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Last Name: ____________________

First Name: ____________________
Student Number: ________________



Economics 100
Professor James E. Pesando



Term Test 1 October 22, 2010

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
________________________________________________


Examiners report:
question points
1
2
3
4
5

Total





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Question 1 (16 points)

Canada can produce 20 cars per hour or 40 computers per hour. On the other
hand, China can produce 10 cars per hour or 50 computers per hour. Assume a
linear production possibilities frontier for both countries.


(a) What does a linear production possibilities frontier imply?








(b) If Canada and China decide to trade, which good will each country import?
Why? Explain.












(c) In an appropriate diagram, show both the production possibilities frontier and
consumption possibilities frontier of Canada if the trade ratio were 6 computers
for 1 car. Would Canada benefit from trade under this trade ratio?
















(d) At which trade ratio will Canada be indifferent between having no trade and
having free trade? At which trade ratio will China be indifferent? Express your
answer in the number of computers per car and explain your answer.












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Question 2 (12 points)

Lisa has decided to attend a concert tonight at a cost of $100. She was willing to
pay up to $200 to attend the concert. In order to attend the concert, Lisa will have to
miss 4 hours of work. Lisas job pays a wage rate equal to the current Ontario
minimum wage rate of $10.25 per hour. Lisa obtains no other satisfaction from
working. Assume that Lisa is a rational decision-maker.


(a) What is the opportunity cost of Lisas decision to attend the concert? Explain.









(b) Suppose that, in addition to working, Lisa had the opportunity to volunteer at a
homeless shelter tonight. Although she would not be paid for her volunteer
work, she would obtain personal satisfaction equal to a total of $30 from the
activity. With this new information, what is the opportunity cost of Lisas
decision to attend the concert? Explain.











(c) Suppose now that Lisas next best alternative for tonight is going for a walk.
With this new information, what is the opportunity cost of Lisas decision to
attend the concert? Explain.













Question 3 (16 points)

Product X is a new good for which relatively little information is known. The limited
information available regarding the demand for Product X is as follows:

Income Price Quantity Demanded

100 $20 5
100 $15 10
50 $20 10
50 $10 80

The supply of Product X is fixed at 10 units.
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(a) Does the above information violate the law of downward-sloping demand?
Explain.










(b) On a diagram, show the equilibrium price and quantity in this market.














(c) Calculate the price elasticity of demand for Product X. Is the demand for Product
X elastic or inelastic? Explain.















(d) Calculate the income elasticity of demand for Product X. Is Product X a normal
or an inferior good? Explain.

















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Question 4 (28 points)

Explain whether the following statements are True, False, or Uncertain. (All marks
are for the explanation).

(a) A competitive market is considered allocatively efficient when producer surplus
and consumer surplus are equal.












(b) A sales tax was recently imposed on the market for professional services. If the
market price remains unchanged, then the tax must have been levied on the
buyers in the market.












(c) Price ceilings always result in shortages and reductions in producer surplus.














(d) The demand curve for a good is linear and downward sloping. The supply curve
is perfectly elastic. A sales tax of $10 per unit, levied on sellers, is removed. As
a result, consumer surplus will fall due to the resulting decline of $5 in market
price.












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5. Multiple Choice. Circle the correct answer. (28 points, 4 each)


1) If wheat farmers were faced with a demand curve of unit elasticity, then:

(a) the total receipts of farmers would not change due to shifts in demand
(b) a shift in supply would have little effect on wheat prices
(c) a poor harvest would cause a drop in total receipts for wheat farmers
(d) a good harvest would cause an increase in the quantity demanded of
wheat
(e) none of the above


2) A market with the usual shaped linear demand and supply curves is in
equilibrium. At the allocatively efficient level of output, the price elasticity of
demand is unity. Total revenue will increase if:

(a) there is an increase in supply
(b) there is a decrease in supply
(c) there is a decrease in demand
(d) all of the above
(e) none of the above


3) John is currently optimizing consumption between good X and good Y by
consuming 10 units of X and 5 units of Y. The price of X is $2 and the price
of Y is $1. The marginal utility of the last unit consumed is 10 for good X. As
a result, the marginal utility of the 4
th
unit of good Y is:

(a) greater than 5
(b) equal to 5
(c) less than 5
(d) not enough information to answer
(e) none of the above.


4) If a sales tax of $5 is levied on the buyer of a good, and if supply is perfectly
inelastic, market price will:

(a) fall by less than $5
(b) fall by $5
(c) rise by $5
(d) rise by less than $5
(e) none of the above


5) Which of the following will NOT cause the demand curve for good A to shift?

(a) a change in the price of A
(b) a change in the price of B, a complement
(c) a change in the price of C, a substitute
(d) a shift in tastes and preferences
(e) none of the above










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6) Apples and oranges are substitutes. If Florida (where orange crops are
grown) experiences unusually poor weather this season, then one would
expect:

(a) an increase in the demand for both apples and oranges
(b) a decrease in the demand for both apples and oranges
(c) an increase in the demand for apples, but a decrease in the quantity
demanded of oranges
(d) an increase in the demand for oranges, but a decrease in the demand for
apples
(e) none of the above


7) Country H and Country L each produce two goods, beer and chocolate. If
Country H has an absolute advantage in the production of both goods, then:

(a) Country H will have a comparative advantage in the production of both
goods
(b) Country H will have a comparative advantage in the production of beer
(c) Country H will have a comparative advantage in the production of
chocolate
(d) Country H will have a comparative advantage in the production of at least
one good
(e) none of the above


8) Gains from trade means that:

(a) one country gains while another country loses
(b) both countries gain by expanding their production possibility frontiers
(c) no country has a comparative advantage
(d) no country has an absolute advantage
(e) none of the above