ECO100 Furlong TT1 2009F PDF

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UNIVERSITY OF TORONTO
DEPARTMENT OF ECONOMICS

ECO100Y
Midterm Test #1; October 23, 2009

Time Allowed: 90 Minutes

This total marks in this test are 80. The test is divided into two parts:

Part I - problem format - is worth 66 marks (82.5% of the total marks of 80)
(5 calculation/diagram questions worth 12 marks each and one worth 6 marks)

Part II - multiple choice- is worth 14 marks (17.75% of the total mark of 80)
(7 multiple choice questions worth 2 marks each)

Show your work where applicable.

YOU MUST USE PEN INSTEAD OF PENCIL

Print your name and student number clearly on the front of the exam and on any loose pages.

Name: _______________________________________
(Family Name) (Given Name)

Student #: ______________________

There are 9 pages to the exam.

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ECO100Y; Midterm Test #1: October 23, 2009
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Part I: Place your answers (and work where necessary) in the space provided.
Clearly label all axes, curves, and points.

1. Production Possibilities Curves: Table (12 marks)

A) Suppose that Canadian resources can produce the following production possibilities for
Vegetable Production and Meat Production (in kilos (millions but dont worry about this)).
Opportunity Cost is constant within options.
a) 1 mark: Meat intercept = 700
and Bread intercept = 960
1 mark: give the mark for a basically concave PPC even
though it is linear between Meat = 500 & 700
d) i) 1 mark: no change in the Meat intercept
1 mark: Vegetable intercept = 1,200 (1.25*960)
Dont worry about shape of PPC provided it only touches
PPCo at Meat intercept
a) Sketch the country's production possibilities curve (PPo) in the space below the table with
Meat on the horizontal axis. (2 marks)
b) What is the opportunity cost of increasing production of Vegetables from 720 to 960 litres?
300 (units) of Meat (must have Meat) ? (1 mark)
c) What is the per unit opportunity cost of increasing Meat production from 500 to 600 kilos?
___ 2.4 (from 240/100) (kilos of Vegetables but dont worry about this)? (1 mark)
d) Opportuntity Cost is constant within options but is it constant between options (i.e., does
more that one option have the same opportunity cost)?
Between Meat = 500 and = 700 (or Vegetables between 0 and 480) , or the last 2 options
e) Suppose that technological change increases the output of Vegetables by 25% for each
amount of resource but does not effect producton of Meat.
i) In your diagram above, sketch the production possibilities curve (PP
1
) that results from
this technological change. (2 marks).
ii) What is the opportunity cost of increasing Meat production from 300 to 500 loaves
after this technological change? (1 mark)
1 mark: = 300 [dont worry about Vegetables; from 240 + 0.25*240 or 240*1.25]
B) Ignore Part A. Suppose that the equation of a Production Possibilities Curve is
Y = 6,400 0.4X..
a) What is the maximum amount of X that the society can produce? (1 mark)
= 16,000 from something like 6,400/0.4
b) What is the opportunity cost of a unit of Y? (1 mark)
= 2.5X (dont worry about the X)
c) If 0.5 units of resource are required to produce each Y, how many units of resource are there
in total? (1 mark)
= 3,200 units Resource (6,400 * 0.5)
d) If technological change doubles the output of X but doesnt change the output of Y,
what is the equation for the new Production Possibilities Curve? (1 mark)
Y = 6,400 0.2X
Vegetables (kilos) 960 720 480 240 0
Meat (kilos) 0 300 500 600 700
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2. Demand and Supply Shifts (12 marks)

The diagrams below represent the original equilibrium position for Turkey, a normal good.
Chicken is a substitute in consumption for Turkey and Cranberries are a complement in
consumption. Giblets (the turkey innards such as heart, lungs, etc.) are a complement in
production and Geese are a substitute in production for Turkey. Feed is an input into production.
Evaluate the statement given in each part to show the shift in the demand curve and/or the
supply curve or movement along either curve for Turkey on the diagram. Mark the new
equilibrium price P
1
and the new equilibrium quantity Q
1
. Designate Qs and Qd if there is no
market equilibrium. Analyze each question independently of the other questions. No
explanations are required. (2 marks per graph)

a) The price of Geese decreases.
1 mark: Supply increases (shifts right)
1 mark: P decreases and Q increases
(they must indicate P and Q here but not below)
Take 2 mark off once if they write rather than indicate
the shifts on the graph

b) The price of Cranberries decreases and the price
of Feed increases.

1 mark: Demand increases
1 mark: Supply decreases (shifts up)

c) Technological change increases the output of
Turkeys per unit of labout and the price of Turkey
decreases.

1 mark: No change in Demand

d) A report indicates that consumption of Turkey
reduces heart disease and a poultry flu kills many
turkeys.
1 mark: Demand increases
1 mark: Supply decreases (shifts left)

e) An economic recession reduces incomes and the
price of Giblets increases.
1 mark: Demand decreases

f) The Government imposes a price floor (minimum
price) on Turkeys to help Turkey farmers
1 mark: P > Po
1 mark: show a surplus at P as the difference between
Qd < Qs (might not designate Qs and Qd but
must show surplus between these two points)

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3. Demand and Supply and Government Price Controls: Linear Example (12 marks)

The demand and supply equations in Toronto for First Year Textbooks are

P = 292 0.09Q and P = 46 + 0.03Q

Prices are $'s/Textbook and quantities are in books

a) What is the equilibrium price and quantity of Textbooks? (2 marks)

1 mark: Q = 2,050 from solution of something like 292 0.09Q = 46 + 0.03Q
1 mark: P = $107.50 either from 292 0.09*2,050 or 46 + 0.09*2,050

b) What is Consumer Surplus at equilibrium? (2 marks)

1 mark: recognition that it is the triangle above P, i.e. bh/2
1 mark: correct answer: CS = from (292 107.50)*2050/2 = $189,112.50

c) Sketch the Demand and Supply equations in a graph indicating the Price (not the Quantity)
intercepts of each function, the relative steepness of each function, and equilibrium Price and
Quantity. (3 marks)

1 mark: Demand intercept is 292 and Supply intercept is 46
1 mark: Linear with Demand steeper than Demand (obvious)
1 mark: Intersection at the P and Q answer in a) (P and Q dont have to be correct but they must
correspond with the students answer in a)

d) What is the amount of the surplus or shortage in the market for Textbooks if the government
legislates a price of $94? (3 marks)

1 mark: Qd = 2,200 from something like 94 = 292 0.09Q
1 mark: Qs = 1,600 from something like 94 = 46 + 0.03Q
1 mark: Shortage = 600 (must indicate shortage or -)

e) What is the Black Market Price if the government legislates a price of $94 but all
commodities sell in the black market?? (1 mark)
1 mark: = P = $148 from 292 0.09*1600

f) Ignore the previous questions but not the Demand and Supply functions. What is market
price if the government establishes a quota of 1,900? (1 mark)

1 mark: P = $121 from 292 0.09*1,900
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4. Elasticity (12 marks)

a) What is the elasticity of Demand if a 20% increases in Price decreases Quantity Demanded
by 15%? (1 mark)
Elasticity = -0.75 (or 0.75) from 15%/20%

b) What is the percentage change in price that causes quantity to increase by 8% when price
elasticity of demand is 1.25 (1.25 in absolute value)? (1 mark)
1 mark = -6.4% (must be negative) from something like 1.25 = 8%/%P

b) What is the point elasticity of demand (to two decimals) for Marble Countertops if a
decrease in Price from $60 to $40 per square foot increases Quantity Demanded from 1,800
to 2,200 countertops? (2 marks)?
1 mark: correct set up of either the numerator or denominator of equation
= something like [(2,200 1,800))/1,800] /[(40 - 60)/60] or 22.2%/33.3%
1 mark: correct answer = - 0.66 (or 0.66)

c) What is the arc elasticity of demand (to two decimals) for Marble Countertops if a decrease
in Price from $60 to $40 per square foot increases Quantity Demanded from 1,800 to 2,200
countertops? (2 marks)?
1 mark: set up either numerator or denominator of equation correctly, i.e., understand that it is a
ratio of change to average
= something like+20% /-40% or [(2,200 1,800))/2,000] /[(40 - 60)/50]
1 mark: = -0.5 (or 0.5)

d) Suppose that the Demand function for Marble Countertops is P = 150 0.05Q.
What is point elasticity at P = 90? (2 marks)

1 mark: Q = 1,200 from (150 90)/0.05
1 mark: elasticity = - 1.5 (or 1.5) from something like -1/0.05 * 90/1,200

e) What is maximum Total Revenue for Marble Counterparts with Demand equal to
P = 150 0.05Q? (2 marks)

1 mark: recognition that P = 75 or Q = 1,500
1 mark: TR = $112,500 from 75 *1,500

f) Suppose that the total sales fall by $50,000 when Price increases from $6 to $7. Is this
commodity elastic, inelastic, or unit elastic (circle one) for this fall in price? (1 mark)
1 mark: elastic

g) What is the relationship between commodity X and commodity Y if their cross price
elasticity is 1.25? (1 mark)
1 mark: complements in consumption

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5. Per Unit Taxes (12 marks)

A. Suppse that the Federal government imposes a per unit tax on Electricity to decrease carbon
emissions. Draw a diagram in the space below indicating the buyers share and the sellers
share of this tax to show who would pay the most if the demand for electricity is relatively
inelastic and the supply of electricity is relatively elastic. Be sure to clearly label your
diagram. In particular:
a) Draw a diagram depicting an initial market equilibrium (Po, Qo) for electricity if demand
was relatively inelastic and supply was relatively elastic. (1 mark)
b) Depict the new equilibrium price (P
1
) and quantity (Q
1
) (relative to the original price plus
the tax) that would result from the tax/unit on electricity. (3 marks)
c) Indicate the Buyers Share (BS) per unit of the tax increase, the after tax price (P
Sel
) received
by sellers (producers) , and the Sellers Share (SS) per unit of the tax. (3 marks)
d) Finally, clearly indicate the total tax revenue due to the tax on your diagram. (1 mark)

P
Po+tax
Po
Q1
Q
Qo
So
D
So+tax
P
1
P
1
-tax
BS
SS
Tax Revenue

a) 1 mark: Po and Qo at intersection of relatively steep Demand and relatively flat Supply
b) 1 mark: shift up Supply (where unimportant)
1 mark: shift up Supply to go through Po+tax and Qo
1 mark: post tax equilibrium at P
1
> Po and < Po+tax and Q
1
< Qo
c) 1 mark: BS = P
1
- Po
1 mark: P
Sel
= P
1
-tax at Q
1
(from So at Q
1
)
1 mark: SS = Po-P
Sel

d) 1 mark: the correct vertical dimension of the tax (P
1
P
Sel
, i.e., distance between the two
supply curves at Q
1
) and the correct horizontal dimensionof the tax (Q
1
)
B) Suppose that competitive equilibrium Price is $334.40 and Quantiy is 4,425 for a
commodity with P = 476 0.032Q and P = 122 + 0.048Q as Demand and Supply functions.
a) What is the Buyers Share (short-run) of a tax on sellers of $40/unit? (1 mark)
1 mark: = $16 from 0.24/(0.24 + 0.36) or by calculation of new Price

b) What is the price received by the seller after sending the tax to the government? (1 mark)
1 mark: = $310.40 from 334.40 24 or 350.40 40 or calculation from equations

c) What is the total revenue from the tax? (2 marks)
1 mark: correct quantity = 3,925 from 40* 1/(0.24 + 0.36) or from solution of equations
1 mark: correct TR = $157,000 from 40*3,925
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- 7/9 -
6. Indifference Curves and Budget Lines (6 marks)

a) Suppose that an individual has an income of $1,800 per year to spend on Books or
Restaurant Meals Given that a Book costs $15 and a Meal costs $12, draw the individuals
budget line in the space below with Books on the vertical axis. Clearly label the intercepts
(numeric) of the budget line (Bo). (2 marks)
b) Illustrate a consumer equilibrium at Meals = 120 for the individual on your graph given your
budget line. Be sure to determine the quantity of books purchased at this point. (2 marks)
c) Suppose that Books are an inferior good for this individual. Show an appropriate consumer
equilibrium if the consumers income falls to $1,500. (2 marks)
Books
Meals
120
150
120
100
125

a) 1 mark: linear budget line
1 mark: Books intercept = 120 and Restaurant Intercept = 150
b) 1 mark: tangency of indifference curve and budget line at Meals = @120 (certainly >
Intercept)
1 mark: textbooks = 24 from something like (1800 120*12)/15
c) 1 mark: parallel shift down of Budget line to intercepts 100 for B and 125 for Meals
1 mark: tangency of indifference curve and new budget line at higher books

Part II: Multiple Choice
Circle the best answer for each question.
Each question is worth 2 marks. No marks deducted for wrong answers.

1. Which of the following will increase the Price and decrease the Quantity of Airline
Passenger Tickets in the next few months?
a) an economic recovery that drives up incomes
b) continued economic recession that reduces incomes
c) an increase in the price of inflight meals charged separate from the ticket
d) a decrease in the number of flights offered
e) none of the above

.
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- 8/9 -
2. What is the effect on the equilibrium price and quantity of Corn of an increase in the price of
ethanol (a good made from corn) and a bad harvest this Fall?
a) equilibrium price and quantity will both fall
b) equilibrium price will fall and equilibrium quantity will rise
c) equilibrium price will rise and equilibrium quantity will fall
d) equilibrium price and quantity will both rise
e) equilibrium price will rise but equilibrium quantity may rise or fall depending on
the relative shifts of supply and demand
f) equilibrium price will fall but equilibrium quantity may rise or fall depending on the
relative shifts of supply and demand
g) equilibrium quantity will rise but equilibrium price may rise or fall depending on
h) equilibrium quantity will fall but equilibrium price may rise or fall depending on
i) no change in either equilibrium price or equilibrium quantity
j) we have insufficient information to determine the effect on price or quantity

3. If Demand for Canadian Exports is unit elastic, which of the following statements is true?
a) an increase in Price increases Total Revenue from Exports
b) an increase in Price decreases Total Revenue from Exports
c) a decrease in Price increases Total Revenue from Exports
d) an increase in Price will not change Total Revenue from Exports

4. Suppose that 4 different government policies - Price Floor guaranteed by government
purchase of surplus, Price Ceiling that results in an Black market price for all output,
Tax/unit, and Quota result in exactly the same market price and quantity for a particular
commodity. Which of the following is false?
a) the loss of Consumer Surplus is the same for all 4 policies
b) the Price Floor is the only policy that results in surplus production
c) the Price Floor is the only policy that results in a government cost (except administration)
d) the Tax/unit is the only policy that provides tax revenue from the sale of the commodity
e) all of the above
f) none of the above

5. Which of the following is false for a subsidy/unit for a commodity with relatively elastic
Demand and relatively inelastic Supply?
a) equilibrium Price falls and equilibrium Quantity increases
b) the Sellers Share of the Subsidy is greater than the Buyers Share of the Subsidy
c) the total Subsidy is the subsidy/unit times the quantity sold
d) the Sellers Price is the equilibrium price minus the Subsidy

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6. Suppose that 700 units of a commodity sell at $28 and 900 units of the commodity sell at
$23. Which of the following is the equation for Demand?
a) P = 28 0.02Q b) P = 28 0.025Q c) P = 28 0.04Q
d) P = 45.50 0.02Q e) P = 45.50 0.025Q f) P = 45.50 0.04Q
g) P = 51 0.02Q h) P = 51 0.025Q i) P = 51 0.04Q
h) none of the above

7. Basic Market equilibrium analysis argues that rent controls (maximum rent laws) do not
improve housing for low-income individuals because
a) landlords provide fewer apartments
b) higher-income earners attracted by lower rents take apartments from low-income earners
c) the supply of apartments decreases in respone to lower rents
d) the demand for apartments increases in response to lower rents
e) all of the above
f) a) and b) only
g) a) and d) only
h) a), c), and d) only
i) none of the above

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