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ECMA04H
First Term Test - October 19, 2011 Time: 90 minutes
Profs. Gordon Cleveland and Jack Parkinson

Version B


Instructions: PLEASE READ CAREFULLY

1. On the Scantron answer sheet, you must
! PRINT your last name and first name
! enter your student number as the identification number
! FILL IN THE BUBBLES under your name and student number
! FILL IN THE BUBBLE ASSOCIATED WITH YOUR TEST VERSION
NOTE - THIS IS VERSION B

2. If you fail to carry out all the tasks indicated in part 1, 4 marks will be deducted
from your final score.

3. This exam consists of 25 multiple choice questions (and a 26
th
which will
confirm your exam version). For each question, choose the correct answer. If two
multiple choice answers both seem to be approximately correct, choose the best of
the two answers. Enter the answers to the multiple choice questions on the
Scantron sheet provided to you by filling in the appropriate bubble. If
answers are not written on this sheet, there will be no marks given for
answers. Each correct answer is worth 4 marks (except for question 26, where the
correct answer simply confirms your exam version); incorrect answers receive 0
marks.

4. When entering your answers on the Scantron sheet:
! Use a medium (HB) pencil (do not use a red pen)
! Fill in the bubble neatly and completely (this is important)
! Erase any changes as completely as possible
! Be very careful to place each answer in the correct place

Note: this exam consists of 9 pages, including this cover page. Make sure that all 9
pages are included in your exam, and notify an invigilator immediately if any are
missing.
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ECMA04 FIRST TERM TEST October 19, 2011

This term test consists of 25 questions. Answer each question by choosing the best alternative and
indicating your choice by filling in the appropriate bubble on the Scantron sheet - it is the only thing you
will turn in at the end of the exam. You may take the rest of the exam away with you, so you can use the
fronts and back of these pages for your rough work. If you wish to keep a record of your answers, make a
note of them on the exam question sheets. The answer sheet (Scantron) will not be returned to you, but
the answers will be posted on the Blackboard site, and of course your mark will be posted on the
Blackboard site as well. Each correct answer is worth 4 marks (there is no deduction for wrong answers).


1"3. A country produces goods X and Y and has the following equation for its production possibilities
frontier: Y = 8(400 X
2
)
0.5
, 0<=X<=20
Questions 1 through 3 concern this country.

1. You are told that the economy is producing efficiently and has chosen to produce and consume 12 units
of X and 128 units of Y. At this point on the production possibilities frontier, you can use calculus to
obtain the opportunity cost of Y as:
A) -12 B) -6 C) 0 D) 1/6 E) 3 F) 4 1/3 G) 5
H) 6 I) 8 J) none of the above

2. Now you are told that the economy is producing efficiently and has chosen to produce and consume 16
units of X. At this point on the production possibilities frontier, you can use calculus to obtain the
opportunity cost of X as:
A) 12/128 B) 16/136 C) 6/71 D) 1/6 E) 6 F) 8 1/3 G) 9
H) 10 2/3 I) 12 1/3 J) none of the above


3. Suppose that those in charge of this economy want to maximize the utility of the residents of the
country, where utility can be computed according to the equation U = XY
2
. How many units of X
(rounding to one decimal place) are included in the set of X and Y that will maximize the utility value of
the output produced?
A) 4.3 B) 6.7 C) 7.5 D) 8.2 E) 9.6 F) 11.5
G) 12.0 H) 13.3 I) 14.5 J) none of the above
3
4"6. The market for swordfish is perfectly competitive, and is in equilibrium. Its short run supply and
demand schedules have the usual shapes. Swordfish is a normal good and you can safely ignore any
effects of income on the demand for related goods. Lemons are a complementary good to swordfish, and
salmon is a substitute good for swordfish. Questions 4 through 6 concern the market for swordfish in the
short run, and each question should be considered in isolation from the others (that is, in each question
assume that the changes described in the other questions have not occurred). In all cases, P
*
and Q
*
refer
to the equilibrium price and quantity of swordfish.

4. Due to the collapse of the stock market and resulting recession, consumer incomes fall. At the same
time, the price of lemons falls. As a result, in the market for swordfish:
A) P
*
and Q
*
both rise B) P
*
and Q
*
both fall
C) P
*
rises and Q
*
falls D) P
*
falls and Q
*
rises
E) P
*
rises, but we do not know exactly what happens to Q
*

F) P
*
falls, but we do not know exactly what happens to Q
*

G) Q
*
rises, but we do not know exactly what happens to P
*

H) Q
*
falls, but we do not know exactly what happens to P
*

I) either P
*
and Q
*
both rise, or P
*
and Q
*
both fall, or neither changes
J) either P
*
rises and Q
*
falls, or P
*
falls and Q
*
rises, or neither changes

5. The cost of the specialized netting that is essential for catching swordfish rises. At the same time, the
price of salmon rises. As a result, in the market for swordfish:
A) P
*
and Q
*
both rise B) P
*
and Q
*
both fall
C) P
*
rises and Q
*
falls D) P
*
falls and Q
*
rises
E) P
*
rises, but we do not know exactly what happens to Q
*

F) P
*
falls, but we do not know exactly what happens to Q
*

G) Q
*
rises, but we do not know exactly what happens to P
*

H) Q
*
falls, but we do not know exactly what happens to P
*

I) either P
*
and Q
*
both rise, or P
*
and Q
*
both fall, or neither changes
J) either P
*
rises and Q
*
falls, or P
*
falls and Q
*
rises, or neither changes


6. Consumer tastes switch away from salmon due to negative scientific findings about effects on human
health. As a result, the price of salmon falls. At the same time, the price of lemons rises. As a result, in
the market for swordfish:
A) P
*
and Q
*
both rise B) P
*
and Q
*
both fall
C) P
*
rises and Q
*
falls D) P
*
falls and Q
*
rises
E) P
*
rises, but we do not know exactly what happens to Q
*

F) P
*
falls, but we do not know exactly what happens to Q
*

G) Q
*
rises, but we do not know exactly what happens to P
*

H) Q
*
falls, but we do not know exactly what happens to P
*

I) either P
*
and Q
*
both rise, or P
*
and Q
*
both fall, or neither changes
J) either P
*
rises and Q
*
falls, or P
*
falls and Q
*
rises, or neither changes
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7-8. A consumer has a utility function for a good X given by the following function:
U = 66(X + 6)
2/3
- 66 , X>0
where X is the quantity of the good purchased each month (quantity need not be an integer) and U is
measured in dollars. Questions 7 and 8 concern this consumer.

7. If the price of X is set at $11 per unit, the quantity of the good purchased by this consumer each month
will be:
A) 40 B) 46 C) 54 D) 58 E) 66
F) 68 G) 70 H) 74 I) 78 J) none of the above

8. If the price of X is set at $11 per unit, the consumer surplus gained by this consumer each month
through purchasing X will be:
A) $0 B) $208 C) $352 D) $368 E) $480
F) $496 G) $508 H) $612 I) $720 J) none of the above


9-10. You are given the following demand curve for an industry:
P = 24 .025Q
Questions 9 and 10 concern this demand curve.

9. At the point on the demand curve where P = 6, the elasticity of demand, expressed as a positive
number, is:
A) 1/4 B) 1/3 C) 1/2 D) 2/3 E) 1 F) 1!
G) 2 H) 3 I) 4 J) 5

10. At the point on the demand curve where Q = 480, the elasticity of demand, expressed as a positive
number, is:
A) 1/4 B) 1/3 C) 1/2 D) 2/3 E) 1 F) 1!
G) 2 H) 3 I) 4 J) 5
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11-14. The market for widgets has the following supply and demand curves:
Supply: P = 40 + 0.02Q
Demand: P = 100 - 0.1Q
Initially, the market is in equilibrium at P = $50, Q = 500. Questions 11 to 14 concern this market.

11. The government places a $12 per unit tax on the buyers of widgets. At the new equilibrium, the price
received by sellers will be:
A) $38 B) $40 C) $42 D) $44 E) $46 F) $47
G) $48 H) $49 I) $50 J) $52


12. Consider again the same $12 per unit tax on the buyers of widgets. At the new equilibrium, the price
paid by buyers (including the tax paid) will be:
A) $46 B) $50 C) $52 D) $54 E) $55 F) $56
G) $57 H) $58 I) $59 J) $60

13. How much is the excess burden due to the tax?
A) $400 B) $600 C) $800 D) $1000 E) $1200 F) $1800
G) $2400 H) $3000 I) $3600 J) none of the above

14. How much would the excess burden of this $12 tax be if the equation of the original supply curve had
been: Supply: P = 40 + 0.2Q ?

A) $80 B) $120 C) $140 D) $160 E) $180 F) $200
G) $220 H) $240 I) $260 J) $280




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15. When a perfectly competitive market reaches equilibrium, which of the following statements are true:
I. All consumers will get to consume the amount of the good they are willing to consume at that price
and all suppliers will get to supply the amount of the good they are willing to supply at that equilibrium
price
II. There will be no consumers who want to change their consumption behaviour and no suppliers who
wish to change their supply decisions.
III. The quantity of the good supplied by suppliers is just equal to the quantity of the good that consumers
wish to purchase.

A) only I B) only II C) only III D) I & II E) I & III
F) II & III G) I, II & III H) none of the three


16-18. A consumer has a kinked demand curve for a good given by the following function:

P = 8 - (1/6)Q 0 # Q # 24
P = 20 - (2/3)Q 24 # Q # 30

where Q is the number units purchased each month and P is measured in dollars. The demand function is
shown in the diagram below. The good cannot be stored, but must be used in the month it is purchased.
Questions 16 through 18 concern this consumer.




















16. If the price of this good is set at $2 per unit, the consumer surplus gained by this consumer each month
through purchasing it will be:
A) $0 B) $48 C) $55 D) $74 E) $81
F) $96 G) $99 H) $104 I) $112 J) $115

0
8
30 24 18 12 6
P
2
4
6
Q
7
17. One month, this consumer receives a special promotional offer through the mail offering a special deal
for one month only: instead of having to pay $2 per unit, the consumer will be allowed to consume
unlimited amounts of this good if the consumer makes an all-inclusive payment of $????. Unfortunately, as
you can see, the amount of the all-inclusive fee is missing, having been obscured by a printing error.
Intrigued, the consumer decides to call up the company to find out what the missing all-inclusive payment
is. Given what we have learned, we predict that the consumer will decide to take the special promotional
offer only if the fee is less than:
A) $30 B) $48 C) $51 D) $57 E) $59
F) $61 G) $65 H) $71 I) $75 J) $99


18. Now forget about the all-inclusive fee and return to the initial situation in which the consumer is
charged a price of $2 per unit. Suppose that the government imposes a tax of $3 per unit on this good, and
that the effect of the tax falls entirely on consumers. The deadweight loss associated with such a tax would
be:
A) $0 B) $3 C) $6 D) $9 E) $12
F) $15 G) $18 H) $21 I) $24 J) $27


19. A (different) market is in equilibrium at the point P = $200, Q = 5000. You are told that at that point,
the elasticity of demand is 2.5 and the elasticity of supply is 5.0. If a $1 per unit tax is placed on consumers
in this market, then you know that the fraction (i.e., proportion) of the tax (rounded to the nearest two
decimal places) that falls on consumers (buyers) will be:
A) 0 B) 0.10 C) 0.25 D) 0.33 E) 0.50 F) 0.67
G) 0.75 H) 0.88 I) 0.90 J) 1.00

20. (This demand curve is not the same as in the questions above!) An industry is operating at a point on
the demand curve where the quantity of output is 6,000 units. We are told that the elasticity of demand,
expressed as a positive number, is 1/3. The industry hires us as a consultant, and asks us to figure out the
impact on the revenue collected by the industry when the price is raised by $2. When we get home, we
realize that we have not been told the current price in this industry (but we do know that it is a lot more than
$2, so that the proposed price increase is a small fraction of the current price). Can we still work out the
effect on revenue, and if so what is it?
A) yes, revenue will rise by about $2000 B) yes, revenue will rise by about $4000
C) yes, revenue will rise by about $6000 D) yes, revenue will rise by about $8000
E) yes, revenue will rise by about $10000 F) yes, revenue will rise by about $2000
G) yes, revenue will fall by about $4000 H) yes, revenue will fall by about $6000
I) yes, revenue will fall by about $8000 J) yes, revenue will fall by about $10000



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21. A point on the graph of a supply curve has co-ordinates P
1
and Q
1
. Which of the following three
interpretations of this point (on the supply curve) are correct?:
I. The maximum price that any supplier will accept and still supply the good is P
1
and the minimum amount
any supplier is willing to supply at that price is Q
1
of the good.
II. At the price P
1
, the maximum amount of the good that suppliers are willing to supply is Q
1
of the
good.
III. Although some suppliers are willing to supply a good for less than P
1
, the minimum price
suppliers are willing to accept for the last unit of the good (i.e., the Q
1
th unit of the good) is P
1
.
(A) Only statement I is correct
(B) Only statement II is correct
(C) Only statement III is correct
(D) Statements I and II are both correct
(E) Statements I and III are both correct
(F) Statements II and III are both correct
(G) Statements I and II and III are all correct
(H) None of the statements are correct

22. If the government decides to levy a small excise tax on the buyers in a perfectly competitive market in
which the demand is perfectly elastic and supply curve is positively sloped, then we can conclude that:
(A) The buyers will bear all of the tax, and there will be some excess burden.
(B) The sellers will bear all of the tax, and there will be some excess burden.
(C) The tax burden will be shared. The buyers will bear more of the tax than sellers, and there will be some
excess burden.
(D) The tax burden will be shared. The sellers will bear more of the tax than buyers, and there will be some
excess burden.
(E) The buyers will bear all of the tax, and there will be no excess burden.
(F) The sellers will bear all of the tax, and there will be no excess burden.
(G) The tax burden will be shared. The buyers will bear more of the tax than sellers, and there will be no
excess burden.
(H) The tax burden will be shared. The sellers will bear more of the tax than buyers, and there will be no
excess burden.
(I) The buyers will bear all of the tax, and they will also bear the excess burden.
(J) none of the above

23. The price of a particular good rises by a small amount, and as a result the total amount of money spent
purchasing this good decreases. We can conclude that:
(A) In the neighbourhood of the original price, the supply curve of this good is elastic
(B) In the neighbourhood of the original price, the supply curve of this good is inelastic
(C) In the neighbourhood of the original price, the supply curve of this good is perfectly elastic
(D) In the neighbourhood of the original price, the supply curve of this good is perfectly inelastic
(E) In the neighbourhood of the original price, the demand curve of this good is elastic
(F) In the neighbourhood of the original price, the demand curve of this good is inelastic
(G) In the neighbourhood of the original price, the demand curve of this good is perfectly elastic
(H) In the neighbourhood of the original price, the demand curve of this good is perfectly inelastic
(I) In the neighbourhood of the original price, the demand curve of this good is unit elastic
(J) None of the above

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24-25. In the short run, a firm producing widgets has built plant and equipment that in total account for 24
units of physical capital. The firms short run production function is given by the function q = 24L
1/3
.
Questions 24 and 25 concern this firm.

24. In the short run, when L=125, the marginal product of labour is:
A) 0.32 B) 0.48 C) 0.66 D) 0.96 E) 1.00 F) 1.50
G) 2.45 H) 4.8 I) 120 J) none of the above


25. In the short run, when L=64, the average product of labour is:
A) 0.32 B) 0.48 C) 0.66 D) 0.96 E) 1.00 F) 1.50
G) 2.45 H) 4.8 I) 120 J) none of the above


26. What is the version of the exam that you have just written? Hint - your correct answer is B
A) Version A B) Version B C) Version C D) Version D