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# Name: Directions

Simon Fraser University Economics 103 Midterm Exam October 25, 2011 Professor D. W. Allen TA Name:

Mechanical Questions 1) In the graph below I want you to draw a demand curve with a solid line. On your graph indicate the quantity demanded for some arbitrary relative price, the marginal value, the consumers surplus, and the total expenditure. Now, with a dashed line, draw a new demand curve for this good if the price of a substitute goes up.

2) With just one sentence answers, tell me: a. What is the principle of substitution?

## b. What is the equation for a cross price elasticity?

c. If at p1 = 7, the elasticity of demand for good 1 is .43, is total revenue maximized? If not, in which direction must the price move to maximize revenue?

d. If good 1 has an income elasticity of .2, then will a fall in income lead to an increase in the demand for good 1?

e. When several consumers are in the market for good 1 and it sells for p1 = 15, then what can we say about every consumers marginal value?

3) Two people make up a small economy producing oats and/or shirts. The table below shows the maximum each individual can produce in one day for each good (and any linear combination).

a. Who has the comparative advantage in producing Oats? In producing shirts? b. In terms of shirts, what is the cost of producing one unit of oats for Sam? For Lindsay? c. If the total number of shirts produced is 100, then how many units of oats will be produced if production takes place according to comparative advantage? d. In the space below, draw the production possibility curve assuming that both Sam and Lindsay specialize according to their comparative disadvantage. Make sure to label everything, and to use the numbers from the table.

4) You are given the following demand curve: Q = 202P . The table below contains several points along this demand curve. Calculate the quantity demanded, the point elasticities at each given price (fractions are okay), and the total revenue at those points. P 8 7 6 5 4 3 Q Elasticity Total Revenue

5) Suppose you own two factories (1 and 2) that produce shoes. One factory is old, while the other is newer and so the costs are dierent at each factory. The costs of producing various levels of shoes is given below:
Q 1 2 3 4 5 6 7 8 T C1 1 4 9 16 25 36 49 64 MC1 T C2 6 12 18 24 30 36 42 48 MC2

a. In the table, ll in the marginal costs at each rm. b. Suppose your rm has orders for ten units. How many should be produced at factory 1 in order to minimize total costs? At factory 2? c. What are the total costs of producing ten units? d. What is true about the marginal costs of producing shoes at each plant when the costs of ten shoes are minimized?

Economic Questions Keep your answers to these questions very short and to the point. 6) The Grand Turks is a small island in the Caribbean Sea. It is about seven miles long, one and a half miles wide, at, and with a population of about 3700. Up until 2005 it was fast becoming a popular place for wealthy Americans to build large vacation homes on the beach. In 2005 a surprise Hurricane Rita hit and pretty much blew everything o the island that was not nailed down. Today, when you visit the island you notice several odd things: many cattle, donkeys, and dogs roam everywhere after being abandoned; and very nice homes sit empty everywhere, both built and half built. Why would people abandon a nice home along with their pets and animals after theyd spent so much money to develop their property?

7) The Ten Commandments are a set of Jewish laws. They mostly consist of statements that start Thou Shalt Not ..., as in Thou Shalt Not Commit Adultery. What economic principle are statements like this directly addressing?

10) Lady Gaga (shes a pop singer) has an estimated net worth of \$110,000,000. Does she face a problem of scarcity? Explain.

9) Lets assume that everyone values their personal space and they value sitting down on public transit. When on public transit in

Vancouver it is considered common courtesy to stand rather than sit down beside someone else, especially if the train or bus is not that crowded. So on a half full train, it is not uncommon to see people standing, even though every other seat is still available. On the other hand, if the bus or train is crowded, it is perfectly acceptable to sit down beside someone if a seat is available. Explain this behavior using the concept of Pareto Optimality?

8) The NHL has a problem. Some of its best players are suering from serious concussions caused by hard hits (not just to the head but to the entire body). The league is struggling what to do about this growing problem. One of the major innovations in hockey over the past 20 years has been the invention of body armor. This equipment protects the wearer from injury when hitting other players. How might the use of body armor have contributed to the rise of brain injuries in hockey?

11) Blue Laws are laws that restrict businesses from operating on Sundays. Although several states still have Blue Laws, the numbers are diminishing. What do you think happens to church attendance within a state after Blue Laws are eliminated? Why?