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Eco100PesandoSolvedTest1s

Eco100PesandoSolvedTest1s - Page 1 of 7 Professor James E...

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Unformatted text preview: Page 1 of 7 Professor James E. Pesando Student Name: Student Number: Economics 100 Mid—Term Test: October 29, 2004 Students Must Answer All Questions in the Space Provided. No Aids Allowed. (8 points) 1. You purchase a broken lawnmower for $300, knowing that you can sell the lawnmower for $800 after it is repaired. You thought that the cost of the repairs would be $400, but discover that the cost will be $600. (a) If you cannot resell the broken lawnmower, should you pay for the repairs? Why or why not? (b) If you could sell the broken lawnmower for the price you paid for it, would your answer change? Page 2 of 7 (12 points) 2. The demand curve for widgets is as follows: Price Quantity Demanded 8 10 7 14 6 1 8 5 22 4 26 The firms in the widget industry are willing to sell an unlimited quantity of widgets for $5 per widget. (a) Draw the demand and supply diagrams for the market. What is the equilibrium price of widgets? (b) The government decides to impose an excise tax of $2 on each widget, to be paid by sellers. (i) Show the new equilibrium price in your diagram. (ii) Show what happens to consumer surplus in the same diagram. Does consumer surplus rise or fall? (15 points) 3. Page 3 of 7 There are three sculptures by a famous artist to be sold at whatever price the market determines. The willingness to pay for one sculpture by each of five potential buyers is as follows: Bu er Willingness to Pay $1,000 A B $800 C $600 D $400 E $200 (a) Write down the market demand and supply curves for this artist’s sculptures (i.e., indicate how quantity demanded and quantity supplied will vary with price). What is the equilibrium price? (b) At the equilibrium price, what is the total of consumer surplus? (c) At the equilibrium price, what is the total of producer surplus? (3 0 points) 4. Page 4 of 7 A worker in Argentina can make 2 saddles or 10 bridles per month, while a worker in Brazil can make 3 saddles or 20 bridles per month. (a) Draw the Production Possibility Frontier for the worker in Argentina. (b) What is the opportunity cost of producing one saddle in Argentina? In Brazil? (c) If trade occurs, which good will Argentina export? Which good will Argentina import? Why? (d) If trade is mutually beneficial, could a worker in Argentina consume 14 bridles per month? Explain your answer (Marks awarded only if explanation is correct) (6) Would your answer to (c) change if a worker in Brazil could make 4 saddles per month? Explain your answer. (35 points) 5. (a) (b) (C) (d) Page 5 of 7 Multiple Choice Suppose that the number of buyers in a market increases and there is technological advancement. What would we expect to happen in the market? (A) The equilibrium price would increase, but the impact on the amount sold in the market would be ambiguous. (B) The equilibrium price would decrease, but the impact on the amount sold in the market would be ambiguous. (C) Both equilibrium price and equilibrium quantity would increase. (D) Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous. (E) Equilibrium quantity would decrease, but the impact on equilibrium price would be ambiguous. The demand curve for widgets is linear (straight-line). When price is 30, quantity demanded is zero. When price is zero, quantity demanded is 10. If price is equal to 15, then: (A) demand is elastic (B) demand is unit elastic (C) demand is inelastic (D) quantity demanded is 6 (E) none of the above Which of the following would cause both the equilibrium price and equilibrium quantity of bananas to decrease? (A) a higher price for apples (a substitute) (B) a lower price for apples (C) an increase in consumer income, assuming bananas are an inferior good (D) a lower price for milk (a complement) (E) more than one of the above are correct The discovery of a new, more productive hybrid wheat would tend to increase the supply of wheat. Under what conditions would wheat farmers realize an increase in total revenue? (A) if the supply of wheat is elastic (B) if the supply of wheat is inelastic (C) if the demand for wheat is inelastic (D) if the demand for wheat is elastic (E) none of these are correct (e) (0 (g) (h) Page 6 of 7 Suppose there are only three things you can do rather than attend a community social event: read a novel (you value this at $5), go to work (you could earn an extra $7), or watch videos with some friends (you value this at $10). The opportunity cost of attending the community social event is (A) $10 (B) $5 (C) $7 (D) $22 (E) Not enough information to determine An individual who is optimizing is consuming 2 slices of pizza and one cup of coffee. The price of a slice of pizza is $2, and the price of a cup of coffee is $3. Which statement is true? (A) The marginal utility of a slice of pizza is greater than the marginal utility of a cup of coffee (B) The marginal utility of a slice of pizza is negative (C) The marginal utility of the second cup of coffee is zero (D) The marginal utility of a cup of coffee is twice the marginal utility of a slice of pizza (E) None of the above Assume that a 4 percent increase in income results in a 2 percent increase in the quantity demanded of a good. The income elasticity of demand for the good is (A) negative and therefore the good is an inferior good (B) negative and therefore the good is a normal good (C) positive and therefore the good is an inferior good (D) positive and therefore the good is a normal good (E) none of the above Carla says that she would buy one banana split sundae a day regardless of the price. If she is telling the truth, (A) Carla’s price elasticity of demand for banana splits is zero (B) Carla’s price elasticity of demand for banana splits is l (C) Carla’s income elasticity of demand for banana splits is negative (D) Carla’s income elasticity of demand for banana splits is positive (E) None of the above answers are correct (i) Page 7 of 7 Suppose the market supply curve for some good is upward sloping. If the imposition of a sales tax causes no change in the equilibrium quantity sold in the market, the good’s demand curve must be , meaning that the burden of the tax has fallen completely on the (A) vertical, firms (B) vertical, consumers (C) horizontal, firms (D) horizontal, consumers (E) not enough information to answer this question The government imposes a price ceiling for a product, and the price ceiling is below the equilibrium price. A black market subsequently develops that gains control of all of the supply of the product. All of the following will be true EXCEPT: (A) The black market price will be higher than the ceiling price. (B) Excess profits will go to the black marketers. (C) Quantity demanded will exceed quantity supplied at the black market price. (D) The black market price will be higher than the equilibrium price. (E) Consumer surplus will be less than if there were no price ceiling. EC0100 Midterm Test #1 Answers (October 29, 2004): 1. (a) (b) (b) (b) (C) (b) bridles. (C) (d) (6) You should pay for the repairs. The $300 is a sunk cost. The marginal cost of the repairs ($600) is less than the marginal benefit ($800). If you could sell the lawnmower for $3 00, you should not pay for the repairs. In this case, your loss is nil. If you paid for the repairs, your loss would be $100. The supply curve is perfectly elastic at $5 per widget. The equilibrium price is $5. (i) The supply curve shifts up by $2 and is still flat at $7. The new equilibrium price is $7. (ii) Consumer surplus decreases. Price Demand Supply 1,000 1 3 800 2 3 600 3 3 400 4 3 200 5 3 The equilibrium price is $600. The total of consumer surplus is $600, which is the surplus of Buyer A (400) plus the surplus of Buyer B (200). The total of producer surplus is $1,800 (Since the supply curve is perfectly inelastic, all of the revenue from the sale represents producer surplus.) Straight line PPF, intersecting left axis (saddles) at 2 and the bottom axis (bridles) at 10. Argentina: Brazil: opportunity cost of producing one saddle is 5 bridles. opportunity cost of producing one saddle is 6.67 (=20/3) Argentina will export saddles since Argentina has a comparative advantage in producing saddles. Argentina will import bridles, since Brazil has a comparative advantage in producing bridles. No. The trade line must be between 5 bridles for one saddle and 6.67 bridles for one saddle. Even if the trade ratio were (almost) 6.67 bridles, the worker in Argentina who would (after specialization) produce 2 saddles per month could consume no more than 2 times (almost) 6.67 which is 13.34 bridles. The opportunity cost of producing one saddle (or of producing one bridle) would be the same in both countries, and there would be no gains from trade. (b) (C) (d) (6) (f) (g) (h) (i) (i) D Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous. The increase in the number of buyers shifts the demand curve to the right and the technological advancement shifts the supply curve to the right. Equilibrium Q will increase for sure, but P might increase, stay the same or decrease. B Demand is unit elastic. On a straight-line demand curve, the middle point (i.e. when P=$15) always has unit elasticity. E More than one of the above Both (B) and (C) lead to a decrease in demand, hence a decrease in equilibrium price and quantity. D If the demand for wheat is elastic When the supply increases, assuming a downward-sloping demand curve, P decreases while Q increases. The only way for the total revenue to increase is if the demand curve is elastic (i.e. % increase in Q is greater than the % decrease in P). A $10 The opportunity cost of attending the social event is the value of the next best alternative. E None of the above Optimization requires MUpizza/Ppizza = MUcoffee/Pcoffee. This implies that 3*MUpjzza:2*MUcoffee. All statements other than (C) are incorrect, and we don’t have any information about the MU of the second cup of coffee, so we cannot conclude that it is correct. D Positive and therefore the good is a normal good The income elasticity of the good is V2 (or 0.5) which is positive. A Carla’s price elasticity of demand for banana splits is zero Carla’s demand is vertical at Q=l, which has an elasticity of 0. B Vertical, consumers When the supply is upward-sloping, a sales tax will shift the supply curve up by the tax amount. If the demand is vertical, the equilibrium Q will not change and the price paid by consumers will increase by the tax amount. C Quantity demanded will exceed quantity supplied at the black market price. Page 1 of 6 Professor James E. Pesando Last Name: First Name: Student Number: Economics 100 Mid-Term Test: October 28, 2005 Length: 55 minutes Students Must Answer All Questions in the Space Provided. 1. (13 points) (a) (b) (c) Non-Programmable Calculators (only) Allowed. in London, during World War II, the weekly demand and supply curves for a carton of eggs are as follows: Quantity Quantity Price Demanded Supplied $ 4 10,000 1 ,000 6 8,000 2,000 8 6,000 3,000 10 4,000 4,000 12 2,000 5,000 What is the equilibrium price and quantity of a carton of eggs? To protect consumers, the government imposes a price ceiling of $6 on each carton of eggs. What is the new quantity demanded? The new quantity supplied? is there a surplus or a shortage of eggs? Illustrate your answer with a diagram. if those consumers who were able to buy eggs at the price ceiling of $6 per carton were to resell the eggs in an illegal or “black market,” what price would they obtain? Show this price in your previous diagram. 2. (15 points) (a) (b) 3. (15 points) (a) (b) Page 2 of 6 To raise revenues, the government imposes a $5 tax on a carton of cigarettes, to be paid by sellers. The supply curve for cigarettes has the usual positive slope. Assuming that the demand curve for cigarettes is downward sloping, show the new market price, the price received by sellers, the price paid by buyers, and the quantity of cigarettes bought and sold in the marketplace. Assume, instead, that the demand for cigarettes is perfectly inelastic at 10,000 cartons per month. What will be the change in the market price of a carton of cigarettes and in the quantity of cigarettes bought and sold? How much revenue will the tax raise each month? Illustrate your answers with an appropriate diagram. In one week, a worker in Canada can produce 30 cars or 50 bushels of wheat. In one week, a worker in Argentina can produce 20 cars or 15 bushels of wheat. Which country has a comparative advantage in the production of cars? Why? Which good will Canada export, if trade occurs? If the trade ratio were two bushels of wheat for one car, would Canada wish to trade? Would Argentina wish to trade? Would trade take place? Explain. 4. (6 points) 5. (7 points) 6. (6 points) (a) (b) Page 3 of 6 You won a free ticket to see an Eric Clapton concert (which has no resale value). Bob Dylan is performing on the same night and is your next-best alternative activity. Tickets to see Dylan cost $40. On any given day, you would be willing to pay up to $50 to see Dylan. Assume there are no other costs of seeing either performer. Based on this information, what is the opportunity cost of seeing Clapton? The following are the elasticities for Volkswagen Beetles: Price elasticity of demand = 2 income elasticity of demand = 1.5 True or False? Explain (Points awarded only for explanation.) a 10% increase in the price of a Beetle will reduce the quantity demanded by 20% An increase in consumer income will increase the price and quantity of Beetles. Since price elasticity of demand is greater than 1, total revenue will go down. You and your friend Joe have identical tastes and both live in Smith Falls. At 2pm you log on to Ticketmaster and buy a $30 nonrefundable ticket to a hockey game to be played that night in Ottawa, 70km north of your home. Joe plans to attend the same game, but he plans to buy his ticket at the game. Tickets sold at the game cost only $25, because they don’t carry a Ticketmaster surcharge. At 4pm an unexpected snowstorm begins, making the prospect of the drive to Ottawa much less attractive than before. If both you and Joe are rational, is one of you more likely to attend the game than the other? Explain your answer. 7. (10 points) (a) (b) Page 4 of 6 Explain why the following statements are true, false or uncertain. (Points are awarded o_nly for the explanation.) if the demand curve for a good is perfectly elastic, then consumer surplus will be large. At current levels of consumption, the marginal utility of a pizza is 50 and the price of a pizza is $10, while the marginal utility of a cake is 20 and the price of cake is $2. If so, the individual should consume more cake and less pizza. 8. (28 points; 3.5 points for each question) MULTIPLE CHOICE 1) 2) Suppose that the incomes of buyers in a market for a normal good decline and there is a reduction in input prices. What would we expect to occur in this market? a. b. 9.0 The equilibrium price would increase, but the impact on the amount sold in the market would be ambiguous. The equilibrium price would decrease, but the impact on the amount sold in the market would be ambiguous. Both equilibrium price and equilibrium quantity would increase. Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous. Equilibrium quantity would decrease, but the impact on equilibrium price would be ambiguous. The President of INCO says that an increase in the price of nickel would have no effect on the total amount spent on nickel. if this is true, the price elasticity of demand for nickel is 99.0.6.9: more than one. exactly one. less than zero. infinitely elastic. not determinable from the information given. 4) 5) 5) Page 5 of 6 Consumers will bear a larger burden of a sales tax if sue-eve demand is relatively elastic and supply is relatively inelastic. demand is relatively inelastic and supply is relatively elastic. both demand and supply are relatively inelastic. both demand and supply are relatively elastic. the tax is collected by firms rather than remitted directly to the government by consumers. If a good has a marginal utility of zero, then consumption of an additional unit would mean weeps» that total utility is also zero. that total utility would not change. that total utility would be increasing. that total utility would be decreasing. that the consumer would no longer receive any satisfaction from consumption of this good. if per capita income increases by 10 percent and household expenditures on fur coats increase by 15 percent, one can conclude that the price elasticity of demand for fur coats is SPF-PST?“ elastic. inelastic. unity. positive. not determinable from the information given. Suppose a scientific breakthrough led to a lower-cost method of producing battery-operated cars in Canada. The likely effect would be to move a. b. .‘DP-P production in Canada to a point beyond its production possibility boundary. production in Canada to a point inside its production possibility boundary. Canada’s current production possibility boundary outward. Canada’s current production possibility boundary inward. none of the above —- there would be no change in Canada’s production possibility boundary. 7) 8) Page 6 of 6 Agnes can produce either 3 units ofX or 3 units on in an hour, while Brenda can produce either 6 units ofX or 12 units on in an hour. Given the above data, which one of the following statements is true? a. 909.033 Agnes has an absolute advantage over Brenda in the production of both X and Y. Agnes has a comparative advantage in the production of Y. Brenda has a comparative advantage in the production of X. Brenda will not gain from trade. None of the above. If the demand curve is downward-sloping, a reduction in the price of an input used to produce the good will: not affect consumer surplus. increase consumer surplus. increase the price of the good. reduce the quantity bought and sold of the good. None of the above. $0519.65» ANSWERS TO TERM TEST #1 (October 28, 2005): 1. (a) (b) (C) 2 (a) (b) 3 (a) (b) 4. 5 (a) (b) P = 10 Q = 4,000 O demanded = 8,000 Q supplied = 2,000 There is a shortage of eggs. P=12 on the “black market,” since Q demanded = 2,000 if P=12. (There are 2,000 units sold in the black-market and the sellers will try to charge the highest price possible that the consumers are willing to pay, which is the price on the demand curve that corresponds to Q=2,000) market price increases, but by less than $5; the price received by sellers falls, but by less than $5; the price paid by buyers is the market price; the quantity bought and sold decreases (see Figure 6.7, page 129 in text) market price increases by $5; the quantity bought and sold is unchanged; tax revenue is $50,000 per month The opportunity cost of producing one car is: 1.67 bushels of wheat in Canada; 0.75 bushels of wheat in Argentina. Argentina has the lower opportunity cost and hence the comparative advantage in the production of cars. Canada would export wheat, if trade occurs. Canada would prefer to produce cars domestically (at an opportunity cost of 1.67 bushels of wheat) rather than trade two bushels of wheat for one car. Argentina would wish to trade since the opportunity cost of producing one car is only 0.75 bushels of wheat. Trade would not take place since it would not be mutually advantageous. The opportunity cost is $10. You would be willing to pay (i.e., “value”) the Dylan concert at $50, but would have to pay $40 for the ticket, so your “net benefit” from the Dylan concert is $50-$40=$10. True. if price elasticity of demand is 2, then quality demanded will fall by 20% in response to a price increase of 10%. False. An increase in consumer income (since this leads to an increase in demand ) will increase the price and quantity of Beetles. Total revenue will thus increase. Total revenue falls if price increases as one moves along an elastic demand curve. ...
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