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Last Name: ____________________

First Name: ____________________
Student Number: ________________

Economics 100
Professor James E. Pesando

Term Test 1 October 23, 2009

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


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Question 1 (16 points)

Russia can produce 50 cars per week or 200 computers per week. Japan can
produce 20 cars per week or 20 computers per week.

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

(b) If the trade ratio is 2 computers for one car, would Russia gain from trade?
Illustrate your answer by showing, in an appropriate diagram, the production
possibilities frontier of Russia and Russias consumption possibilities.

(c) If the trade ratio were one computer for one car, would Russia gain from trade?
Would Japan gain from trade? Explain your answer.

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Question 2 (8 points)

You purchase a broken machine for $600, knowing that you can sell it for $1,000
after it is repaired. You thought that the cost of the repairs would be $200, but
discover that the cost will be $700.

(a) If you cannot resell the machine unless you fix it, should you pay for the
repairs? Why or why not?

(b) Suppose you could sell the broken machine for $400. Because you would
suffer a loss, you should not do so. Is this correct? Explain.

Question 3 (16 points)

The demand curve for apples is as follow:

Price Quantity Demanded

12 12
10 16
8 20
6 24
4 28

The supply of apples is perfectly inelastic. The equilibrium price of apples is $8 per

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

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(b) The governments imposes a $2 sales tax on an apple, to be paid by sellers.

i) How much of the tax will be paid by buyers? How much will be paid by
sellers? Explain your answer.

ii) By how much will market output change? Why?

Question 4 (28 points)

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

(a) You buy a bottle of wine for $50. Your friend also buys the same bottle of wine,
but pays $35. You could sell your bottle of wine for $40. If your next best
alternative is to sell the wine, the opportunity cost if you choose to drink the wine
is $50.

(b) Oranges and apples are substitutes. If the price of apples falls, and the total
revenues received by orange producers falls, the demand for apples must be

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(c) The government removes a sales tax of $10 that had been levied on sellers (i.e.
sellers had to pay the tax). If the market price does not change, we can conclude
that the supply curve is perfectly elastic.

(d) Two groups of students go out for pizza. Group A goes to a pizza shop where
each student must pay $10 to enter, but can eat as many slices of pizza as he or
she wants at no additional cost. Group B goes to a different pizza shop, where
the students pay $2 for each slice of pizza they consume. Students in Group B
will, on average, consume more slices of pizza.

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

For Questions 1) and 2)
Your demand curve for baseball tickets is as follows:

Price Per Ticket Quantity Demanded
$1 4
$2 3
$10 2
$20 1

1) You buy 2 tickets at $10 each. The value to you of the two tickets is:

(a) $10
(b) $20
(c) $30
(d) Less than $30, but more than $20
(e) $32

2) The game is sold out, and you must buy tickets from a scalper. The scalper
offers to sell one ticket at $20 and a second ticket at $10. If you accept this
offer, what is the value of your consumer surplus?

(a) $10
(b) $20
(c) $30
(d) More than 30, but less than $32
(e) $0
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3) A firm increases its price. Its demand curve is perfectly inelastic. As a result:

(a) quantity sold increases and total revenue increases;
(b) quantity sold increases and total revenue declines;
(c) quantity sold decreases and total revenue increases
(d) quantity sold decreases and total revenue decreases;
(e) none of the above.

4) The equilibrium wage rate for unskilled workers is $8 per hour. The
government introduces a law which sets the minimum wage rate at $6 (so
that an unskilled worker cannot be paid less than $6 per hour). As a result:

(a) employment of unskilled workers will fall;
(b) the wage rate will fall;
(c) firms will not want to hire as many unskilled workers;
(d) the wage rate will rise;
(e) none of the above.

5) Your demand curve for apples is unit elastic. If the price of apples goes

(a) you will consume more apples;
(b) your total expenditure on apples will increase;
(c) you will consume more oranges, a substitute for apples;
(d) you will consume the same number of apples;
(e) none of the above.

6) John can produce 10 units of X per week or 5 units of Y per week. Jane can
produce 20 units of X per week or 10 units of Y per week. Which statement is

(a) John has a comparative advantage in the production of good X.
(b) Jane will export good X, if trade occurs.
(c) Jane will not benefit from trade.
(d) Jane can produce good Y at a lower opportunity cost than John.
(e) None of the above.

7) The price elasticity of demand for widgets is 4, while the income elasticity of
demand is 2 (so widgets are a normal good). The supply curve for widgets is
perfectly elastic. If there is an increase in income:

(a) price will rise and total revenue will fall;
(b) price will rise and total revenue will increase;
(c) price will rise and the impact on total revenue cannot be determined;
(d) price will be unchanged and total revenue will increase;
(e) none of the above.

8) The price of X is $5 and the price of Y is $10. At present, you are consuming
4 units of X and 6 units of Y. The marginal utility of the last unit consumed is
10 for good X and 22 for good Y. As a result:

(a) you should consume 6 units of good X;
(b) you should consume more of good Y;
(c) you should consume 5 units of good X;
(d) you should not change your consumption of X and Y;
(e) none of the above.