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Assignment 1 Answer Key
Commerce 295: Sections 101106
FRE 295: Sections 001 and 002
Fall 2009
Section I: 40 True/False Questions (0.5 points each; 20 points total)
1.
Answer the following questions about elasticity.
True False
a)
Gasoline and automobiles are likely to have a negative cross price elasticity of demand.
T
b)
If Dan’s demand for artichokes rises by 15% when his income rises from $50,000 to
$55,000 (holding price constant), then artichokes are a normal good for Dan over this
income range.
T
c)
If the demand schedule for popsicles is linear, then demand is more inelastic the
higher
the price per popsicle.
F
d)
If the supply schedule for popsicles passes through the origin of a graph, then the price
elasticity of supply does not depend on the slope of the supply schedule.
T
2.
British Columbia is set to replace its provincial sales tax (PST) with a new system that is
harmonized with the goods and services tax (GST). The new harmonized sales tax (HST)
has the property that producers will not have to pay sales tax on the inputs they purchase.
This reduces costs for producers. Use the supplydemand model to help you consider
whether the following statements are true or false.
True False
a)
In an industry with perfectly inelastic demand and upward sloping supply we would
expect full “pass through” in that consumer prices would fall by an amount equal to the
per unit tax saving.
T
b)
If demand
is downward sloping, marginal cost is upward sloping, and marginal cost falls
by $10 per unit for every producer, consumer prices will fall by more than $10.
F
c)
If supply is perfectly elastic there would be no pass through of the tax saving.
F
d)
The share of the tax saving that is passed through to consumers would vary from industry
to industry depending on the shapes of the supply and demand curves.
T
3.
Ben buys nuts and oats for use in his homemade granola. He always buys 1 lb of nuts for
each 2 lb of oats that he purchases.
True False
a)
Ben’s indifference curves for nuts and oats are linear.
F
b)
Ben’s marginal rate of substitution of nuts for oats is ½.
F
c)
If the price of nuts and oats both double, neither the slope nor the position of the budget
constraint will be affected.
F
d)
In this particular example, the formula MRS = MRT does not provide a formula that can
be used to solve for the quantities of nuts and oats.
T
1
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A large Canadian firm asks some executives to move from Vancouver to Montreal, where
housing is much cheaper but outdoor recreation is much more expensive and
inconvenient. Assume that these executives have standard smooth convex downward
sloping indifference curves. Ignore other goods for the purposes of this question
True False
a)
If salaries are unchanged, executives who move to Montreal will purchase more housing
and less outdoor recreation than they did in Vancouver.
T
b)
If the move is optional, we can assume that executives who choose to move to Montreal
definitely do not need a salary increase because, for them, the higher cost of recreation
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 Spring '09
 BRIANOGRAM

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