eco 100y introduction to economics midterm test # 1 · 3. (12 marks) consider a hypothetical...

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Department of Economics Prof. Gustavo Indart University of Toronto October 22, 2010

ECO 100Y INTRODUCTION TO ECONOMICS

Midterm Test # 1

LAST NAME

FIRST NAME

STUDENT NUMBER

INSTRUCTIONS: 1. The total time for this test is 1 hour and 50 minutes. 2. Aids allowed: a simple calculator. 3. Write with pen instead of pencil.

DO NOT WRITE IN THIS SPACE

Part I 1. /10

2. /8 3. /12 4. /10

5. /12 6. /12 Part II /36

TOTAL /100

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PART I (64 marks)

Instructions: Answer all questions in the space provided.

1. (10 marks) Determine the amount of consumer or producer surplus generated in each of the

following situations. Briefly explain how you get to this amount.

a) Aneseh goes to the CD store to buy Lady Gaga’s latest CD. She is willing to pay up to $15 for the CD and finds that its price tag is exactly $15. At the cash register she is told that Lady Gaga’s CD is on sale today for $12. (2 marks)

b) Galina is willing to pay up to $20 for a used copy of the last of Harry Potter’s books. She goes to the bookstore and finds one copy selling for $20. (2 marks)

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c) Bowen has just finished a soccer practice at the Athletic Centre. She wants to purchase a bottle of mineral water for up to $2. The Centre’s vending machine sells mineral water for $2.50. (2 marks)

d) Fatima advertises her car for sale in the Varsity for $2,000. She is, however, willing to sell her car for any price above $1,800. A classmate buys her car for $2,000. (2 marks)

e) Lady Gaga’s concert is sold out. Allison got a ticket for the concert for $50. She lists her ticket on eBay thinking of selling it for at least $75. To her surprise, after two days of bidding she sells the ticket for $150. (2 marks)

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2. (8 marks) What can you conclude about the price elasticity of demand in each of the following statements? Briefly explain with the help of an appropriate demand curve diagram.

a) My economics professor has chosen to use the Ragan/Lipsey textbook. I have no choice but to buy this book. (2 marks)

b) The photocopy business is very competitive. I would lose half of my sales when I raised the

price by as little as 10 percent. (2 marks)

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c) I don’t get it! I’m spending more on coffee even though the price of coffee fell from $8 to $5 a pound. (2 marks)

d) The price of coffee has oscillated between $0.75 and $1.50 a cup during the last two years. However, I always spend exactly $15 a week on coffee. (2 marks)

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100 15050

Y

X

50

200 250 300

150

100

3. (12 marks) Consider a hypothetical country that has 250 units of resources and produces only two goods, good X and good Y. The table below shows different allocations of resources between these two industries and the corresponding maximum levels of output that can be produced of each of these two goods.

a) In the diagram below, draw this country’s production possibilities curve (PPC1). (2 marks)

b) What is the opportunity cost of producing 30 additional units of X if the economy is initially

producing 60 units of X and 60 units of Y? And, what is the opportunity cost of producing 30 additional units of X if the economy is initially producing 90 units of X and 45 units of Y? (2 marks)

Quantity of resources used

in the Y industry

Annual production of Y


in the X industry

Annual production of X

0 0 250 130 50 20 200 120

100 45 150 90 150 60 100 60 200 70 50 35 250 75 0 0

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c) Given your answer in b), what can you conclude regarding the opportunity cost of X? What is the economic explanation of your conclusion? (2 marks)

d) Suppose now that only the technology associated with producing good Y improves, so that the maximum level of Y that can be produced with any given quantity of resources increases by 100 percent. Fill in the table below with the annual production of Y and X corresponding to each resource allocation. Draw this country’s new production possibilities curve (PPC2) in your diagram above. (3 marks)

e) Go back to the situation of part a) above. Suppose now that the technology associated with producing both good X and good Y improves, so that the maximum level of X and the maximum level of Y that can be produced with any given quantity of resources increases by 100 percent. Fill in the table below with the annual production of Y and X corresponding to each resource allocation. Draw this country’s new production possibilities curve (PPC3) in your diagram above. (3 marks)


in the Y industry



in the X industry


0 250 50 200

100 150 150 100 200 50 250 0


in the Y industry



in the X industry


0 250 50 200

100 150 150 100 200 50 250 0

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4. (10 marks) Consider the market for milk in the small country of Las Piedras. This market demand and supply schedules are shown in the table below, where the price of milk is expressed in pesos per litre and the quantity of milk in millions of litres per month:

Price 10 9 8 7 6 5 4 3

Quantity demanded 2 4 6 8 10 12 14 16

Quantity supplied 11 10 9 8 7 6 5 4

a) Assuming there is no government intervention in this market, what are the equilibrium price and the equilibrium quantity? Briefly explain. (2 marks)

b) Now suppose the government of Las Piedras guarantees milk producers a price of 9 pesos per litre and promises to buy any amount of milk that the producers cannot sell. What are the quantities demanded and supplied at this guaranteed price? Briefly explain. (1 mark) How much milk would the government be buying (per month) with this price support program? Briefly explain. (1 mark)

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c) What is, in pesos, the cost of this price support system (to the government)? Briefly explain. (1 mark) Who pays for the milk that the government buys? Who is helped and who is harmed by this policy? Briefly explain. (2 mark)

d) Suppose that the price of milk in Ontario is equal to the equilibrium price you determined for Las Piedras in part a) above, i.e., equal to the equilibrium price in Las Piedras before the intervention of the government. Further suppose that the government of Las Piedras exports to Ontario—at a price of 6 pesos per litre—the milk it purchased through the pricing system of part c) above. What is now, in pesos, the cost of this price support system (to the government of Las Piedras)? Briefly explain. (1 mark) Who is helped and who is harmed by this policy in Ontario? Briefly explain. (2 mark)

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5. (12 marks) Suppose that the hockey arena of a small town has a seating capacity of 6000. Hockey is the main sports activity in this town and every Saturday the local hockey team plays in this arena. The demand schedule for regular hockey games’ tickets is as follows:

a) What price would fill the arena without creating a shortage of seats at a regular Saturday hockey game? Briefly explain. (1 mark) At this price, what is the revenue generated at each hockey game? Show your work. (1 mark)

b) If the hockey team sets a price of $10 per ticket, will there be an excess demand or supply of tickets for a regular hockey game? Briefly explain. (1 mark) At this price, what is the revenue generated at each hockey game? Show your work. (1 mark) Considering the range of the demand curve for hockey games between P = $8 and P = $10, without doing any additional calculation what can you conclude about the price elasticity of demand? Is it elastic or inelastic? (2 marks)

Price $4 $6 $8 $10 $12 $14 Quantity demanded 8000 7000 6000 5000 4000 3000

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c) If the hockey team sets a price of $12 per ticket, what is the revenue generated at each hockey game? Show your work. (1 mark) Considering the range of the demand curve for hockey games between P = $10 and P = $12, without doing any additional calculation what can you conclude about the price elasticity of demand? Is it elastic or inelastic? (1 mark)

d) Once a year, the Maple Leafs come to town to play a friendly game against the local team. If at each price the quantity demanded of tickets doubles when the Leafs play, what is the equilibrium price for a Leafs game? Briefly explain. (2 marks)

e) Go back to the situation of part a) above. Suppose now that, in order to promote hockey among children, the team decides to give local schools 1000 free tickets to every game. If the team also decides to charge a price to paying fans that will ensure every hockey game to be sold out without creating a shortage, what price will the team set? Briefly explain. (2 marks)

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6. (12 marks) Suppose that government regulation does not allow Canadian salmon to be exported to other countries. Further suppose that the yearly supply and domestic demand schedules of Canadian salmon are as follows:

Price (per pound) $15 $12 $9 $6 $3

Quantity demanded (thousands of pounds) 200 400 600 800 1000

Quantity supplied (thousands of pounds) 800 700 600 500 400

a) Draw the supply (S) and domestic demand (D) curves in the diagram below and clearly show the market equilibrium (point A). (1 mark)

b) Now suppose that Canadian salmon can also be sold in the U.S. and that the American yearly

demand schedule for Canadian salmon is as follows:

Price (per pound) $15 $12 $9 $6 $3

Quantity demanded (thousands of pounds) 200 300 400 500 600

Fill in the blanks in the box below to express the yearly demand schedule for Canadian Salmon now that Americans are also buying it. (1 mark)

Price (per pound) $15 $12 $9 $6 $3

Quantity demanded (thousands of pounds)

2000 1500

5

15

10

Q 1000 500

P

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c) In the diagram above, draw the new demand curve (D’) for Canadian salmon now that American consumers can also buy it. (1 mark) What is the new equilibrium price and equilibrium quantity of Canadian salmon sold in the market? Clearly show the new market equilibrium (point B) in your diagram. (1 mark) What happens to the quantity purchased by Canadian consumers? Briefly explain. (2 marks)

d) Suppose that as a result of overfishing after the increase in demand of part c), the stock of Canadian salmon is seriously depleted. In order to allow salmon stock to recover, the government introduces a quota limiting the quantity of Canadian salmon caught to 400 thousand pounds per year. What happens to the price paid by consumers? What happens to the quantity purchased by Canadian consumers? What happens to the quantity purchased by American consumers? Briefly explain. (3 marks)

e) The government finds that the quota is difficult to administer and decides to impose instead a unit-tax on producers to reduce the quantity of Canadian salmon caught to 400 thousand pounds per year. In the diagram above, draw the new supply curve (S’) of Canadian salmon. What is the amount of the tax per pound? Briefly explain. What price do consumers pay? What price do producers receive net of the tax? Briefly explain. (3 marks)

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PART II (36 marks)

Instructions:

• Multiple choice questions are to be answered using a black pencil or a black or blue ball-point pen on the separate SCANTRON sheet being supplied.

• Be sure to fill in your name and student number on the SCANTRON sheet! • Write the version of your paper — either AA or BB — on the SCANTRON sheet where it says “DO

NOT WRITE IN THIS SPACE.” • Each question is worth 3 marks. No deductions will be made for incorrect answers. • Write your answers to the multiple choice questions ALSO in the table below. You may use this

question booklet for rough work, and then transfer your answers to each multiple choice question to the table AND onto the separate SCANTRON sheet. Your answers must be on the SCANTRON sheet. In case of a disagreement, the answer to be marked is the one on the SCANTRON sheet.

1 2 3 4 5 6 7 8 9 10 11 12

1. Which one of the following will cause the demand for bacon to decrease?

A) The price of ham (a substitute) increases. B) Disposable income decreases and bacon is an inferior good. C) The price of eggs (a complement) increases. D) The price of bacon decreases. E) A storm in Southern Ontario kills 30 percent of the province’s pigs.

2. Which one of the following circumstances would cause the supply curve of goat cheese to shift

down? A) The price of labour increases in the goat cheese industry. B) The government imposes a quota on the goat cheese industry’s output. C) The government introduces a specific unit-tax on the goat cheese industry. D) Energy prices increase for each firm in the goat cheese industry. E) The price of goat milk decreases.

3. At a garage sale, Heba purchases a used bicycle for $60 when she was willing to pay $100.

Before paying for the bicycle she realizes that it needs repair at a cost of $15 but she buys it anyway. If the bicycle costs $200 new, Heba’s consumer surplus is

A) $140. B) $115. C) $100. D) $40. E) $25.

4. When the price of milk used to produce cheese rises, the consumer surplus associated with

the consumption of cheese A) will definitely increase. B) will definitely decrease. C) will increase if cheese is a normal good. D) will decrease if cheese is an inferior good. E) None of the above is true.

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Diagram 1: Production Possibility Curve Quantity of good Y PPC1 PPC2 Quantity of good X

5. In Diagram 1, the shift of the production possibility curve from PPC1 to PPC2 might be the result of

A) an increase in the quantity of resources available for production combined with technological improvement throughout the economy.

B) a decrease in the quantity of resources used by the Y industry and an increase in quantity of resources used by the X industry.

C) an increase in the quantity of resources used by the X industry. D) technological improvement throughout the economy with no change in the quantity of

resources. E) a decrease in the quantity of resources throughout the economy and technological

improvement in the X industry. 6. Because hamburgers and French fries are often eaten together, they are complements. We

observe that both the equilibrium price of hamburgers and the equilibrium quantity of French fries have risen. What could be responsible for this pattern?

A) An increase in the price of potatoes. B) A fall in the price of potatoes. C) A fall in the price of beef. D) An increase in the price of beef. E) A decrease in the price of hot dogs, a close substitute for hamburgers.

7. Consider a country that produces only two goods—good X and good Y. If the production of one unit of good X requires 10 units of resources and the production of one unit of good Y requires 20 units of resources, what is the opportunity cost of producing one unit of X in this country?

A) 2.5. B) 2.0. C) 0.5. D) 0.4. E) 20.

8. Because bagels and cream cheese are often eaten together, they are complements. We

observe that both the equilibrium price of cream cheese and the equilibrium quantity of bagels have risen. What could be responsible for this pattern?

A) An increase in the price of flour. B) A fall in the price of milk. C) An increase in the price of milk. D) A fall in the price of flour. E) A decrease in the price of muffins, a close substitute for bagels.

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Diagram 2: Price Elasticity of Demand

B A ● ● Price D1 D2

Quantity 9. In Diagram 2, the demand curves D1 and D2 are parallel. Therefore, we can conclude that the

price elasticity of demand A) at point A is greater than at point B. B) is equal at points A and B. C) at point A is less than at point B. D) at point A cannot be compared to that at point B. E) is not determinable from the information given.

10. Sandy’s demand schedule for soccer games is given in the following table:

Price Per Ticket $1 $5 $10 $15 Quantity Demanded 4 3 2 1

The price of a ticket is $5 and Sandy is planning to buy three tickets. However, the game is sold out and now Sandy cannot buy tickets except from a scalper. The scalper sells tickets only in packages of three. The scalper offers her a package of three tickets at $25. If Sandy accepts this offer, what is the value of her consumer surplus?

A) $0. B) $5. C) $10. D) $15. E) None of the above is correct.

11. If per capita income increases by 10 percent and household expenditures on fur coats

decrease by 15 percent, one can conclude that the income elasticity of demand for fur coats is A) unity. B) elastic. C) negative. D) inelastic. E) not determinable from the information given.

12. Suppose that the demand for CDs is very elastic and the supply is very inelastic. A sales tax on CDs would be paid:

A) equally by buyers and sellers. B) more heavily by sellers. C) more heavily by buyers. D) by neither buyers nor sellers. E) cannot be determined without more information.

eco 100y introduction to economics midterm test # 1 · 3. (12 marks) consider a hypothetical...

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