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Last Name: ____________________

First Name: ____________________
Student Number: ________________

Economics 100
Professor James E. Pesando

Term Test 1 – October 27, 2006

Length: 55 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

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examiner’s report:

question points

total
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1. (20 points) Country L and Country S each produce 2 goods, food and books.
In Country L, each worker can produce either 2 units of food or 4
books. In Country S, each worker can produce 4 units of food or 4
books.

(a) In each country, what is the opportunity cost of producing one

book? Which good will Country S import? Why?

(b) Due to climate change, each worker in Country L becomes one-half

as productive and thus can produce only 1 unit of food or 2 books.
How does this change the comparative advantage of Country L and
of Country S? Which good will Country S now import?

(c) If the trade ratio were one book for one unit of food, would Country
L benefit from trade? Why or why not? Would Country S benefit
from trade? Why or why not?

2. (14 points) You have decided to attend a rock concert, which is free. The
alternatives are to attend a hockey game, which you value at $30,
or to attend a book reading, which you value at $25. Both are also
free.

(a) What is the opportunity cost of your attending the rock concert?
Why?

(b) How would this opportunity cost change if the hockey game was no
longer free, but cost $15?
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(c) When you arrive at the rock concert, you are told that there is a
fee of $20 to pay for crowd control. Do you pay the $20 and attend
the rock concert or just go home? Why?

3. (18 points) Pete has the following willingness to pay for beer:

P 15 10 7 5 4 2 0
Q 1 2 3 4 5 6 7

In the local pub, a beer costs $5 (and the pub will sell an unlimited
quantity of beers at this price).

(a) Draw Pete’s demand curve for beer and, in an appropriate diagram,
show the equilibrium price and the quantity of beers that he will
consume. (Note: Pete’s demand curve is not linear.)

(b) What is Pete’s consumer surplus?

(c) On Friday nights, the pub charges a $15 cover (admission fee) and
each beer costs $5. Should Pete go to the pub on Friday nights
and, if so, how many beers should he consume?

(d) On Wednesday nights, the pub charges a $25 cover and drinks are
free. Assuming that Pete will go to the pub on Wednesday nights,
how many beers should he consume? Why?
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4. (12 points) A city provides the following three goods to its citizens, at the
indicated prices The city knows the price elasticity of each good,
which is as shown.

Parking Passes Snow Removal Symphony Tickets

Quantity 30,000 60,000 10,000

Price 10 5 30
Price elasticity 2.0 0.5 0.2

(a) If the mayor wants to increase revenues from the sale of each of
these goods, should the mayor increase or reduce the price of
each? Explain your answer.

(b) If the mayor decides to increase the price of only one of the goods
by 10% in order to increase revenues, which one should be chosen
so as to maximize the revenue raised?

5. (36 points, 4 each) Multiple Choice. Circle the correct answer.

1. Which of the following will definitely increase the equilibrium price?

(a) an increase in both demand and supply

(b) a decrease in both demand and supply
(c) an increase in demand combined with a decrease in supply
(d) a decrease in demand combined with an increase in supply
(e) none of the above

2. You bought a bottle of wine for $200. Unfortunately, the market for
wine has fallen, and you can now sell the wine for only $50. A new
shirt that you like is on sale for $60. If your next best alternative is
to sell the wine, what is the opportunity cost of drinking the wine?

(a) $200
(b) $150
(c) $50
(d) $60
(e) none of the above
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3. Bagels and cream cheese are complements. We observe that both

the equilibrium price of cream cheese and the equilibrium quantity
of bagels have risen. What could be responsible for this pattern?

(a) an increase in the price of flour (used to make bagels)

(b) a fall in the price of milk (used to make cream cheese)
(c) an increase in the price of milk
(d) a fall in the price of flour
(e) a decrease in the price of muffins, a close substitute for
bagels

4. A donut sells for $1 while a large cup of coffee costs $2. Julie does
not eat any donuts but she drinks 3 cups of coffee and derives 20
units of utility from the last cup she drinks. Since Julie maximizes
her utility, her marginal utility from the first donut must be (in units
of utility):

(a) 10
(b) 20
(c) less than 10
(d) more than 20
(e) zero

5. If per capita income increases by 5 percent and household

expenditures on fur coats increases by 15 percent, one can
conclude that:

(a) the price elasticity of demand for fur coats is elastic

(b) the price elasticity of demand for fur coats is inelastic
(c) the price elasticity of demand for fur coats is unity
(d) fur coats are an inferior good
(e) none of the above

6. The demand curve for a good is downward-sloping and the supply

curve is perfectly elastic. An increase in the price of an input used
to produce the good will:

(a) not affect consumer surplus

(b) increase consumer surplus
(c) reduce producer surplus
(d) not affect producer surplus
(e) none of the above

7. The supply curve for tuna fish is upward sloping. The government
introduces an income tax cut so that disposable incomes increase.
As a result, the price of tuna fish falls. We can therefore conclude
that:

(a) tuna fish is a normal good

(b) the demand curve for tuna fish is elastic
(c) the demand curve for tuna fish is inelastic
(d) tuna fish is a substitute good
(e) none of the above
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8. There is a sharp drop in the fish stocks in the Atlantic fishery

industry. As a result, we would expect to see

(a) increases in the demand for meat (e.g., beef), since this is a
complement to fish
(b) reductions in the price of fish, leading to reductions in the
demand for meat, since meat and fish are substitutes
(c) reductions in the price of fish, leading to increases in the
demand for meat, since meat and fish are substitutes
(d) increases in the demand for meat, since meat is a substitute
for fish
(e) increase in the price of fish, leading to reductions in the
demand for meat, since meat and fish are complements

9. The demand for a drug used to fight cancer is perfectly

inelastic. To encourage production, the government provides the
suppliers of the drug a subsidy of $100 for each unit of the drug
produced. The impact of the subsidy (i.e. a payment of $100 per
unit) on the market for this drug will be as follows:

(a) market price will rise by $100

(b) quantity demanded of the drug will increase
(c) market price will fall by $50
(d) market price will not change
(e) none of the above