University of Toronto ECO101: Principles of Microeconomics

Department of Economics Robert Gazzale, PhD

I. [90 Marks] Multiple Choice Questions: Indicate answer on Bubble Form.

1. [2 Marks] In 2018, TD Bank would have paid you $120,000. CIBC would have paid you
$140,000. Instead, you started a consulting business where you paid yourself $160,000.
According to an economist, what is the cost of using your labour for your business?
A. $260,000.
B. $160,000.
C. $140,000.
D. $20,000.

2. [2 Marks] You are on a date. When ordering, you assumed that each person would pay
for what she ordered. At the end of the meal, you learn that each person will pay half of
the total bill. Given that you are unexpectedly splitting the bill evenly, how does your
marginal benefit compare to your actual marginal cost?
A. Your marginal benefit was less than your actual marginal cost.
B. Your marginal benefit was equal to your actual marginal cost.
C. Your marginal benefit was greater than your actual marginal cost.
D. Whether your marginal benefit was greater or less than your actual marginal cost
depends on whether you ordered more or less than your date.

3. [2 Marks] Assume a car can either be powered solely by gasoline or solely by a recharge-
able battery. Assume an increase in the price of gasoline. The model of supply and de-
mand makes which of the following predictions for the market for battery-powered cars?
A. P will #. Q will #.
B. P will #. Q will ".
C. P will ". Q will #.
D. P will ". Q will ".

4. [2 Marks] Assume a perfectly competitive market without taxes. The equilibrium price
is $10, and each unit produced creates a $1 external benefit. What is elasticity of demand
at $10?
A. Demand is elastic at $10.
B. Demand is unit elastic at $10.
C. Demand is inelastic at $10.
D. We do not have enough information to determine elasticity of demand at $10.

5. [2 Marks] A monopolist is constrained to charging the same price for each unit it sells.
What is elasticity of demand at P m , the price maximizing the monopolist’s profits?
A. Demand is elastic at P m .
B. Demand is unit-elastic at P m .
C. Demand is inelastic at P m .
D. We do not have enough information to determine elasticity of demand at P m .

20190610 Summer 2019 2 Exam

University of Toronto ECO101: Principles of Microeconomics
Department of Economics Robert Gazzale, PhD

6. [2 Marks] BobCo is a standard profit maximizing firm in a perfectly competitive market

with only labour variable in the short run. Given the current market price, it chooses
q = 100, 000 to maximize profits. What do we know about the marginal product of
labour (MPL) at this quantity?
A. MPL is increasing at q = 100, 000.
B. MPL is decreasing at q = 100, 000.
C. MPL is maximized at q = 100, 000.

7. [2 Marks] BobCo incurs no additional cost every time someone downloads the app it
produced. It has correctly calculated that if it has to charge the same price in both Spain
and Portugal, e 1 would maximize profits. It has also correctly calculated that at e 1,
demand is elastic in Portugal and inelastic in Spain. What prices would it choose if it
can choose a different price in each country?
A. Pspain > e 1. Pportugal < e 1.
B. Pspain < e 1. Pportugal > e 1.
C. Pspain = e 1. Pportugal = e 1.

8. [2 Marks] Alpha and Beta are duopolists who are not colluding. What would happen
if they merged into one company (i.e., a monopoly)?
A. Market quantity ". Producer Surplus ".
B. Market quantity ". Producer Surplus #.
C. Market quantity #. Producer Surplus ".
D. Market quantity #. Producer Surplus #.

9. [2 Marks] Each time a resident gets a flu shot, it decreases the likelihood that another
resident gets the flu. (Assume getting the flu is bad.) In Boblandia, the perfectly com-
petitive market for flu shots without government intervention resulted in Q⇤ = 100, 000.
A. At Q⇤ = 100, 000, marginal societal benefit > marginal societal cost.
B. At Q⇤ = 100, 000, marginal societal benefit = marginal societal cost.
C. At Q⇤ = 100, 000, marginal societal benefit < marginal societal cost.
D. At Q⇤ = 100, 000, we cannot determine the relationship between marginal societal
benefit and marginal societal cost.

10. [3 Marks] The benefit to Arya of seeing the concert is $100. Believing Sansa would
drive her to the concert, Arya paid $60 for a concert ticket. She now learns Sansa cannot
drive. If Uber is the only way for Arya to get to and from the concert, what is the most
Arya is willing to pay for Uber (round trip) if she cannot resell the ticket?
A. Arya will go to the concert as long as she needs to pay no more than $40 for Uber.
B. Arya will go to the concert as long as she needs to pay no more than $60 for Uber.
C. Arya will go to the concert as long as she needs to pay no more than $100 for Uber.
D. Arya will go to the concert as long as she needs to pay no more than $160 for Uber.
E. Arya will go to the concert as long as she needs to pay Uber no more than she was
going to pay Sansa for a ride.

20190610 Summer 2019 3 Exam

University of Toronto ECO101: Principles of Microeconomics
Department of Economics Robert Gazzale, PhD

11. [3 Marks] You can do one of three things from 9 pm – 11 pm tonight.

i. Earn $25 making deliveries for UberEats.
ii. Earn $30 completing a task on TaskRabbit.
iii. Pay $10 to attend a yoga class.
Based on this information, what is the (opportunity) cost of attending the yoga class?
A. $10.
B. $30.
C. $35.
D. $40.
E. $65.

time: 6 am 10 am Noon 2 pm 5 pm
Marginal Benefit: $11 $5 $8 $10 $2

Table 1: Prof. G.’s value of five different coffees during a day. Importantly, the value he places on
a particular coffee depends only on the time of day, and not how many coffees he’s had before or
after.

12. [3 Marks] Refer to Table 1. The price of each cup of coffee is $2.50. The price of a frog
is $5. If purchasing coffee is the next best alternative to purchasing a frog, what is the
opportunity cost of purchasing a frog?
A. $19.
B. $16.
C. $13.
D. $12.
E. $7.

13. [3 Marks] Assume a car can either be powered solely by gasoline or solely by a recharge-
able battery. Assume both a) an improvement in battery-production technology; and
b) an increase in the price of gasoline. Our standard model of supply and demand makes
which of the following predictions for the market for cars powered by a battery?
A. P will #. Q may " or #.
B. P will ". Q may " or #.
C. P may " or #. Q will #.
D. P may " or #. Q will ".
E. P may " or #. Q may " or #.

20190610 Summer 2019 4 Exam

University of Toronto ECO101: Principles of Microeconomics
Department of Economics Robert Gazzale, PhD

14. [3 Marks] Assume that after the quinoa harvest, the market finds the price where
quantity demanded exactly equals the quantity harvested. If elasticity of demand is 2,
what is the change in price after a 10% increase in the quantity harvested?
A. Price decreases by 20%.
B. Price decreases by 10%.
C. Price decreases by 5%.
D. Price decreases by 2%.
E. Price decreases by 0.2%.

15. [3 Marks] Assume the market for coffee is perfectly competitive. Own-price elasticity
of demand for coffee has been estimated at 0.25. (This is true, by the way.) If a single
coffee producer Haile increases output by 10%, what will be the change in his revenues?
A. Haile’s revenues will decrease.
B. Haile’s revenues will increase by 2.5%.
C. The increase in Haile’s revenues will be greater than 2.5% but less than 10%.
D. Haile’s revenues will increase by 10%.
E. Haile’s revenues will increase by more than 10%.

16. [3 Marks] Assume a competitive market where elasticity of demand is 0.5 for all prices
relevant for this question. If there is an increase in the wages firms in this market must
pay their workers, what happens to consumer surplus (CS) and total revenue (TR)?
A. CS will #. TR will #.
B. CS will #. TR will ".
C. CS will ". TR will #.
D. CS will ". TR will ".
E. CS may " or #. TR may " or #.

17. [3 Marks] Assume quantities must be integers. Refer to the table below. If the govern-
ment implements an $6 price floor, what is the largest possible consumer surplus?
Q 1 2 3 4 5 6 7
MWTP $20 $15 $12 $10 $8 $6 $4
MC $1 $3 $5 $7 $9 $11 $13
A. $6
B. $29
C. $33
D. $45
E. None of the above.

20190610 Summer 2019 5 Exam

University of Toronto ECO101: Principles of Microeconomics
Department of Economics Robert Gazzale, PhD

18. [3 Marks] Assume that in the short run, supply is fixed at 1 million units. Exactly
a million units are demanded at P=$10, and elasticity of demand is 1.1 at this price.
If a $1 per unit tax, payable by the seller, is introduced, what will be the the short-run
market price?
A. $10.00
B. Between $10.00 and $10.50.
C. $10.50
D. Between $10.50 and $11.00.
E. $11.00

19. [3 Marks] Assume a perfectly competitive market currently at long-run equilibrium with
P = $10 and Q = 1, 000, 000. At P = $10, short-run elasticity of demand is 1.5 and
short-run elasticity of supply is 2. If a $1 per unit tax, payable by the seller, is introduced,
what will be the the short-run market price?
A. $10.00,
B. Between $10.00 and $10.50.
C. $10.50
D. Between $10.50 and $11.00.
E. $11 .00

20. [3 Marks] Assume a perfectly competitive market currently at long-run equilibrium with
P = $10 and Q = 1, 000, 000. At P = $10, elasticity of demand is 1. If a $1 per unit
tax, payable by the seller, is introduced, what will be the the long-run market price?
A. $10.00
B. Between $10.00 and $10.50.
C. $10.50
D. Between $10.50 and $11.00.
E. $11.00

21. [3 Marks] Rental apartments in Boblandia are subject to a binding rent control. If
Boblandia ends rent control, in which case will it see the largest increase in apartments
rented?
A. The more elastic supply is, the greater the increase in apartments rented.
B. The more inelastic supply is, the greater the increase in apartments rented.
C. The more elastic demand is, the greater the increase in apartments rented.
D. The more inelastic demand is, the greater the increase in apartments rented.
E. When elasticity of supply equals elasticity of demand, the increase in apartments
rented will be greatest.

20190610 Summer 2019 6 Exam

University of Toronto ECO101: Principles of Microeconomics
Department of Economics Robert Gazzale, PhD

22. [3 Marks] Each bánh mì sandwich requires $2 in ingredients and some labour. You pay
$20 for each unit of labour. If you produce 100 sandwiches, your marginal cost is $10,
variable costs are $600 and total costs are $2200. What is the marginal product of labour
for your 100th sandwich?
A. 1.
B. 2.
C. 2.5.
D. 5.
E. 10.

The Assumed Uber Market Two options for travel within Toronto are Uber and the
TTC. Assume the Uber market is perfectly competitive constant-cost industry where
all “firms” (i.e., drivers) have access to the same LRATC and input prices do not vary
with market output. Short-run supply and demand have the usual slopes, and the
market starts in long-run equilibrium.

23. [3 Marks] Refer to The Assumed Uber Market. If there is an increase in TTC fares
(i.e., the price to ride the TTC), what is the predicted effect on equilibrium price (P ⇤ )
and quantity (Q⇤ ) in the Uber market in the long run?
A. P⇤ will ". Q⇤ will ".
B. P⇤ will ". Q⇤ will not change.
C. P⇤ will ". Q⇤ may " or #.
D. P⇤ will not change. Q⇤ will ".
E. P⇤ will not change. Q⇤ will not change.

24. [3 Marks] Refer to The Assumed Uber Market. If there is an increase in TTC
fares (i.e., the price to ride the TTC), what is the predicted effect on Uber drivers in the
long-run?
A. Drivers enter the market. The number of trips each driver produces increases.
B. Drivers enter the market. The number of trips each driver produces does not change.
C. Drivers exit the market. The number of trips each driver produces increases.
D. Drivers exit the market. The number of trips each driver produces does not change.
E. The number of drivers does not change. The number of trips each driver produces
increases.

20190610 Summer 2019 7 Exam

University of Toronto ECO101: Principles of Microeconomics
Department of Economics Robert Gazzale, PhD

25. [3 Marks] In 2020, a profit-maximizing firm in a perfectly competitive market for an

inferior good produces q20 units and earns zero economic profits. In 2021, there is an
increase in the price of a substitute, and the firm responds by producing q21 in the
short-run. Which of the following is true in the short run?
A. Marginal cost at q21 and q20 are the same. Economic profits are zero at q21 .
B. Marginal cost is lower at q21 than at q20 . Economic profits are negative at q21 .
C. Marginal cost is lower at q21 than at q20 . Economic profits are positive at q21 .
D. Marginal cost is higher at q21 than at q20 . Economic profits are negative at q21 .
E. Marginal cost is higher at q21 than at q20 . Economic profits are positive at q21 .

26. [3 Marks] The bánh mì monopolist in Boblandia is a profit maximizer constrained to

charging the same price for each bánh mì sandwich. Each bánh mì sandwich requires
one baguette. If the price of a baguette increases from $0.25 to $0.50, what is the effect
on the price the bánh mì monopolist charges and its profits?
A. The monopolist does not change its price. Profits decrease.
B. The monopolist increases its price. Profits increase.
C. The monopolist increases its price. Profits remain the same.
D. The monopolist increases its price. Profits may increase or decrease.
E. The monopolist increases its price. Profits decrease.

27. [3 Marks] A profit-maximizing monopolist constrained is constrained to charging the

same price for each unit it sells. It incurs a $100 per-period fixed cost, a $2 marginal
cost on each unit, and has set Pm = $10. What will be the effect of a $5 price ceiling?
A. PS may " or #. TS may " or #.
B. PS will # and may be positive or negative at Pm = $5. TS will ".
C. PS will # and may be positive or negative at Pm = $5. TS may " or #.
D. PS will # but will still be positive at Pm = $5. TS will ".
E. PS will # but will still be positive at Pm = $5. TS may " or #.

20190610 Summer 2019 8 Exam

University of Toronto ECO101: Principles of Microeconomics
Department of Economics Robert Gazzale, PhD

28. [3 Marks] Assume quantities must be integers. The following table gives your demand
for slices of pizza at Roberto’s tomorrow night.
MWTP $10 $7 $5 $3 $1
Q 1 2 3 4 5
The way Roberto’s works is that you pay $20 to enter, and can then have as many slices
of pizza as you like at $2 each. How many slices of pizza will you have at Roberto’s
tomorrow night?
A. 5.
B. 4.
C. 3.
D. 2.
E. None of the above.

29. [3 Marks] Francesca (a.k.a. player 1, the row player) and Melissa (a.k.a. player 2, the
column player) play the game depicted in the following payoff matrix once.

Melissa

L R

T 10,6 10,5
Francesca
B 6,5 12,4
Which player or players have a dominant strategy?
A. Both players have a dominant strategy.
B. Only Francesca has a dominant strategy.
C. Only Melissa has a dominant strategy.
D. Neither player has a dominant strategy.
E. Uncertain.

30. [3 Marks] Assume quantities must be integers. Alpha and Beta are duopolists. The
market demand schedule is given in the following table. Alpha and Beta are planning
on colluding by producing 2 units each. What is Beta’s marginal revenue from breaking
the collusive arrangement by producing 1 more unit?
Q 1 2 3 4 5 6 7
P $24 $20 $18 $16 $14 $12 $10
A. $14.
B. $10.
C. $6.
D. $2.
E. None of the above.

20190610 Summer 2019 9 Exam

University of Toronto ECO101: Principles of Microeconomics
Department of Economics Robert Gazzale, PhD

Ton 1 2 3 4 5
Firm A: Marginal Cost of Reducing $1 $4 $6 $8 $10
Firm B: Marginal Cost of Reducing $7 $9 $11 $13 $16

Table 2: For two firms, the marginal cost of reducing each ton of pollution currently emitted.

31. [3 Marks] Refer to Table 2. Assume quantities must be integers. Each of two firms is
currently emitting 5 tons of pollution. If we want reduce total pollution to 6 tons as
efficiently as possible, how many tons will Firm A emit?
A. 1
B. 2
C. 3
D. 4
E. 5

32. [3 Marks] Refer to Table 2. Assume quantities must be integers. Each of two firms
is currently emitting 5 tons of pollution. The Government implements cap-and-trade,
giving 5 pollution permits to Firm A and 0 pollution permits to Firm B. How many tons
of pollution will Firm A emit?
A. 5
B. 4
C. 3
D. 2
E. 1

33. [3 Marks] Quantities do not need to be integers. In a perfectly competitive market,

demand is given by M W T P (Q) = 100 Q, while supply is given by M C = 20 + Q. The
production of each item causes a $10 external cost. What is the deadweight loss caused
by a per-unit tax of $10?
A. $0.
B. $25
C. $50.
D. $100.
E. None of the above.

20190610 Summer 2019 10 Exam