test1_solns

# test1_solns - Department of Economics University of Toronto...

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Page 1 of 15 Department of Economics Prof. Gustavo Indart University of Toronto June 14, 2007 ECO 100Y INTRODUCTION TO ECONOMICS Midterm Test # 1 LAST NAME FIRST NAME STUDENT NUMBER SECTION (“Morning” or “Evening”): INSTRUCTIONS : 1. The total time for this test is 1 hour and 50 minutes. 2. This exam consists of three parts. 4. Aids allowed: a simple calculator. 5. Write with pen instead of pencil. DO NOT WRITE IN THIS SPACE Part I 1. /5 2. /5 3. /5 4. /5 5. /5 6. /5 Part II 1. /6 2. /8 3. /16 Part III /20 TOTAL /80 A SOLUTION

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Page 2 of 15 PART I (30 marks) Instructions : Indicate your position regarding the following statements and explain your answers in the space provided (if space is not sufficient, continue on the back of the previous page). Each question is worth 5 (five) marks. 1. Mohammed has waited in line to buy tickets for a long time, but is not sure if he wants to wait much longer. Statement: Jacob, Mohammed’s friend, advises Mohammed that since leaving will result in his wasting the time already spent (“you have already waited for so long”), he should not leave. Position: Do you agree with Jacob’s advice? Indicate, with reasons, whether you agree or disagree with Jacob’s view. No, I disagree with Jacob’s advice. The concept of “opportunity cost” is relevant in addressing this question. The fact that Mohammed has been waiting in line for so long is not a sufficient (“rational”) reason for continuing waiting in line. Instead, Mohammed should consider how long he expects he will still have to wait in line to get the tickets and the opportunity cost of doing so. If he considers that the opportunity cost of staying in line (e.g., missing his ECO100 class!) is greater than the satisfaction he will get by getting the tickets and attending the event, then he should leave. Otherwise he should continue waiting in line – but not because he has already waited for too long but because the opportunity cost of continuing waiting is relatively low for him.
Page 3 of 15 2. When the price of apples is \$0.75 a piece, Yvonne doesn’t buy any. However, when the price of apples drops to \$0.50 a piece she eats one apple a day, and when it drops to \$0.40 a piece she eats two apples a day. Statement: Natalia, an ECO100 student, concludes that Yvonne’s consumer surplus is \$0.45 when the price of apples is \$0.40 a piece. Position: Do you agree with Natalia’s conclusion? Indicate, with reasons, whether you agree or disagree with Natalia’s view. [Note: Assume that Yvonne does not partially eat an apple, i.e., she only eats two whole apples, one whole apple, or none at all.] No, I disagree with Natalia’s conclusion. When the price is \$0.75 Yvonne doesn’t buy any apples. This means that the maximum price she is willing to pay for the first apple is less than \$0.75. However, when the price of apples drops to \$0.50 a piece she buys one apple a day. This

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## This note was uploaded on 06/09/2010 for the course ECO ECO100 taught by Professor Inheart during the Spring '09 term at University of Toronto.

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test1_solns - Department of Economics University of Toronto...

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