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test1_solns

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

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Page 1 of 9 Department of Economics Prof. Gustavo Indart University of Toronto October 26, 2007 ECO 100Y – L0201 INTRODUCTION TO ECONOMICS Midterm Test #1 LAST NAME FIRST NAME STUDENT NUMBER INSTRUCTIONS : 1. The total time for this test is 50 minutes. 2. This question booklet has 9 (nine) pages. 3. Answer all questions in the space provided. 4. Aids allowed: a simple, non-programmable calculator only. 5. Use pen instead of pencil . DO NOT WRITE IN THIS SPACE Part I 1. /12 4. /12 2. /12 5. /12 3. /12 Part II /20 TOTAL /80 SOLUTIONS

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Page 2 of 9 PART I (60 marks) Question 1 (12 marks) The table below represents the supply and demand for Mexican papaya in thousands of pounds. [Note: Use the space provided in this table to work your answers to parts b) to d).] Price (\$/pound) Quantity Supplied Quantity Demanded S 0 S 1 S 2 D 0 D 1 0 0 0 4 20 30 10 6 4 8 16 24 20 12 8 12 12 18 30 18 12 16 8 12 40 24 16 20 4 6 50 30 20 24 0 0 a) Graph both the supply (S 0 ) and demand (D 0 ) curves in the diagram below. What is the current equilibrium price? Label that point A. (2 marks) Equilibrium price = 20 20 \$ Q 40 20 D 0 D 1 S 1 S 2 S 0 A B C D 25 30 10 14.4 26 12
Page 3 of 9 b) Assume that Mexico is hit by a hurricane, and the supply of papaya is reduced by one- third. Draw the new supply curve (S 1 ). What will be the new equilibrium price in the market? Label that point B. (3 marks) Equilibrium price = 25 At each price level the quantity supplied is one-third less than before. c) Now assume that President’s Choice introduces a new papaya drink, and this increases the demand for Mexican papaya by 50%. Draw the new demand curve (D 1 ). What will be the new equilibrium price keeping in mind that the supply curve is S 1 ? Label this new equilibrium point C. (3 marks) Equilibrium price = 30 At each price level the quantity demanded is one-half more than before. d) The government of Mexico wants to increase the country’s production of papaya and to that end introduces a unit-subsidy paid to producers of \$10 per pound. Draw the new supply curve (S 2 ). What will be the new equilibrium price keeping in mind that the demand curve is D 1 ? Label this new equilibrium point D. (4 marks) Equilibrium price = 26 Papaya producers now require a minimum price \$10 lower than before to produce any particular unit of output. Therefore, the supply curve shifts down by exactly \$10 at each level of output.

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Page 4 of 9 Question 2 (12 marks) a) In the past, rental car companies used to charge more for an SUV or a luxury car than for a compact car. However, in 2006 rental car companies often charged more to rent a compact car than an SUV or a luxury vehicle. Why do you think rental companies changed their normal pricing structure? Briefly explain . (6 marks) The price of gasoline increased significantly in 2006 and thus drivers preferred to drive more gas efficient compact cars rather than gas inefficient SUVs and luxury cars. The increase in the demand for compact cars resulted in an increase in its rental price, while the decrease in the demand for SUVs and luxury cars resulted in a drop in its rental price.
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test1_solns - Department of Economics University of Toronto...

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