INTRODUCTION TO MICROECONOMICS
THIRD HOMEWORK ASSIGNMENT1) The mathematical relationship between inputs and outputs is referred to as:
A) demand curve.
B) derived demand.
C) supply curve.
D) production possibilities.
E) production function.2) As quantity of production increases, the average fixed cost:
A) increases due to diminishing marginal productivity.
B) decreases due to the law of increasing costs.
C) increases due to the law of economy of scale.
D) decreases due to fixed cost being spread over larger volume.
E) stays the same, since it is fixed.3) Economic profit is:
A) the same as accounting profit.
B) the residual after all resources used in production are compensated at their normal market determined rates.
C) what the owners can take out of business without reducing its capital.
D) total revenue minus expenses and before taxes.
E) all of the above.4) Utility
A) is the satisfaction obtained from consumption of a product.
B) has no meaning in economics.
C) can be used to decide what to produce.
D) all of the above.
E) none of the above.5) The difference between what a consumer is willing to pay for a commodity and what he/she actually pays for that commodity is known as:
A) producers surplus.
B) consumers surplus.
C) bargaining power.
D) utility gained.
E) profit.
Kiki owns a small factory producing and selling facial lotions. Each jar of lotion is sold for $50 and the marginal cost of each worker is constant at $150. The table below is also known. Use the information to answer questions 6-10.QUANTITY OF LABOR UNITS OF OUTPUT0 0
1 12
2 22
3 30
4 36
5 40
6 43
7 44
6) The marginal product of the fifth worker is:A) 8.
B) 3.
C) 40.
D) 4.
E) none of the above.7) The average product, when 4 workers are employed, is:A) 36.
B) 4.
C) 9.
D) 6.
E) none of the above.8) The marginal cost of third worker hired is:
A) $50.
B) $100.
C) $200.
D) $150.
E) none of the above.9) The marginal revenue product of the sixth worker is:A) $100.
B) $150.
C) $50.
D) $200
E) none of the above.
10) In order to maximize profit, how many workers Kiki should hire?
A) Seven workers.
B) Six workers.
C) Five workers.
D) As many workers as he can find.
E) Not enough information to answer the question.11) Marginal utility is the
A) total satisfaction gained by consuming large quantities of a good.
B) total satisfaction gained by saving a large quantity of a good.
C) additional satisfaction gained by the consumption of one more unit of a good.
D) additional consumption divided by the additional satisfaction of consumption.
E) any of the above.12) You own a business that answers telephone calls for physicians after their offices close. Currently you operate at your optimal point. You have an incentive to substitute capital for labor if:
A) price of capital increases.
B) price of labor decreases.
C) price of labor increases.
D) marginal product of labor increases.
E) all of the above.13) The principle of diminishing marginal utility implies that when Sophia eats pizza, her utility from the second slice of pizza is:A) greater than the utility from the first slice.
B) equal to the utility from the first slice.
C) not comparable to the utility from the second slice.
D) less than the utility from the first slice.
E) none of the above.14) Marginal cost:
A) is the increase in total cost resulting from producing one more unit.
B) is the average cost of production divided by output.
C) equals the increase in fixed cost resulting from producing one more unit.
D) always equals average total cost.
E) none of the above.15) Which one of the followings can be considered as a derived demand?
A) demand for pizza and soft drink.
B) demand for airline pilots.
C) demand for electricity.
D) all of the above.
E) (B) and (C) above.
Use the following information to answer questions 16-20UNITS OF OUTPUT TOTAL COST0 $100
1 $130
2 $158
3 $183
4 $210
5 $25016) Marginal cost of producing the third unit is:
A) $183
B) $40
C) $393
D) $27
E) none of the above.17) Average total cost of producing five units of output is:
A) $40
B) $250
C) $50
D) $30
E) none of the above.18) Average fixed cost of producing four (4) units of output is:
A) $100
B) $25
C) $20
D) $210
E) none of the above.19) Average variable cost of producing the fifth (5) unit is:
A) $25
B) $30
C) $50
D) $250
E) none of the above.20) Total cost of producing 2 units is:
A) $28.
B) $70.
C) $58.
D) $158.
E) none of the above.
21) Sunk cost is:A) the cost that is implicit.
B) the cost that will not be paid.
C) the cost that can not be retrieved.
D) the same as marginal cost.
E) any of the above is possible.22) As output increases, average variable costsA) fall.
B) initially fall and then increase.
C) remain constant.
D) increase.
E) any of the above is possible.23) In a world of two commodities, the optimal level of consumption for a consumer will be:A) where the consumer spends all of his/her income on one commodity.
B) where the consumer spends half of his/her income on each commodity.
C) where the budget line intersects the indifference curve.
D) at the point at which the indifference curve is just tangent to the budget line.
E) any of the above.24) Assume there are only two inputs in a production, labor and capital. If a firm wants to utilize least cost combination of the two inputs, it should combine them:A) in such a way that the amount spent on each input is equal.
B) in such a way that the output produced by each input is equal.
C) in such a way that contribution of each dollar invested in each input is the same.
D) any of the above.
E) none of the above.25) The long run refers to the period of time for which:A) all inputs are fixed.
B) at list one input is fixed.
C) all inputs are variable.
D) all of the above.
E) all of the above.

ECO1104B: Introduction to microeconomics
Formal assignment II
Fall 2015
Due in class on Tuesday, 8 December
? You will be graded for the quality and accuracy of your answers and presentation of your results. Make sure that your assignment is presented consistently from page to page (e.g., same font and font size).
? USE the cover page, available from the Web site on the Assignment page.
? Hand in your assignment on 8.5 in. x 11 in. single sided sheets of paper.
? The assignment should be produced as an MS Word document. Copy and paste all tables and charts from your Excel sheet to this document.
? Always keep a back-up copy and photocopy of your document.
? Staple the pages of your assignment together.
1. A price ceiling, consumer surplus, and producer surplus (designed to accommodate chapter 7)
a. Using the following equations, generate a table in Excel to show the market for apartments in a large city where the local government has imposed rent control. Using quantity values ranging from 0 to 240 (increasing at 5 unit increments), calculate the corresponding price based on the demand for apartments equation: P = 1200 – 5Qd, and the corresponding price based on the supply of apartments equation: P = 300 + 5Qs. Copy and paste this table in your main MS Word document.
b. Construct a chart showing the demand curve, the supply curve, and a price ceiling of $ 700. Label them D, S, and Ceiling. Copy and paste this chart in your Word document.
c. In the absence of rent control, what would be the equilibrium rent? Compute your answer algebraically. Does this answer agree with the equilibrium in the table?
d. With the rent control ceiling, how many units are being rented? Is there a shortage or surplus of apartments? If yes, by how many? Derive all your answers algebraically.
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e. Considering the number of units actually being rented at the rent control price, what has happened to total consumer surplus and total producer surplus in this market compared to the situation where the equilibrium price prevailed? Compute your answers by providing before and after values for consumer, producer and total surpluses. What is the size (value) of the deadweight loss from rent controls? Derive all your answers algebraically. Remember that the deadweight loss is the difference between the total surplus before and total surplus after the ceiling is implemented.
2. Government Spending and Taxation (designed to accommodate chapters 8 and 11)
Public goods are the domain of the public sector. The learning objective for this particular question is to give you an idea of the size of the public sector as well as what its functions are.
a) Visit the website of the finance department of the federal government of Canada. The governmental unit is called “Finance Canada”. The URL is www.fin.gc.ca. This is the central command post for all taxes that are collected by the federal government as well as all of its expenditures. The funds themselves, however, are dispersed by an agency called The Treasury Board. Look for information on “Budget 2014” then go to “Budget Plan”. You can find the answers to the specific questions below by browsing through chapter 5. Browse through tables 5.2.4 for the big picture (i.e. the government’s overall balance sheet), 5.2.5 for revenues (see chart 5.2.3 as well), and 5.2.6 for expenditures (see chart 5.2.4 as well). The fact that I give you these table numbers and chart numbers is big, generous, time-saving hint.
i) What is the approximate current annual expenditure level? We are currently in fiscal year 2015-2016.
ii) What share of GDP does this account for? (GDP means aggregate output, which can be interpreted as the size of the economy) What this figure represents is the weight of the federal government relative to the size of the entire economy.
iii) How is this divided into program spending and spending on debt servicing?
iv) What is the current annual revenue level?
v) What is the projected deficit in the fiscal years 2015-2016 (which we are in now)? When do they forecast a balanced budget? I mention that these forecasts were recently updated towards higher deficits.
vi) What are the big-ticket items are far as federal government spending is concerned?
vii) What are the major sources of revenue as far as the federal government is concerned?
b) Visit the website of the finance department of the province of Ontario. The unit is called “the Ontario Ministry of Finance”. You can google it. This is the central command post for all taxes that are collected by the provincial government as well as all of its expenditures. Look for information on “2014 Ontario Budget”. Look
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at Tables 2.21, 2.23, 2.24. Read the overview statement, which can be accessed through a link called “Budget 2015 – Building Ontario Up”. Note that I have been very generous in narrowing the scope of your search. As such these questions are total “gimmes”. Even if you are not interested in this material for its intellectual content, I assure you that it affects directly through the channel of your financial and physical well-being (none the least because of your use government services such as health care and higher education, both of which are provincial responsabilities).
i) What is the projected level of expenditures for budget year 2015-2016?
ii) List 6 important expenditure areas – I call them the ‘biggies’. In particular, how much is slated for you and me through the envelope of ‘training, colleges, and universities’?
iii) What is the projected level of revenues for budget year 2015-2016?
iv) What are the major sources of revenue for the provincial government, and what is the split between its own tax levies are the transfers that it received from the Federal government?
v) What was the deficit for fiscal year 2014-2015, which is now over?
vi) What is the projected level of the deficit for budget year 2015-2016? My guess is that they will fail to reach this target.
Note the intense political undertones that are apparent in both of these websites. While they are both very factual, they read like an infomercial. It is actually a challenge to find the basic statistics that I ask for because the government wants to persuade you that they are doing wonderful things with taxpayer funds, making very important changes for the better, and that you can rest assured that a steady hand manages the treasury.
3. Production and costs (designed to accommodate chapter 13)
There is an excel file is posted with this questionnaire. The data consist of the production function for chairs, and there is also cost information. From this information, one can derive all of the cost curves.
a. Fill in the blanks in table A in the Excel file. Assume that a worker costs $ 100 a day, and that the firm faces fixed costs of $ 200.
b. Fill in the blanks in table B in the Excel file. Assume that a worker costs $ 150 a day, and that the firm faces fixed costs of $ 200.
c. Fill in the blanks in table C in the Excel file. Assume that a worker costs $ 100 a day, and that firm faces fixed costs of $ 300.
d. In all three tables, what pattern do you see for marginal product? Why?
e. In all three tables, what pattern do you see for average total cost? Why?
f. In all three tables, what pattern do you see for marginal costs?
g. Compare the column for marginal cost and marginal product. Explain the relationship.
h. Going from case a) to case b), which cost variables are affected and why? In other words, see which ones change, and think about why.
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i. Going from case a) to case c), which cost variables are affected and why? In other words, see which ones change, and think about why.
j. For the figures in Table A, plot the marginal product curve and the total product curve on the same figure. Total product is the same thing as output. Label the axes and curves. Plot the marginal cost curve and the average total cost curve on another figure. Label the axes and curves. Note that in your graphs, because we are using discrete units for production (and not continuous units), the plots will appear lumpy. It is hard to get the MC curve to intersect the ATC curve at its minimum point, and to get the MP curve to intersect the AP curve at its maximum point. If your intersections are close to being at the right place, that is acceptable.