The University of Alberta

Department of Economics

Economics 204 - A1 Midterm #1

Gordon Lee 2005 Name ______________________ _______________ ID Number October,

You have 50 minutes to complete this exam.

Exam Code:

91 C
Section A Section B

Section C

Total

1 Section A: Short Answer Questions (6 points)

Question 1 (2 points) As discussed in class, allocations of resources can be evaluated on the basis of three criteria. List two.

Question 2 (2 points) Fully state the law of demand.

Question 3 (2 points) In the theory of consumer behaviour we assumed that preferences are complete. List two other assumptions that we made about preferences.

Section B: Multiple Choice Questions (24 points) Select the best answer. 1. Scarcity refers to a condition a. that only applies to poor individuals and poor nations. b. where resources are unlimited. c. where wants exceeds resources. d. wants are limited.

2. Consider the following production possibilities table for the country of Anviliania which produces only anvils and corn. Anvils 10 20 30 40 50 Corn 150 140 120 90 50 Based on the above information, a. the opportunity cost of producing 40 anvils instead of 30 anvils is 30 units of corn. b. there is a constant trade off between corn and anvils. c. the production possibilities curve for anvils and corn is a straight line. d. the opportunity cost of producing 30 anvils instead of 20 anvils is 120 units of corn.

2 e. the combination of 120 units of corn and 20 anvils is unattainable. 3. During the nineteenth and early twentieth centuries, thousands of people immigrated to Western Canada. The effect on the Canadian economy was to a. move it beyond its production possibilities frontier. b. move it inside its production possibilities frontier. c. shift its production possibilities frontier inside. d. shift its production possibilities frontier outward. e. none of the above - there was no change in Canadas production possibilities frontier. 4. Markets in which firms buys labour and resources are called a. factor markets. b. command markets. c. mixed markets. d. foreign exchange markets. e. goods and services markets. If the price of milk rises, ceteris paribus, a. there will be a decrease in the demand for milk. b. buyers will substitute milk for other beverages. c. there will be a decrease in the quantity demanded of milk. d. the demand for cola drinks will fall.

5.

6. All of the following would be expected to cause the supply of wool to decrease except a. a decrease in the price of wool. b. a decrease in the number of wool producers. c. an increase in the cost of raising sheep. d. an increase in the wages paid to workers in the wool industry. e. all of the above cause the supply of wool to decrease. 7. In the market for lupines, initially the equilibrium price was 10 per lupine and the equilibrium quantity was 200 million lupines. The following year the equilibrium price was 14 per lupine and the equilibrium quantity was 160 million lupines. This change could have been the result of a. a decrease in wages. b. an increase in taxes levied on producers of lupines. c. an increase the price of a complement. d. an increase in income. e. a decrease in the price of a substitute.

8. By the phrase invisible hand, Adam Smith was expressing the idea that a. there are no economic conflicts among nations. b. there would be no economic conflicts among nations if countries would eliminate tariffs. c. legal and political systems often influence market outcomes. d. by pursuing their own self interests, people frequently promote the interests of society. e. business executives have a natural interest in keeping prices down and preventing inflation.

3 9. Suppose that the government of Freedonia imposes a price floor below the equilibrium price in the pizza market. The impact of this price floor will be a. excess demand of pizzas. b. excess supply of pizzas. c. a black market for pizzas. d. pizza producers leaving the pizza market. e. None of the above.

10. In Freedonia, there is an effective rent ceiling in the housing market. Recently, there was an earthquake in Freedonia that destroyed 18 % of the rental housing. What effect will this earthquake have upon the market for housing in Freedonia? a. Rents will rise by 18%. b. The shortage of rental housing will become larger. c. The surplus of rental housing will become larger. d. The shortage of rental housing will fall by 18% e. The shortage of rental housing will fall by an undetermined amount. 11. In Freedonia, rice and chicken are complements while rice and potatoes are substitutes. Freedonia imports its rice from Anviliania. Suppose that due to pressure from Freedonian potato producers, the government imposes a quota upon rice. The result of this will be a. an increase in the equilibrium price of potatoes. b. a decrease in the price of rice. c. a decrease in the equilibrium quantity of chicken. d. an increase in the equilibrium price of chicken. e. a and c. 12. According to Arthur Figgis, the increase in consumer surplus from a $1000 reduction in the price of used cars is found by multiplying $1000 by the original quantity of demand for used cars. This method for calculating the increased consumer surplus a. is correct if the elasticity of demand is 0.10. b. correct if used cars are normal goods. c. wrong and overstates the true change in consumer surplus. d. correct if the demand curve was perfectly elastic. e. wrong and understates the true change in consumer surplus. Section C: Long Answer Questions (20 points)

Question 1 (6 points) Recently, the Supreme Court of Canada ruled that the provinces could sue large tobacco companies. This event comes as preferences are continuing to change in Canada so that smoking is no longer considerably socially acceptable by some groups of people. With the use of a supply and demand diagram, explain what impact you believe that these TWO events will have upon the equilibrium price and quantity of cigarettes.

5 Question 2 (8 points) Suppose that the city of Pavement Narrows is considering imposing a tax on hotel rooms of $t per night that the room is occupied. (a) Using diagrams, explain the effect of the tax on the price of a hotel room and who bears the burden of the tax: (i) in the short term if the supply of hotel rooms in Pavement Narrows is perfectly inelastic. (ii) in the long term when the supply of hotel rooms is elastic. (b) Suppose that the daily charge at the hotel Maison de Pavement is $120 per day. The manager has stated that a tax of $5 per night will force him to raise the daily charge to $124 per day and eventually cause a decline in business by 10%. What is the elasticity of demand for hotel rooms at the Maison de Pavement?

6 Question 3 (6 points) The town of Woodpile is located in the southwest region of Freedonia. Suppose that the demand for garbage removal for each household is given by P = 12 - 0.6 q where q is the number of bags of garbage removed per month. In the past, the town has charged a flat fee of $30 per month for garbage removal. However, in an effort to reduce the amount of garbage, a local policy analyst, Anne Elke, has suggested charging the flat fee and a per bag fee. a. If the town wishes to reduce the amount of garbage disposed by 10 %, what per bag fee should it charge? b. A local politician, Mr. Alan Jones-Bus-Stop-Ftang-Ftang-OleBiscuit-Barrel, wishes to reduce garbage disposal by 10 % as suggested in part a but he also does not want to upset the voters. Given the per bag fee from part a, he wants to adjust the flat fee so that the household has the same NET BENEFITS as it did before the per bag fee was introduced. What flat fee should be charged. (Hint: Here, NET BENEFITS = CS - Flat Fee.)