Ta+le 3 (escri+es the profits accruin# to each firm in a #ame. The first fi#ure in an& +ox is firm 0Is profit' an( the secon( is firm EIs profit. Ai#h an( low refer to the strate#& of ha-in# a hi#h or low a(-ertisin# +u(#et. 3.. 7eferrin# to Ta+le 3 a+o-e' which of the followin# statements is correct if E an( 0 reach a secret a#reement +etween themsel-es concernin# a(-ertisin# +u(#ets an( this a#reement hol(s +ecause neither cheats= a. )ot/ 1i++ /ave a +o1 advertisin< 9,d<et and 9ot/ 1i++ earn profits of 7?00. +. Eoth will ha-e a low a(-ertisin# +u(#et an( +oth will earn profits of 1.44. c. Eoth will ha-e a hi#h a(-ertisin# +u(#et an( E will earn a profit of 1344 an( 0 will earn a profit of 1<44. (. 9one of the a+o-e. Ta9+e = *rance Jerman& (euros) (euros) %ine 14 $4 Jenerator 14'444 34'444 7eferrin# to Ta+le . a+o-e' which (efines the cost of pro(ucin# wine an( #enerators per unit in *rance an( Jerman&' we can conclu(e: a. *rance has a comparati-e a(-anta#e in wine an( Jerman& has a comparati-e a(-anta#e in #enerators. 9- .ermany /as a comparative advanta<e in 1ine and "rance /as a comparative advanta<e in <eneratorsc. Jerman& has a comparati-e a(-anta#e in +oth #oo(s. (. 9one of the a+o-e statements are true.

35.

*art II' #ns1er "I&E of t/e fo++o1in< SI% B,estions- If more t/an five B,estions are ans1ered@ on+y t/e first five attempted 1i++ 9e mar5ed 2Tota+3?4 mar5s60,estion F 1 21! mar5s6 !onsi(er the la+or market in Kue+ec. If % (wa#e rate) is the price of la+or ((ollars per hour) an( H is the quantit& of la+or (measure( in hours worke(). 6uppose that the (eman( an( suppl& cur-es for la+or are #i-en +&: )eman(: % L 15 - H 6uppl&: % L 5 M H (i) 6uppose there are no inter-entions in the la+or market. *in( the equili+rium % an( H' consumer an( pro(ucer surplus' the total income of the workers. 0lso calculate the point price elasticit& of (eman( at equili+rium. (3 marks). $34@ 310@ 1or5ers tota+ income34G10340@ C-S30-4G4G4312-4@ *-S30-4G4G4312-4*rice e+asticity of demand3A1G10H43A2 9ow suppose the #o-ernment (eci(es to ha-e a Nprice support pro#ramO with a minimum wa#e set at % L 1 1$ per hour an( promises to +u& an& excess suppl& of la+or ser-ices. *in( the new quantit& of la+or tra(e( on the market' the wa#e pai( +& emplo&ers' the wa#e recei-e( +& workers an( the quantit& of la+or ser-ices the #o-ernment woul( +e +u&in#. (3 marks).

(ii)

0,antity of +a9or traded on t/e mar5et314A123!

2

1a<e paid 9y emp+oyers312 t/e 1a<e received 9y 1or5ers312 B,antity of +a9or services t/e <overnment 1o,+d 9e 9,yin<38A!3=
(iii) Ji-en this polic& of price control' fin( the new consumer surplus' pro(ucer surplus' the cost to the #o-ernment an( the (ea(wei#ht loss. (3 marks).

C-S30-4G!G!3=-4 *-S30-4G8G832=-4 Cost to <ov312G=3=I D $3=IA0-4G=G23== 2ass,min< <overnment /ires 1or5ers for nonAprod,ctive ,se6- D $ 1i++ 9e = ot/er1ise- .ive at +east one mar5 for attemptin< t/is B,estion and full marks for obtaining
anyone of the two values for DWL.

(i-)

6uppose' instea(' the #o-ernment (eci(es to ha-e a N#o-ernment su+si(& pro#ramO with a #uarantee( (or tar#et) wa#e of %L 1 1$. *in( the amount of the su+si(& per unit of la+or require( such that the total income of workers is the same as un(er the price floor (minimum wa#e). 0lso fin( how much the emplo&ers pa& per unit of la+or an( the total cost to the #o-ernment. (. marks).

S,9sidy312A214A863= a<e paid 9y emp+oyers 3 14A83I Tota+ cost to <ov3=G832I

0,estion F2 21! mar5s6 6uppose the prices of ham+ur#er (A) an( coke (!) are P A L 1$ an( Pc L 11' an( we o+ser-e the consumer to purchase exactl& two ham+ur#ers an( one coke e-er& (a&. (i) Jraph the resultin# +u(#et constraint on a (ia#ram (ham+ur#er on the -ertical axis an( coke on the hori8ontal axis)' with intercepts clearl& marke(' explainin# how &ou arri-e at the answers. %hat is the consumerIs total income= (3 marks). I32G2J1G134 &ertica+ intercept3IH *K 34H232-4 KoriDonta+ intercept3IH *c34H134 (ii) !alculate the slope of the +u(#et line an( explain what it stan(s for. If the B5 from coke consumption at the chosen +un(le is equal to 54' fin( the B5 o+taine( from consumin# ham+ur#er. (3 marks).

S+ope )-$ 3A *c H *K 3A0-4- It means t/at to <et one more eCtra ,nit of co5e t/e cons,mer m,st <ive ,p 0-4 ,nits of 9,r<er- MUK#M)UR.ER 3 2G403100 (iii) 9ow suppose the #o-ernment imposes a $5; a( -alorem tax on coke so its price rises to 1.$5. Illustrate #raphicall& an( explain what happens to the B76 an( the quantit& consume( of coke' if coke is a normal #oo(. (3 marks). Ne1 *co5e 3 1-24 @ )-$ rotates in1ard and 9ecomes steeper- MRS3 ne1 s+ope of )-$31-24H230-?24 So MRS 1i++ increase- T/e B,antity cons,med of co5e decreases(i-) Instea( of the tax in (iii)' assume now that the consumer experience( a (rop in income to 1. per (a&. Illustrate the new +u(#et constraint an( the new optimal +un(le on a (ia#ram' assumin# that the new quantit& consume( of ham+ur#ers is 1 +ur#er. 6pecif& whether ham+ur#ers are a normal@inferior #oo(. (. marks).

<

)-$ 1i++ s/ift to t/e +eft

Kam9,r<er 2-4 2

1 2 Kam9,r<ers are a Norma+ <ood-

co5e

0,estion F! 21! mar5s6 In a competiti-e market the suppl& an( (eman( functions are #i-en +&: P L 1 [email protected] an( P L $1 - K@144. (i) (ii) 6ol-e for the equili+rium price an( quantit& in the marketplace. ($ marks) * 3 4@ 0 3 1?00 9ow let:s look at a representati-e firm in this competiti-e in(ustr&. It has a mar#inal cost cur-e #i-en +& B! L 1 M q@. an( it has an a-era#e total cost cur-e #i-en +& 0T! L $@q M 1 M q@<. This is a re#ular 5-shape( 0T! cur-e. There is no (ifference here +etween the lon# run an( short run. !alculate the +reak-e-en le-el of output (where the 0T! is at a minimum). (3 marks) B3=

(iii) )raw the 0T! an( B! cur-es on a (ia#ram. ($ marks) MC is +inear and positive+y s+oped and #TC is U s/aped (i-) 9ow use the price &ou #ot in part (i) an( (etermine the output le-el of each of these representati-e firms usin# the profit maximi8in# rule for choice of output. (3 marks) B 3 1? Cnce &ou ha-e (etermine( how much each firm pro(uces' usin# the result from part (i) calculate how man& firms there must +e in the in(ustr&. (3 marks) 0 3 100

(-)

0,estion F= 21! mar5s6 0 monopolist faces a (eman( cur-e (efine( +& P L 144 P 1K. Ae has a mar#inal cost cur-e (efine( +& B! L . an( an a-era#e total cost (efine( +& 0T! L . M .<@K (i) )etermine his profit-maximi8in# output an( price. (. marks) 0 3 =I@ *342 (ii) Illustrate #raphicall& his B! an( 0T! cur-es. ($ marks) MC is constant: #TC s+opes do1n1ards indefinite+y to1ards t/e MC c,rve va+,e >

(iii) Illustrate on a (ia#ram' an( compute numericall& the (ea(wei#ht loss ()%H) associate( with not pro(ucin# at the efficient output (where B! L P). (3 marks) Efficient 0 is s,c/ t/at * 3 MC@ i-e- 0G 3 L?: D $ 3 0-4 G =I G =I31142(i-) If the monopolist pro(uce( at the efficient output an( sol( that output in the marketplace' what is the numerical -alue of the profit or loss per unit of output= (. marks) #TC 3 = J =IHL? 3 =-4: and price 3 = t/erefore +oss is one /a+f do++ar per ,nit0,estion F4 21! mar5s6 !onsi(er a market with the followin# (eman(: PL12$-3K( Cn the pro(uction si(e' we know that Bar#inal 7e-enue is B7L12$-"K(' an( the Pro(uction !osts are #i-en +& B!L0T!L14 for all output le-els. (i) (ii) *in( the equili+rium price' quantit& an( profit for a monopolist (3 marks). #ns' MR3MC@ so 0328@ *3L1@ 321I86uppose there are two firms 0 an( E an( each firm pro(uces output K 1 an( K$' respecti-el&. In the (uopol& #ame' each firm sets its quantit& as follows: *irm 0: K1L($2-K$@$) *irm E: K$L($2-K1@$) 0ssume +oth firms ha-e the same cost functions as +efore' an( therefore are i(entical firms. 0ssume that if the firms collu(e' the& 3ointl& +eha-e as a monopolist. 9otice that K1MK$LK(' an( P1LP$LP. (a) *in( K1LK$ for each firm in the a+sence of collusion (1 mark). #ns' 0130231I (+) *in( P1LP$LP for each firm (1 mark). #ns' ?=@ ma5e s,re yo, p,t in 01J02 to find t/e *(c) *in( 1L$ for each firm (1 mark). #ns' 3L82 for eac/ firm(iii) !ompare their in(i-i(ual profits un(er (ii)' part (c) with the un(er collusion. 6houl( the& collu(e or not= Gxplain (3 marks). #ns' If t/ey compete 1it/ eac/ ot/er@ eac/ earns 7L82- If t/ey cooperate and sp+it t/e monopo+y profits 29y c,ttin< 9ac5 o,tp,t6@ t/en t/ey sp+it 721I8@ 1/ic/ 1o,+d yie+d t/em 710L!-4@ /ence incentives to co++,deCo++,sion means 9ot/ firms co++ective+y 9e/ave as one firm@ i-e-@ as a ;oint monopo+ist- Use yo,r res,+ts from 2i6%oul( &ou expect these firms to +e a+le to collu(e an( +eha-e like a monopolist' #i-en that explicit written contracts to cut output an( raise prices are ille#al in !ana(a= 5se the quantit& settin# equations to show that the firms ha-e an incenti-e to cheat ($ marks) #ns' 01328A228H26H2 32!G286H=M 28H2 so t/e reaction is to c/eat@ and t/ey event,a++y <o 9ac5 to eac/ prod,cin< 1I ,nits6uppose now that the market is in a state of perfect competition. *in( the competiti-e price' the quantit& pro(uce( +& a firm in competition' an( the profits. ($ marks) #ns' *3MC so *310@ 034=@ 30-

(i-)

(v)

0,estion F? 21! mar5s6 6uppose that +oth Tom an( 6ara like to #row tomatoes an( #reen peppers in their +ack&ar(s. In a 34-(a& month' Tom can #row in his +ack&ar( either <4 tomatoes an( 4 peppers or 4 tomatoes an( .4 peppers or an& other com+ination l&in# on the line +etween these two points. In the same amount of time' 6ara can #row in her +ack&ar( either .4 tomatoes an( 14

4 peppers or 4 tomatoes an( < peppers or an& other com+ination l&in# on the line +etween these two points. (i) 9o tra(e: 0ssume that Tom an( 6ara +oth spen( half of their time to pro(uce tomatoes an( the other half of their time to pro(uce peppers. Aow man& tomatoes an( peppers can each consume= )raw two separate #raphs for their PP*s' with tomatoes (T) on the -ertical axis an( peppers (P) on the hori8ontal axis (3 marks). #ns' Tom cons,mes 2=0T@ 20*6@ 1/i+e Sara cons,mes 220T@ =*6-

(ii)

If the& start tra(in# with each other' what shoul( Tom sell an( what shoul( 6ara sell= Gxplain +& calculatin# the opportunit& costs of pro(ucin# peppers an( tomatoes for Tom an( 6ara' respecti-el& (3 marks). #ns' Tom s/o,+d se++ peppers@ 1/i+e Sara s/o,+d se++ tomatoes- T/is is 9eca,se Tom /as a +o1er OC t/an Sara in prod,cin< peppers 2Tom 1*32T: Sara 1*34T6@ 1/i+e Sara /as a +o1er OC in prod,cin< tomatoes 2Tom 1T30-4*: Sara 1T30-2*6*ollowin# from (ii): 6uppose Tom an( 6ara each speciali8es in pro(ucin# onl& the #oo( in which she@he has a lower opportunit& cost. 0lso suppose Tom an( 6ara exchan#e 5 peppers for 15 tomatoes with each other (&ou ha-e to (etermine who sells peppers an( who sells tomatoes). !alculate the new consumption +un(les of Tom an( 6ara an( plot them on &our #raphs in (i) (3 marks). #ns' Tom cons,mes 214T@ !4*6@ 1/i+e Sara cons,mes 224T@ 4*6-

(iii)

(i-)

*ollowin# from (iii): 6how that #i-en TomIs an( 6araIs consumption quantities of tomatoes' the& coul( not ha-e pro(uce(@consume( the correspon(in# quantities of peppers &ou ha-e foun( in (iii) in the a+sence of tra(e (. marks). #ns' Tom <ains 9eca,se if /e 1ere to prod,ce 14T /imse+f 24-?24 days o,t of !06@ /is remainin< time 22=-!84 days6 can on+y 9e ,sed to prod,ce !2-4*- No1 /e en;oys !4*#s for Sara@ if s/e 1ere to prod,ce 24T 2ta5es /er 1I-84 days6@ /er remainin< time 211-24 days6 can on+y 9e ,sed to prod,ce ! *- No1 s/e /as 4*@ t/erefore s/e a+so <ains.ive f,++ mar5s if t/ey s/o1 a <rap/ 1it/ a cons,mption frontier t/at is 9eyond t/e **"-

The Gn(

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