Econ 312 Section A01 Page 1 of 19 UNIVERSITY OF VICTORIA FINAL EXAM DECEMBER 2011 NAME: STUDENT NUMBER: V00 Course Name & No.: Econ 312 Section(s): A01 CRN: 13949 Instructor: Farnham Duration: 2 hours This exam has a total of _19__ pages including this cover page and _0__ separate handout(s). Students must count the number of pages and report any discrepancy immediately to the Invigilator. This exam is to be answered: _X_ On the paper __ In Booklets provided _X_ NCS Answer Sheets Marking Scheme: The exam is worth 100 points. Materials Allowed: non-programmable calculator Econ 312 Section A01 Page 2 of 19 Assumptions: Throughout the exam, assumeunless otherwise notedthat markets are competitive and agents are rational. Section 1: Multiple ChoiceEach multiple choice question is worth 2 points. Select the most appropriate answer, and fill in the matching letter on your NCS bubble form. Questions 1-4 refer to the following diagram of a perfectly competitive market. No externality is present. Econ 312 Section A01 Page 3 of 19 1) What is consumer expenditure in equilibrium in the above market? A) $4 B) $800 C) $1,600 D) $3,200 E) None of the above 2) What is consumer surplus in equilibrium in the above market? A) $1,600 B) $3,200 C) $4,800 D) $6,400 E) None of the above 3) What is total variable cost in equilibrium in the above market? A) $1,600 B) $3,200 C) $4,800 D) $6,400 E) None of the above 4) Suppose that the quantity Q=1200 is produced and consumed. What is total social welfare (aggregate net benefits) in this situation? A) $2,400 B) $4,000 C) $5,000 D) $7,200 E) None of the above 5) Which of the statements about policy to restrict residential building permits in the Capital Regional District (CRD) is FALSE? A) Limiting permits would slow population growth within the CRD. B) Limiting permits would benefit owners of undeveloped land within the CRD. C) Limiting permits would benefit current homeowners within the CRD. D) Limiting permits could hurt renters within the CRD. E) Limiting permits would increase housing prices within the CRD. Econ 312 Section A01 Page 4 of 19 6) Which of the following statements about local property tax finance of local public goods is TRUE? I. Local property tax finance gives the poor an incentive to live near the rich. II. Local property tax finance gives the rich an incentive to locate away from the poor. III. Local property tax finance combined with exclusionary zoning leads to less income segregation. A) I only. B) II only. C) III only. D) I and II only. E) I, II and III. Questions 7-8 refer to the following setup and diagram. Consider a region with 2 cities. Everyone lives in City A or in City B and people can migrate between the two cities. Utility per worker curves are given for each city below. In the diagram below we see the region in initial equilibrium. Econ 312 Section A01 Page 5 of 19 7) Consider a change in policy in City B that improves social welfare for residents of City B instantaneously (at all levels of population). Assume that the utility per worker curve of City B remains below that of City A. Which of the following will occur as a result of the policy change in City B? I. People will migrate from City A to City B. II. City B's population will shrink. III. City A's population will shrink. A) I only. B) II only. C) III only. D) I and III only. E) I, II and III. 8) Which of the following will occur as a result of the policy change in City B? I. Utility in City B will be higher in the new equilibrium than in the old equilibrium. II. Utility in City A will be higher in the new equilibrium than in the old equilibrium. III. The utility per worker curve in City A will shift down. A) I only B) II only. C) I and II only. D) I and III only. E) I, II and III. 9) Consider the monocentric city as modelled in class. Assume the city implements a gas tax. Revenues from the tax are redistributed lump-sum to residents. Also assume that consumer and factor substitution occur when rents increase. Which of the following statements about the effect of this gas tax is TRUE? I. Willingness to pay for land by residential users will increase near the employment district. II. Willingness to pay for land by residential users will decrease far from the employment district. III. Residential density will increase near the employment district. A) I only. B) II only. C) III only. D) I and II only. E) I, II, and III. Econ 312 Section A01 Page 6 of 19 10) In the monocentric city as modelled in class, the housing price function is decreasing in distance from the employment district because A) commuting is costly. B) residential users have a preference for downtown amenities. C) residential users prefer to live in the suburbs. D) residential users engage in consumer substitution. E) developers engage in factor substitution. 11) In the monocentric city as modelled in class, convexity in the housing price function occurs because A) commuting is costly. B) residential users have a preference for downtown amenities. C) residential users prefer to live in the suburbs. D) residential users engage in consumer substitution. E) developers engage in factor substitution. 12) In the monocentric city as modelled in class, convexity in the office firm bid-rent occurs because: A) traveling to meetings is costly. B) office workers have a preference for downtown amenities. C) office workers prefer to locate in the suburbs. D) office firms have to pay workers a higher wage to work downtown than to work in the suburbs. E) office firms engage in factor substitution. 13) One of the additional readings, the Times Colonist Op-Ed article entitled \"Toll Makes Sense for Malahat,\" argues that, compared with expanding the Malahat, I. a toll on the Malahat would save BC taxpayers money. II. a toll on the Malahat would reduce traffic congestion in Victoria. III. a toll on the Malahat would benefit people who live in Victoria. A) I only. B) II only. C) III only. D) I and II only. E) I, II and III. Econ 312 Section A01 Page 7 of 19 14) One of the additional readings, the Times Colonist Op-Ed article entitled \"Limiting growth would be a good thing\" argues I. There are costs of growth. II. There are benefits of growth. III. A public discussion of local growth policy would be useful. A) I only. B) II only. C) III only. D) I and III only. E) I, II and III. 15) All of the following could contribute to Europe having less urban sprawl than Canada, EXCEPT A) Higher gas prices in Europe than in Canada. B) Higher housing subsidies in Europe than Canada C) Higher agricultural subsidies in Europe than Canada. D) Higher energy costs in Europe than Canada. E) Public transit in Europe that is more focused on the urban core than that in Canada. 16) In order for an early trading city to form, which of the following would have been necessary? I. The existence of gains from trade II. The existence of economies of scale in exchange III. The existence of economies of scale in production A) I only. B) I and II only. C) I, II, and III. D) I and III only. E) II and III only. Econ 312 Section A01 Page 8 of 19 17) Suppose the City of Victoria taxes each rental unit $400 each year and burns the revenues in a large bonfire (assume no one gets any benefit from the bonfire). The annual interest rate is fixed at 5%. Assuming all properties in Victoria have one residential rental unit on them and that the supply of rental units is fixed, how much will these properties decline in value as a result of this wasteful policy? A) $2000 B) $8000 C) $12,000 D) $24,000 E) $48,000 18) BC's Agricultural Land Reserve has limited suburban sprawl by doing which of the following? I. Increasing the value of agricultural land. II. Restricting conversion of agricultural land to other uses. III. Implementing a system of tradable development permits. A) I only. B) II only. C) III only. D) I and III only. E) I, II and III. 19) Assume that a rich community finances expenditures with a property tax. If developers find it profitable to provide apartments in this rich community that are appealing to poor people and use very little land, this could lead to I. the poor outbidding the rich for some land in the neighbourhood. II. the rich trying to enact exclusionary zoning. III. an increase in property tax rates in the community. A) I only. B) II only. C) III only. D) I and II only. E) I, II, and III. Econ 312 Section A01 Page 9 of 19 20) Which of the following statements about road tolls is FALSE? A) A road toll can benefit non-drivers. B) A road toll imposes costs on drivers. C) A road toll is likely to benefit drivers who value their time a lot. D) A road toll is likely to benefit low-wage drivers. E) None of the above. 21) Suppose a local government increases property taxes in order to improve the local schools. Which of the following statements about this policy is FALSE? A) This could increase property values in the community. B) This could decrease property values in the community. C) This would be likely to lead to elderly people migrating into the community. D) The overall effect of the policy change would likely be capitalized into land values. E) None of the above. 22) Highway 14 (also known as Sooke Road) runs from Langford out to Port Renfrew. It is subject to congestion as people commute from Sooke towards Victoria and back each day. One policy approach to addressing this congestion is to widen Highway 14. Which of the following is likely to occur if Highway 14 is widened? I. More development will occur in the Sooke area. II. Congestion will be reduced in the long-run. III. The value of undeveloped land in Sooke will rise. A) I only B) II only C) III only D) I and III only E) I, II and III 23) Which of the following policies is the BEST for addressing traffic congestion? A) subsidized transit B) optimal road tolls C) a gas tax D) increased parking fees near jobs. E) the introduction of high occupancy vehicle lanes. Econ 312 Section A01 Page 10 of 19 24) Which of the following is NOT typically associated with a municipality implementing an urban growth boundary (as a policy for combating suburban sprawl)? A) Housing costs rise within the growth boundary. B) Growth will occur outside the boundary in areas where the municipality does not have jurisdiction. C) Owners of undeveloped land outside (but near) the boundary will see their property values fall. D) Owners of undeveloped land within (but near) the boundary will see their property values fall. E) None of the above. 25) Rent-control is likely to lead to all of the following EXCEPT: A) An increase in rental supply in the short run B) A reduction in rental supply in the long run C) Excess demand for rental units D) Reduced maintenance of rental units by landlords E) Waitlists for rental units. 26) According to Glaeser, cities like Vancouver and London are A) education cities. B) manufacturing cities. C) consumer cities. D) in decline. E) none of the above. 27) According to Glaeser, low real wages in a city suggest that A) the city should do more historic preservation B) workers have high education C) workers are underpaid D) the city is an undesirable place to live E) none of the above. Econ 312 Section A01 Page 11 of 19 28) According to Glaeser, cities are more environmentally responsible than leafy suburbs because I. energy use per person is lower in cities II. land use per person is lower in cities III. car use per person is lower in cities A) I only B) II only C) III only D) II and III only E) I, II, and III End Section 1 Answer the remaining questions clearly and concisely on your exam paper. Section 2: Short answers 2) 8 points total Consider the following neighbourhood sorting diagram: The diagram shows rent premium curves for rich people and for poor people considering renting in neighbourhood A. The city is assumed to have two identical neighbourhoods of equal size (1000 housing units per neighbourhood) and an equal number of rich and poor residents (1000 of each). All housing units are identical. The question we're interested in is how the rich and poor sort across neighbourhoods, and whether they integrate or segregate. Econ 312 Section A01 Page 12 of 19 a) 4 points In the diagram above, clearly label any stable equilibrium \"s\" and label any unstable equilibrium \"u\". b) 4 points In the diagram below the rent premium curves have been reversed from what they were above. Clearly label all equilibria (s for stable, u for unstable). 3) 15 points total Suppose that workers travel from a suburb to a city along a highway. No alternative route is available. The diagram below gives the marginal cost and marginal benefit curves associated with travel along this road. A congestion externality is present. Q denotes the number of trips taken on the highway. Econ 312 Section A01 Page 13 of 19 Answer the following questions about this market for trips on the highway. a) 3 points Write down the equilibrium number of off-peak trips and the equilibrium number of peak trips. b) 3 points Write down the efficient number of off-peak trips and the efficient number of peak trips. Econ 312 Section A01 Page 14 of 19 c) 3 points Illustrate the optimal off-peak toll on the diagram above (you don't need to provide a number). Also illustrate the optimal peak toll (clearly label which is which in the diagram). d) 3 points Shade in and clearly label the area representing deadweight loss in the untolled peak- demand equilibrium; also shade in and label the area representing deadweight loss in the untolled off-peak-demand equilibrium. e) 3 points Shade in and clearly label the area representing the toll revenues collected from off- peak tolling. 4) 8 points total Consider the market area diagram from early in the course. In this model we consider factory production versus home production of some commodity like textiles (e.g. shirts). Home production occurs at high production cost per unit, but transportation costs are zero for home producers. Factory production occurs at low cost per unit, but transportation costs are increasing in distance. An example of the model is illustrated in the diagram below. Econ 312 Section A01 Page 15 of 19 a) 4 points In the 1880s the Canadian Pacific Railway finally connected Toronto to western markets as far out as British Columbia. Use the market area model to illustrate how this would have affected a factory in Toronto that built logging equipment. Assume the building of the railroad only affects transport costs. Use the diagram above to clearly illustrate the resulting change in market area. Econ 312 Section A01 Page 16 of 19 b) 4 points In the 1880s, the industrial revolution was in full swing. During this period of time, new manufacturing processes were introduced that lowered unit production costs. Assume that these new processes had no effect on the cost of home production or on transport costs. Clearly illustrate the effect of these technological changes on market area of a Toronto factory in the diagram above. Econ 312 Section A01 Page 17 of 19 5) 13 points total The diagram below illustrates the market for subway transit in a major city. Demand for rides is given, as are marginal revenue, long-run marginal cost and long-run average cost curves for the transit provider. Assume transit is provided by a private firm that is a monopolist. Assume the monopolist cannot price discriminate (it sets 1 price for all subway tickets) a) 4 points In the above diagram, label the equilibrium number of rides (Qeq) that the profit- maximizing, unregulated monopolist would provide. What is the equilibrium price it would charge per ride? b) 2 points Clearly label (Qeff) the efficient number of rides. c) 2 points How much would consumers need to be charged per ride to induce them to purchase the efficient number of rides? Econ 312 Section A01 Page 18 of 19 d) 2 points What would the monopolist's profit margin be on a ride if they produced the efficient quantity, assuming they receive no subsidy from the city? e) 3 points Suppose the city has the authority to regulate the monopoly subway ride provider. Now suppose that the city requires the monopolist to produce the efficient quantity and offers a top-up subsidy per ride to keep the monopolist from closing down. What is the minimum per ride subsidy the city would have to offer, in order to induce the monopolist to stay in business? End Econ 312 Section A01 Page 19 of 19 THIS PAGE INTENTIONALLY LEFT BLANK FOR SCRATCH WORK