This exam has three sections. The possible marks for each section are indicated at the beginning of each section. You have 50 minutes to write the exam and there are 50 possible marks in total – please use your time accordingly.

Part I :The purpose of this section is to test your knowledge of the terminology we have covered in class. In each part below you are given two terms. Use the space provided to__draw a diagram__ that illustrates the difference in meaning between the two terms. Make sure your diagram is properly labeled. No written definition is required.[5 MARKS EACH FOR A TOTAL OF 15 MARKS IN THIS SECTION]

- Perfect complements/Perfect substitutes.

- Increasing marginal returns / Decreasing marginal returns

- c) Economic loss / Economic profit

Part II: Indicate if the following statements are true (T) or False (F) and explain your answer. No illustrations are required you may to use them if you feel they help. [5 MARKS EACH FOR A TOTAL OF 15 MARKS IN THIS SECTION]

- In perfectly competitive market, a firm can maximize its profits by choosing to produce any level of output at which the marginal cost is less than the market price of the good.

T F

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- In January 2012 Sameer quit his job, which paid him $80,000 a year, and opened his own business. He spent$10,000 on equipment and withdrew $2,000 from his bank account that pays 2% interest per year in order to finance the business. If economic depreciation is $2,000 and normal profits are $15,000, Sameer’s revenue in 2012 must at least $19,040 for him to make positive economic profit.

T F

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- In response to a change in the relative price of a good, it is possible for both the substitution effect to be positive and the income effect to be negative.

T F

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PART III: Answer the following two questions in the space provided. Marks are distributed as given in the question.Marks will only be given when all work is shown. Please be certain to label your diagrams carefully. [11 MARKS EACH FOR A TOTAL OF 22 FOR THIS SECTION]

Please note that when this question was given on the actual exam, students had a version with multiple indifference curves drawn on the graph.

- Estelle enjoys both cross-country skiing and snowshoeing. A day of cross-country skiing costs 0 while a day of snowshoeing costs $80. This winter she has decided to budget $1200 for winter activities.

- Derive Estelle’s budget line and plot it on the graph on the following page. Please label the number of ski and snow mobile days Estelle will choose to consume given her preferences.

- Suppose that the cross-country ski packages are offered at a special price of $80 per day. Derive her new budget line below and then draw iton the graph above. Be certain to label her new number of ski and snowmobile days.

- Of the total increase in cross-country ski days how much is due to the substitution effect? Please label this on your graph.

- Of the total increase in cross-country ski days how much is due to the income effect? Please label this on your graph.

- Please use the table below to answer this question.

Q
units |
TC
($) |
TVC
($) |
ATC
($) |
AVC
($) |
MC
($) |

0 | 12 | 0 | — | — | |

1 | 24 | ||||

2 | 32 | ||||

3 | 42 | ||||

4 | 60 |

- Complete the table for total variable cost (TVC), average total cost (ATC), average variable cost (AVC) and marginal cost (MC) for each level of output.

- Plot average total cost (ATC), average variable cost (AVC) and marginal cost (MC) on the graph below remembering to label your axis.

- Assuming that this firm operates on a perfectly competitive market, pleasedraw the firm’s marginal revenue (MR) curve when market price is $18 on your graph. What is the level of output at that price?

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