W2010 Solution To Test 3 ECO100 February 18 2011
Department of Economics
University of Toronto
Prof. Gustavo Indart
February 18, 2011
SOLUTIONS
ECO 100Y
INTRODUCTION TO ECONOMICS
Midterm Test # 3
LAST NAME
FIRST NAME
STUDENT NUMBER
INSTRUCTIONS:
1.
2.
3.
The total time for this test is 1 hour and 50 minutes.
Aids allowed: a simple calculator.
Write with pen instead of pencil.
DO NOT WRITE IN THIS SPACE
Part I
1.
/10
2.
/10
3.
/15
4.
/15
Part II
/30
TOTAL
/80
Page 1 of 12
PART I
(50 marks)
Instructions: Answer all four questions in the space provided.
1. (10 marks) Consider a perfectly competitive, constant cost industry with “n” identical firms. The diagrams below depict the market demand and short-run supply curves for this industry and the
ATC and MC curves of a representative firm — Lalinda Company. This industry is initially in long-run equilibrium.
Industry
P
Lalinda Co.
120
ATC
$
S
120
S’
100
100
80
LRS
80
60
LRS’
60
ATC’
MC
MC’
40
40
D
20
20
4
6
8 9
12
16
Quantity in thousands of units per month
4
8
10 11 12
16
Quantity in units per month
a) Show in the diagram above the industry’s equilibrium price and output and Lalinda’s equilibrium output. Draw the industry’s long-run supply curve (LRS). (1 mark) What’s the number of firms in this perfectly competitive industry? Briefly explain. (1 mark)
Since market equilibrium is at P = $80 and Q = 6,000 units and at P = $80 a firm’s output is
10 units (i.e., q = 10 at P = MC), then the number of firms in the industry is Q/q = 6,000/10 =
600.
Since the industry is in long-run equilibrium, then each firm is making zero economic profits and producing at the minimum of the LRAC curve. (Note that the LRAC is not shown in the diagram above.) Since this is a constant cost industry, then the LRS is horizontal at the level of the minimum LRAC, i.e., at P = $80.
b) Lalinda Co. invents a new process that reduces the cost of production by $20 per unit at all levels of output. Lalinda patents this new process, thus
University of Toronto
Prof. Gustavo Indart
February 18, 2011
SOLUTIONS
ECO 100Y
INTRODUCTION TO ECONOMICS
Midterm Test # 3
LAST NAME
FIRST NAME
STUDENT NUMBER
INSTRUCTIONS:
1.
2.
3.
The total time for this test is 1 hour and 50 minutes.
Aids allowed: a simple calculator.
Write with pen instead of pencil.
DO NOT WRITE IN THIS SPACE
Part I
1.
/10
2.
/10
3.
/15
4.
/15
Part II
/30
TOTAL
/80
Page 1 of 12
PART I
(50 marks)
Instructions: Answer all four questions in the space provided.
1. (10 marks) Consider a perfectly competitive, constant cost industry with “n” identical firms. The diagrams below depict the market demand and short-run supply curves for this industry and the
ATC and MC curves of a representative firm — Lalinda Company. This industry is initially in long-run equilibrium.
Industry
P
Lalinda Co.
120
ATC
$
S
120
S’
100
100
80
LRS
80
60
LRS’
60
ATC’
MC
MC’
40
40
D
20
20
4
6
8 9
12
16
Quantity in thousands of units per month
4
8
10 11 12
16
Quantity in units per month
a) Show in the diagram above the industry’s equilibrium price and output and Lalinda’s equilibrium output. Draw the industry’s long-run supply curve (LRS). (1 mark) What’s the number of firms in this perfectly competitive industry? Briefly explain. (1 mark)
Since market equilibrium is at P = $80 and Q = 6,000 units and at P = $80 a firm’s output is
10 units (i.e., q = 10 at P = MC), then the number of firms in the industry is Q/q = 6,000/10 =
600.
Since the industry is in long-run equilibrium, then each firm is making zero economic profits and producing at the minimum of the LRAC curve. (Note that the LRAC is not shown in the diagram above.) Since this is a constant cost industry, then the LRS is horizontal at the level of the minimum LRAC, i.e., at P = $80.
b) Lalinda Co. invents a new process that reduces the cost of production by $20 per unit at all levels of output. Lalinda patents this new process, thus