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Last Name: ____________________

First Name: ____________________
Student Number: ________________


Economics 100
Professor James E. Pesando



Term Test 1 October 19, 2012

Length: 1 hour, 5 minutes


Answer ALL questions in the space provided

Aids: Pen/ Pencil and non-programmable calculator

________________________________________________

Please enter the multiple choice answers in the box below:
1 2 3 4 5
6 7 8 9 10
________________________________________________

Examiners report:
question points
1
2
3
4
5
6
7
Total



Please check the Tutorial you ATTEND (Your exam will be handed back to you in the
indicated tutorial):

Tuesday, 11:00am-12:00pm SS 1085 -- TA: Lisa or Annetta
Wednesday, 12:10pm-1:00pm -- UC 85 -- TA: Emma
Wednesday 1:10pm-2:00pm -- UC 87TA: Emma
Wednesday 4:10pm-5:00pm -- UC 244 TA: Lisa or Annetta
Wednesday 5:10pm-6:00pm -- WI 524 TA: Lisa or Annetta
Thursday 10:10am-11:10am -- UC 87TA: Jessica
Thursday 11:10am-12:10pm -- UC 85 TA: Jessica










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Question 1 (18 points)

Canada can produce 50 cars per week or 200 computers per week. Germany can
produce 20 cars per week or 20 computers per week.

(a) If trade takes place, which good will Canada import? Why?












(b) If the trade ratio is 2 computers for one car, would Canada gain from trade?
Illustrate your answer by showing, in the diagram below, the production
possibilities frontier of Canada and Canadas consumption possibilities.





CARS








COMPUTERS


(c) If the trade ratio were four computers for one car, would Canada gain from trade?
Explain your answer.














(d) If Germany could produce 20 cars per week or 80 computers per week, would
Germany benefit from trade? Why?













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Question 2 (12 points)

John is given $200 and spends the $200 on dinner. Johns next best alternative is to
spend $200 for a new computer which is on sale from its usual price of $300. The
most John would be willing to pay for the computer is $300. John values the dinner
at $400.

(a) What is the opportunity cost of the dinner? Explain your answer.









(b) If John values the dinner at $350, what happens to the opportunity cost? Explain
your answer.









(c) If John spends $225 on the dinner (instead of $200), what happens to the
opportunity cost? Explain your answer.









Question 3 (16 points)

The demand curve for oranges is as follow:

Price Quantity Demanded

12 24
10 32
8 40
6 48
4 56

The supply of oranges is perfectly elastic. The equilibrium price of oranges is $6 per
orange.

(a) On a diagram below, show the equilibrium price and quantity in this market.
Show, also, consumer surplus and producer surplus.













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(b) The government imposes a $4 sales tax on an orange, to be paid by sellers.

i) On a new diagram show:
(1) the (new) market price of oranges
(2) the (new) quantity bought and sold















ii) How much of the $4 tax is paid by buyers? How much is paid by sellers?
Explain your answer.











(c) If the demand for oranges were perfectly inelastic (at 48), would:

i) there be a different tax incidence (burden of the tax) than in part (b)?




ii) a difference in the quantity bought and sold? Explain your answer.









Question 4 (8 points)

Your demand curve for cups of tea per week is as follows:
Price $7 $6 $5 $4 $3 $2 $1 $0
Quantity 0 1 2 3 4 5 6 7

The market price of tea is $4 per cup.

(a) How many cups of coffee will you consume? What will be your consumer
surplus?








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(b) You can buy a ticket for $30 which permits you to have as many cups of tea as
you want during the week, for free. Should you buy the ticket? Explain your
answer.










Question 5 (8 points)

You sell wine, and rent your store for $6,000 per month (which is $200 per day). If
you stay open on Sunday, you will sell 30 bottles of wine at $20 each. Each bottle
costs you $15, and you will need to pay the sales person a wage of $20 per hour, for
8 hours of work.

(a) Should you open your store on Sunday? Explain your answer.










(b) Suppose, instead, that your sales persons salary of $40,000 per year includes
her hours of work on Sunday, if you open your store. However, if she works on
Sunday, she also receives $2 for each bottle of wine sold.

Should you stay open on Sunday? Explain your answer.










Question 6 (8 points)

The demand curve for apples is as follows:

Price Quantity Demanded
$0 1,200
$1 1,050
$2 900
$3 750
$4 600
$5 450
$6 300
$7 150
$8 0

(a) What is the elasticity of demand if price increases from $2 to $3? From $5 to $6?





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(b) The market price is $2. The seller is advised to lower the price to $1 in order to
increase the sellers revenues. Is this good advice? Explain.










7. Multiple Choice. Circle the correct answer. (30 points, 3 each)

1) Anne will go either to the opera, which she values at $50, or the theatre,
which she values at $100. At ticket to the opera costs her $30 and a ticket to
the theatre costs her $15. She can walk to the opera hall but has to spend
$10 on a taxi ride to get to the theatre. What is Annes opportunity cost of
going to the theatre?

(a) $20;
(b) $75;
(c) $25;
(d) $15;
(e) none of the above.


2) There is an increase in the demand for an inferior good. As a result:

(a) Total revenue from the sale of the inferior good will fall;
(b) Total revenue from the sale of the inferior good will be unchanged;
(c) The price of a substitute good will increase;
(d) The demand for a complementary good will increase;
(e) None of the above.


3) In spite of bad weather and reduced production of coffee, the revenues of
coffee growers increased. Which of the following statements is correct?

(a) The supply curve for coffee is inelastic;
(b) The supply curve for coffee is elastic;
(c) The demand curve for coffee is elastic;
(d) The demand curve for coffee is inelastic;
(e) None of the above.


4) A museum reduces its admission price by 5 percent. As a result, total
revenues decrease by 5 percent. This implies that the price elasticity of
demand for admission is

(a) less than one;
(b) greater than one;
(c) one;
(d) five;
(e) none of the above.


5) Argentina and Mexico produce two goods, wheat and corn. Argentina
specializes in the production of wheat and Mexico specializes in the
production of corn. Due to a technological failure, Argentina becomes only 50
percent as productive in the production of both wheat and corn. Which of the
following statements is correct?

(a) Mexico now has an absolute advantage in both wheat and corn;
(b) Argentina will now specialize in the production of corn;
(c) The trade ratio will change;
(d) Argentina will not be on its production possibilities frontier;
(e) None of the above.
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6) Consider the pizza market, with a negatively-sloped demand curve and a
positively-sloped supply curve. Suppose that the market equilibrium quantity
is 1,000 pizzas. The consumer surplus on the 1,000
th
pizza is

(a) a positive value;
(b) zero;
(c) the price of the 1000
th
pizza;
(d) a negative value;
(e) cannot be determined without knowledge of the demand equation.


7) There is an effective price ceiling (a maximum price) for apples. The price of
oranges, a substitute for apples, increases. As a result:

(a) the quantity of apples bought and sold will increase;
(b) the excess demand for apples will decrease;
(c) the excess supply of apples will increase;
(d) the quantity of apples bought and sold will be unchanged;
(e) none of the above.


8) The market demand curve for widgets is negatively sloped and the supply
curve is positively sloped. If the government introduces a $1 tax on widgets,
to be paid by the seller, which one of the following statements is true:

(a) The price of widgets will increase by $1 and consumer surplus will fall;
(b) The quantity of widgets bought and sold will decrease and producer
surplus will rise;
(c) The price of widgets will increase by less than $1 and producer surplus
will fall;
(d) Consumer surplus will increase while producer surplus will fall in this
market;
(e) None of the above.


9) Your demand curve for apples is unit elastic. If the price of apples goes
down:

(a) you will consume fewer apples;
(b) your total expenditure on apples will fall;
(c) you will consume fewer oranges, a substitute for apples;
(d) you will consume the same number of apples;
(e) none of the above.


10) The price elasticity of demand for widgets is 2, while the income elasticity of
demand is 1. The supply curve for widgets is perfectly inelastic. If there is an
increase in income:

(a) price will fall and total revenue will fall;
(b) price will rise and total revenue will increase;
(c) price will rise and the impact on total revenue cannot be determined;
(d) price will be unchanged and total revenue will increase;
(e) none of the above.