c295_assign1_2009_sol

c295_assign1_2009_sol - Assignment 1 Answer Key Commerce...

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Assignment 1 Answer Key Commerce 295: Sections 101-106 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 supply-demand 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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4. 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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c295_assign1_2009_sol - Assignment 1 Answer Key Commerce...

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