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UNIVERSITY OF TORONTO
DEPARTMENT OF ECONOMICS

INTRODUCTION TO ECONOMICS ECO100Y
LEC0301 & LEC6001

MICHAEL HO

TEST 1 SOLUTIONS
OCTOBER 19
TH
, 2012

Name:

ID#:

Tutorial #:

IMPORTANT:

If you do not provide the correct Tutorial #, then your test will be graded later.
Do not use red-coloured pen (this colour is reserved for the markers) and avoid using pencil in your
answer because you cannot appeal any part of your answer if it is done in pencil (except the diagram
in Question 2).
You must show the step-by-step calculations in every part of Question 1 or a zero will be given.
You must relate your explanation in Question 2 to your diagram for full marks.
Do not separate any page from this test.

Question 1 Question 2
Questions
3 to 7
Total
Marks 50 25 25 100
Score

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1. Suppose in the market for ECO100 private tutoring the supply curve is and the
demand curve is , where is the price of private tutoring per hour and is the
number of hours of private tutoring. (Note: Part (d) requires you to plot all your results)
1. (a) Show how to solve for equilibrium number of hours

## and price per hour

of private
tutoring, total revenue to the tutors

, consumer surplus

, producer surplus

, and
total surplus

. (18 marks)

1. (b) Suppose the government believes the tutors cannot earn a decent living at the equilibrium
price

from part (a) and it legislates to change the price of private tutoring by an hour
with a binding price floor

hours

## of private tutoring, total revenue to the tutors

, consumer surplus

, producer
surplus

## , and total surplus

. (18 marks)

1. (c) Can the price floor policy raise the total revenue for the tutors? Why? (8 marks)

The demand curve between (

) and (

## ) is elastic (with elasticity ).

1. (d) Plot all your results in a properly labeled diagram. (6 marks)

2. A country has no trade with the outside world and its automobile market (with downward-sloping
demand curve and upward-sloping supply curve) is initially in equilibrium with price

and
quantity

## . Suppose an earthquake destroys a significant portion of its automobile production

capacity. Use a properly labeled supply-demand diagram of automobiles to help you explain how
the adjustment mechanism discussed in class restores market equilibrium.
Diagram: 5 marks
Explanation: 20 marks

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Questions 3 to 7 (5 marks each)

3. A basic underlying point in economics is that
(A) governments should never interfere in the workings of a market economy.
(B) there are unlimited resources.
(C) governments should satisfy the needs of the people.
(D) people have limited wants in the face of limited resources.
(E) people have unlimited wants in the face of limited resources.

4. A positive statement is one that states
(A) what is desirable.
(B) non-negative numbers.
(C) what is and what should be.
(D) what is, was, or will be.
(E) what should be but is not.

5. Which of the following best defines quantity demanded?
(A) The amount, per time period, an individual desires and is able to purchase at the given price.
(B) The amount an individual purchases at its current price.
(C) The various amounts that a society desires at all relevant prices.
(D) The amount an individual purchases at his or her current income.
(E) The amount, per time period, that is desired at a given price.

6. When the percentage change in quantity demanded is greater than the percentage change in price
that brought it about, demand is said to be
(A) inelastic.
(B) elastic.
(C) perfectly elastic.
(D) perfectly inelastic.
(E) unit elastic.

7. At any disequilibrium price, whether controlled or not, the quantity actually exchanged is
determined by
(A) the elasticity of supply.
(B) the elasticity of demand.
(C) the lesser of quantity demanded and quantity supplied.
(D) the greater of quantity demanded and quantity supplied.
(E) government regulation.