10803A Microeconomic Analysis
B.B.A.
Midterm exam
Coordinator: Nathalie Boisvert
Fall 2019
•
This exam has five (5) questions, and is worth a total of 100 points.
•
You have three (3) hours to answer the following questions.
•
Write your answers directly on this questionnaire.
FOR CORRECTOR ONLY
Q1
Q2
/24
Q3
/12
Q4
/21
Q5
/29
TOTAL
/14
/100
IMPORTANT
With the exception of multiple choice questions, you must justify your
answers and show your calculations. Unless otherwise specified, no
credit will be awarded for unjustified answers.
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Midterm Exam - Fall 2019
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QUESTION 1 – MULTIPLE CHOICE QUESTIONS (24 POINTS – 43 MINUTES)
NO JUSTIFICATION IS REQUIRED.
[NOTE: THERE IS ONLY ONE GOOD ANSWER FOR EACH QUESTION.]
WRITE YOUR ANSWERS IN THE FOLLOWING TABLE.
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
USE THE INFORMATION BELOW TO ANSWER QUESTIONS 1.1 AND 1.2.
Suppose that the quantity demanded for celery is given by the following equation:
QCELERY = 21 - 3 PCELERY + 2 PCARROT - 0.5 PCHEESE + 2 I
where:
QCELERY
PCELERY
PCARROT
PCHEESE
I
quantity demanded of celery (in millions of kg)
price of celery (in $/kg)
price of carrot (in $/kg)
price of cheese spread (in $ for 250 g)
Household income (in thousands of $)
Suppose that PCELERY = $2, PCARROT = $4, PCHEESE = $6 and the average income of Canadian
households is $40,000 (I = 40).
1.1 (3 points)
If the price of celery were to increase by 10%, what would be the impact on the quantity
demanded for celery?
a)
The quantity demanded of celery would increase by 0.06%.
b) The quantity demanded of celery would decrease by 0.06%.
c)
The quantity demanded of celery would increase by 0.6%.
d) The quantity demanded of celery would decrease by 0.6%.
e)
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The quantity demanded of celery would decrease by 6%.
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1.2 (3 points)
Among the following statements, which one is TRUE?
a)
Celery and carrots are substitutes because the cross-price elasticity between these
goods is lower than zero.
b) Celery and carrots are complements because the cross-price elasticity between
these goods is higher than zero.
c)
Celery and cheese spread are substitutes because the cross-price elasticity
between these goods is higher than zero.
d) Celery and cheese spread are complements because the cross-price elasticity
between these goods is lower than zero.
THE NEXT QUESTIONS ARE NOT RELATED TO THE PREVIOUS ONES.
1.3 (3 points)
The market demand for a good is Q = 10 - 2P. The market price is $3. What is the
consumer surplus?
a)
The consumer surplus is equal to $4.
b) The consumer surplus is equal to $8.
c)
The consumer surplus is equal to $14.
d) The consumer surplus is equal to $28.
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1.4 (3 points)
If the Canadian economy goes into a recession and household incomes fall, what will
happen to the equilibrium price and quantity in the market for a normal good?
a)
Both the equilibrium price and quantity will rise.
b) Both the equilibrium price and quantity will fall.
c)
The equilibrium price will rise and the equilibrium quantity will fall.
d) The equilibrium price will fall and the equilibrium quantity will rise.
1.5 (3 points)
A firm in a perfectly competitive market increases the amount of units it sells by 25%.
Which of the following is TRUE? [Note: Consider that we are in the short run.]
a)
The price of its output remains the same.
b) The price of its output will decrease.
c)
The price of its output will increase.
d) It is impossible to know what will happen to the price.
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1.6 (3 points)
You have 3 options: A, B and C. If you choose option A, your accounting profit is equal to
$55,000. If you choose option B, your accounting profit is equal to $90,000. If you choose
option C, your accounting profit is $80,000.
You choose option B. What is your opportunity cost of choosing this option?
a)
$55,000
b) $90,000
c)
$80,000
d) $35,000
e)
$10,000
1.7 (3 points)
Consider a firm in a perfectly competitive market. The firm currently produces a quantity
for which the average cost is $20 and the marginal cost is $10.
If the firm were to slightly increase its production, which of the following must occur?
a)
The marginal cost would decrease.
b) The average cost would decrease.
c)
The average cost would increase.
d) The average cost would not change.
e)
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The average cost may decrease or increase depending on the size of the fixed cost.
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1.8
(3 points)
In the long-run equilibrium of a competitive market with identical firms, which
statement is correct?
[Note: Consider that the market price is P, the marginal cost of each firm is MC, the
average cost of each firm is AC and the average variable cost of each firm is AVC.]
a)
P > MC and P > min AVC
b) P > MC and P = min AC
c)
P = MC and P > min AC
d) P = MC and P = min AVC
e)
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P = MC and P = min AC
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QUESTION 2 – SHORT QUESTIONS (12 POINTS – 22 MINUTES)
2.1 The price of celery is skyrocketing in Canada
Recently, bad weather in California and a food fad promoting the benefits of celery juice have pushed the price of celery
at major Canadian grocery stores to $5.99 for a single bunch.
Canada imports a significant portion of its celery, particularly from California. “This region has experienced unseasonably
cold temperatures and heavy rainfall over the past few months.”
The popularity for celery seems to have started with Anthony William, who self-identifies as a medical medium. William
says drinking 16 ounces of celery juice every morning on an empty stomach helps with a whole host of health problems.
Adapted from: Bianca Bharti, National Post, May 1st, 2019
Note: For the two following sub-questions, use P1 and Q1 to illustrate the new equilibrium
price and quantity in the final situation.
a)
In the supply and demand graph below, illustrate the impact of the bad weather in
California and the recent popularity of celery on the equilibrium price and quantity
in the celery market. (4 points)
Celery Market
Explain briefly the impact on the equilibrium price and quantity.
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b) Cucumber is known to be a substitute for celery. What would be the impact of an
increase in the price of celery on the cucumber market? More specifically,
illustrate in the graph below the impact of the increase in the price of celery on the
equilibrium price and quantity of cucumbers. Explain briefly. (3 points)
Cucumber Market
Explanations
THE FOLLOWING QUESTION IS NOT RELATED TO THE PREVIOUS ONE.
2.2 Bianca and Mary have the following marginal valuations for milk shakes. Marginal
valuations are expressed in dollars.
q
MV Bianca (q)
MV Mary (q)
a)
1
7
8
2
6
5
3
4
3
4
2
2
5
0
1
If the market for milk shakes consists of only these two people, what would be the
total quantity demanded if the price is $3.50? Justify your answer. (3 points)
b) If the market for milk shakes consists of only these two people, what is the total
consumer surplus if the price is $5.50? Show your calculations. (2 points)
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Midterm Exam - Fall 2019
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QUESTION 3 – PERFECT COMPETITION (21 POINTS – 38 MINUTES)
Consider a competitive industry with identical firms. In this industry, the demand and
supply equations are:
QD = 22,500 - 50P and
QS = 400P
The cost function of a typical firm in this industry is C(q) = q2/50 + 200.
3.1 Name 3 conditions for a market to be considered perfectly competitive. (3 points)
3.2 Consider the cost function of a typical firm above and find the following functions:
(3 points)
a)
Marginal cost function (MC):
___________________________________
b) Average cost function (AC):
___________________________________
c)
Average variable cost function (AVC): ___________________________________
QUESTIONS 3.3 TO 3.6 ARE ABOUT MARKET CONDITIONS IN THE SHORT RUN.
3.3 Find the equilibrium price and quantity in this market. (2 points)
Equilibrium Market Price
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Equilibrium Market Quantity
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3.4 Find the output supplied by one typical firm and compute the profit made by one
typical firm. (4 points)
Quantity supplied by each firm
Profit of each firm
3.5 How many firms are operating is this market? (2 points)
3.6 What is the minimum price that allows those firms to be profitable? [Hint:
Compute the break-even price.] (4 points)
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QUESTION 3.7 CONCERNS MARKET CONDITIONS IN THE LONG RUN.
3.7 What will be the long-run equilibrium price in this market? How many firms will
be operating in the market in the long run? (3 points)
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Midterm Exam - Fall 2019
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QUESTION 4 – THE BUS ROUTE BETWEEN OTTAWA AND TORONTO
(29 POINTS – 52 MINUTES)
WHY DOES THE GOVERNMENT GRANT MONOPOLIES TO BUS COMPANIES THAT CUT ROUTES?
The bus company Greyhound announced that it will be cutting all of its Canadian intercity bus routes west of Sudbury
after October 31 of this year.
Ontario gives intercity bus companies a pretty sweet deal: bus routes are legal monopolies guaranteed by the Ontario
Highway Transportation Board. This deal wasn’t supposed to be a giveaway: the idea was that bus companies would
reinvest the profits from more lucrative routes between big cities into the lower-ridership services rural communities
depend on.
That’s the theory: in practice, though, Greyhound has made cuts, cuts, and more cuts to rural bus service while continuing
to enjoy the golden goose that is the Toronto–Ottawa route. After the latest round of cuts, Greyhound’s rural service will
basically not exist. But its monopoly on some of the highest-ridership routes in the country will — for now.
Adapted from: John Michael McGrath, TVO, July 1th, 2018
As described above, Greyhound has the monopoly of some bus routes in Ontario. For
the purpose of this question, we will study the bus route service between Ottawa and
Toronto. Suppose that the demand for each ride between Ottawa and Toronto is given
by:
P = 120 - Q
where Q is the number of passengers for each ride and P is the price of a ticket in dollars.
For Greyhound, each ride between Ottawa and Toronto costs $1,000 plus $10 per
passenger. [Note: All questions are about the market in the short run.]
4.1 Using the information above, answer the following questions: (3 points)
a)
What are Greyhound’s fixed costs?
b) What is the marginal cost of serving one passenger?
c)
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What is Greyhound’s marginal revenue function?
Midterm Exam - Fall 2019
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4.2 Greyhound’s decisions. (5 points)
− What is the price that maximizes Greyhound’s profit for the bus route between
Ottawa and Toronto?
− At this price, how many tickets are sold?
− What is the profit made by Greyhound for each ride?
Price
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Quantity (number of tickets)
Midterm Exam - Fall 2019
Profit
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4.3 Given the results in 4.2, complete the graph below. (4 points)
− Indicate all the relevant information on the axes.
− Identify the price and the quantity which maximize the profit of Greyhound.
− Illustrate and clearly identify the marginal revenue curve and the marginal cost
curve (indicate all the relevant information about these two curves).
4.4 Compute and illustrate on the graph in 4.3, the consumer surplus, the producer
surplus and the deadweight loss. (6 points)
Consumer surplus
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Producer surplus
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Deadweight loss
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TWO PROPOSALS FROM THE ONTARIO HIGHWAY TRANSPORTATION BOARD
Suppose that the Board continues to give Greyhound the monopoly of the bus route
between Ottawa and Toronto. Moreover, suppose that the Board is studying two proposals
to make sure that Greyhound could maintain some rural routes that are less profitable.
PROPOSAL #1
4.5 The Board would request by legislation that Greyhound use 50% of its revenue made
on the bus route between Ottawa and Toronto to finance rural routes that are less
profitable. If that legislation were to be adopted, (5 points)
− how much would Greyhound charge for a bus ticket between Ottawa and Toronto?
− how many tickets would be sold?
[Hint: Consider that Greyhound’s revenue is reduced by 50%. This reduction in
revenue will have an impact on its profit-maximisation decision.]
Price
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Quantity (number of tickets)
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PROPOSAL #2 (THIS PROPOSAL IS INDEPENDENT OF THE FIRST ONE. CONSIDER THE
INFORMATION INITIALLY USED IN QUESTION 4.1).
4.6 In order to encourage Greyhound to maintain rural routes, the Board is considering
subsidizing Greyhound on the route between Ottawa and Toronto. Suppose
Greyhound receives a subsidy of $6 per passenger. This effectively lowers
Greyhound’s marginal cost by $6 per passenger. (4 points)
− How much would Greyhound charge for a ticket between Ottawa and Toronto?
− How many tickets would be sold?
Price
Quantity (number of tickets)
4.7 Between the two proposals, which one would be the most advantageous for
passengers on the route linking Ottawa and Toronto? Justify briefly. (2 points)
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Midterm Exam - Fall 2019
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QUESTION 5 – A STORY OF TENNIS BALLS (14 POINTS – 25 MINUTES)
Consider two individuals with identical preferences for tennis balls, which are represented
by the marginal valuation table below: (MV are in dollars)
q
MV(q)
1
2
3
…
q
…
2,000
2,000
1,999
1,998
…
2,001 - q
…
1
5.1 Consider an individual who initially owns 300 tennis balls. (4 points)
a)
How much would this person be willing to pay to buy one additional tennis ball
(which is the 301st)?
Answer: __________________
b) How much would this person be willing to pay to buy a second additional tennis
ball?
Answer: __________________
c)
Denote by “x” the number of tennis balls purchased by this individual. Using your
answers in the two previous questions, what is the individual’s marginal valuation for
buying the xth additional ball (assuming that she owns 300 already)? [Hint: you have
to find the marginal valuation as a function of x.]
MV = __________________
5.2 Consider now an individual who initially owns 1,600 tennis balls. (4 points)
a)
What is the lowest price at which this person is willing to sell one tennis ball (that is,
the person’s 1,600th ball)?
Answer: __________________
b) What is the lowest price at which this person is willing to sell a second tennis ball?
Answer: __________________
c)
Denote by “y” the number of tennis balls sold by this individual. Using your answers
to the two previous questions, what is the individual’s marginal cost for selling the yth
additional ball (assuming that she owns 1,600 already)? [Hint: you have to find the
marginal cost as a function of y.]
MC = __________________
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5.3 Because every unit sold by one individual must be purchased by the other, any
trade between the two individuals considered must verify x = y.
In addition, in order for the trade to be efficient, another condition must be verified.
Write this condition below. (2 points)
Answer: __________________
5.4 Consider an efficient trade between the two individuals. (4 points)
a)
Calculate the number of tennis balls traded. [Round down to the closest whole
number.]
b) How many tennis balls does the buyer end up with?
c)
How many tennis balls does the seller end up with?
d) What unit price will the buyer and the seller agree on to trade this efficient amount of
tennis balls?
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Midterm Exam - Fall 2019
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For Rough Work
The corrector will not take account of anything written on this page.
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Midterm Exam - Fall 2019
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For Rough Work
The corrector will not take account of anything written on this page.
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