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Last Name: ____________________

First Name: ____________________
Student Number: ________________


Economics 100
Professor James E. Pesando



Term Test 1 October 21, 2011

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

total


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

Tues, 5-6pm - UC 144 Shahar
Tues, 6-7pm - SS 1088 Shahar
Wed, 1-2pm - SS 1088 - Adam
Wed, 3-4pm - UC A101 Alice
Wed, 4-5pm - RW 143 Yi Chuan
Wed, 5-6pm - MP 118 Alice
Thurs, 11am-12pm - MP 137 Jessica
Thurs, 12-1pm - BF 323 Jessica
Thurs, 1-2pm - SS 1072 Mathieu


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Question 1 (18 points)

Canada can produce 500 bushels of wheat per week or 50 cars per week. Japan
can produce 15 bushels of wheat per week or 15 cars per week.

(a) If trade takes place, which good will Japan export? Why?














(b) If the trade ratio is 5 bushels of wheat for one car, show in an appropriate
diagram the production possibilities frontier of Canada and Canadas
consumption possibilities frontier under trade.




Cars
















Bushels of Wheat



(c) If Canada could produce 50 bushels of wheat per week or 50 cars per week,
which good would Japan export in order to gain from trade? Why?



















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Question 2 (10 points)

You purchased a used car that needs repair for $1,000 and planned to sell it for
$2,500 after it is repaired. The cost of the repairs is $800. Unfortunately, you
discover that you can sell the car for only $1,500 after you repair it. You cannot
resell the car unless you fix it.

(a) What is the marginal benefit of repairing the car? What is the marginal cost?
Will you repair the car?












(b) How would the marginal benefit and marginal cost of repairing the car change
if you could sell the car, unrepaired, for $750? Would you repair the car?















Question 3 (12 points)

The market price of widgets is $10. The demand curve for widgets is downward
sloping. The supply curve of widgets is perfectly elastic. The government removes
a $2 sales tax on widgets, which was levied on sellers.

(a) What will happen to the price paid by buyers? Illustrate your answer in an
appropriate diagram. Explain the economic reason for this result.























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(b) In addition to removing the $2 sales tax, the government imposes a price floor of
$9. What is the new price in the market if the demand curve is unit elastic?
Illustrate your answer with an appropriate diagram. How does the fact that
demand is unit elastic affect the result?















Question 4 (30 points)

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

(a) Coffee and tea are substitutes. If there is a reduction in the supply of coffee, the
total revenues earned by coffee producers will increase if the demand for tea is
(price) inelastic.











(b) If the government imposes a price ceiling beneath the market-clearing price, total
surplus will fall. (To answer the question, students must draw an appropriate
diagram.)













(c) Without looking at the price, you decide to buy $50 worth of gas. Your demand
curve for gasoline is, therefore, inelastic.














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(d) The price of an apple is $1 and the price of an orange is $2. You are consuming
3 apples and 3 oranges. The marginal utility of the 3
rd
apple consumed is 10,
and the marginal utility of the 4
th
apple is $8. Therefore, you should be
consuming more apples.











(e) Your demand for alcoholic drinks is as follows:

Price Quantity
$10 1
$8 2
$6 3
$4 (or less) 4

You must pay $30 to enter the bar, but can have as many drinks as you want
once you are inside. You should pay the $30.











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


1) If the price elasticity of demand is 0.5, then a 10 percent increase in price
results in a

(a) 50 percent decrease in total revenues;
(b) 5 percent decrease in total revenues;
(c) 0.5 percent decrease in quantity demanded;
(d) 10 percent decrease in total revenues;
(e) none of the above.

2) Good X is an inferior good. If there is a fall in income, then

(a) quantity demanded will fall if demand is elastic;
(b) quantity demanded will increase if demand is perfectly inelastic;
(c) price will fall if supply is perfectly inelastic;
(d) quantity demanded will fall if supply is perfectly elastic;
(e) none of the above.

3) Suppose that in June, 2006, 100,000 cell phones were sold at a price of $30
each. And in June, 2007, 200,000 cell phones were sold at a price of $50 each.
One possible explanation for this is that from 2006 to 2007 the _______ curve
shifted to the _______.

(a) supply; left
(b) supply; right
(c) supply or demand; right
(d) demand; right
(e) none of the above.
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4) You bought a painting for $50. You put on a new frame, which cost $75. You
could now sell the painting with the new frame for $100. What is the opportunity
cost of giving this painting with the new frame to a friend, if the next best
alternative is to sell it?

(a) $50;
(b) $150;
(c) $100;
(d) $125;
(e) none of the above.

5) If the demand for widgets is perfectly elastic, and if a $2 sales tax is removed
from the sellers of widgets, then:

(a) the market price of widgets will fall;
(b) the quantity demanded of widgets will increase;
(c) the quantity supplied of widgets will fall;
(d) the quantity supplied of widgets will not change;
(e) none of the above.

6) If income increases by 5 percent and total expenditures on widgets falls by 5
percent, the price elasticity of the demand for widgets must be

(a) perfectly inelastic;
(b) inelastic;
(c) unit elastic;
(d) perfectly elastic;
(e) not possible to determine.

7) Suppose that the quantity demanded of a good rises from 90 units to 110 units
when the price falls from $1.20 to $0.80 per unit. The price elasticity of demand
for this product is:

(a) 4.0;
(b) 1.5;
(c) 2.0;
(d) 1.0;
(e) 0.5.

8) India and Nigeria are considering international trade. In India, 200 units of labour
can produce either 200 units of rice or 50 bicycles. In Nigeria, 200 units of labour
can produce either 25 units of rice or 25 bicycles. On the basis of this
information, which one of the following statements is correct?

(a) Nigeria has an absolute advantage in rice;
(b) Nigeria has an absolute advantage in bicycles;
(c) Nigeria should specialize in rice;
(d) India should specialize in rice;
(e) none of the above.

9) If the demand for wheat is unit elastic:

(a) the total revenues of wheat farmers would not change due to shifts in
demand;
(b) a shift in supply would not change wheat prices;
(c) a poor harvest would cause a decline in total revenues of wheat farmers;
(d) a good harvest would cause an increase in the quantity demanded of
wheat;
(e) none of the above.

10) The government imposes a price floor above the equilibrium market price.
As a result:

(a) quantity will fall and consumer surplus will fall;
(b) quantity will increase and consumer surplus will increase;
(c) price will increase and consumer surplus will increase;
(d) price will increase with no change in consumer surplus;
(e) none of the above.