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Solution to Test 1 Department of Economics Prof. Gustavo Indart University of Toronto June 22, 2004 SOLUTIONS ECO 100Y – L0201 INTRODUCTION TO ECONOMICS Midterm Test #1 LAST NAME FIRST NAME STUDENT NUMBER INSTRUCTIONS: 1. The total time for this test is 1 hour and 45 minutes. 2. This exam consists of three parts. 3. This question booklet has 16 (sixteen) pages. 4. Aids allowed: a simple calculator. DO NOT WRITE IN THIS SPACE Part I /40 Part III 1. /10 Part II 1. /5 2. /10 2. /5 3. /10 3. /5 4. /10 4. /5 TOTAL /100 Page 1 of 16 PART I (40 marks) Instructions: • The multiple choice questions are to be answered using a black pencil or a black or blue ball-point pen on the separate (SCANTRON) sheet being supplied. Be sure to fill in your name and student number on the SCANTRON sheet! When you finish your examination, place the SCANTRON sheet inside the question booklet. • Each question is worth 2 (two) marks. No deductions will be made for incorrect answers. • You may use the question booklet as a worksheet to answer questions, and then transfer your answers onto the SCANTRON sheet. Make sure that all your answers are transferred onto the SCANTRON sheet. In case of a disagreement, the answer to be marked is the one in the SCANTRON sheet. 1. A society can increase its production possibilities curve through a) investment = depreciation b) positive net investment c) emigration of the labour force d) technological improvement with no change in resources e) both b) and d) are correct 2. Sean has received a $2,000 scholarship to attend university as a full time student this year. Sean therefore had to give up his full time job in which he earned $20,000 per year. In addition, Sean must pay tuition of $5,000; buy text books for $500 and enrol in a university residence which costs $10,000 per year. The opportunity cost for Sean to become a full-time university student thus becomes: a) $20,000 b) $25,000 c) $33,500 d) $15,500 e) $35,500 3. Assume that apples and oranges are substitute goods in consumption. Given the initial supply and demand curves for apples, a reduction in the price of oranges will tend to a) increase the price of apples b) increase the demand for apples c) increase the demand for oranges d) decrease the demand for oranges e) decrease the price of apples 4. With a given supply curve for sirloin steak, a normal good, a rise in household income will cause a) the equilibrium price to increase and the equilibrium quantity of sirloin steak to decrease b) both the equilibrium price and the equilibrium quantity of sirloin steak to increase c) both the equilibrium price and the equilibrium quantity of sirloin steak to decrease d) the equilibrium price to decrease and the equilibrium quantity of sirloin steak to increase e) none of the above 5. If demand is inelastic, a very good harvest will cause farm receipts to a) increase because of the increase in quantity that farmers can sell b) remain unchanged, because the increase in the quantity that can be sold will be matched by an equal decrease in price c) increase because of the downward movement along the supply curve, encouraging an increase in demand d) decrease because the percentage fall in price is greater than the percentage increase in quantity sold e) decrease because the percentage fall in price is less than the percentage increase in quantity sold Page 2 of 16 6. The price of apples at a local market rises from $2.95 to $3.05 per kilo, and as a result the quantity of oranges that households purchase increases from 3,950 to 4,050 kilos/week. The cross-price elasticity is a) -1.33 b) -0.75 c) 0.75 d) 1.33 e) insufficient information to know 7. Suppose fixed costs are $100 and average variable costs are constant regardless of output. Which of the following is then true? a) marginal cost will equal average total cost b) average total cost will decrease when output increases c) marginal cost will be less than average variable cost d) average total cost will be constant e) none of the above 8. For a certain firm, total cost is $10 at 5 units of output and $13 for 6 units. In that range of output, marginal cost is a) decreasing b) less than average variable cost c) greater than average total cost d) equal to average variable total cost e) less than average total cost 9. Which one of the following statements is correct relating to the imposition of a specific commodity tax on a perfectly competitive industry in the short run: a) the more inelastic the demand curve, the smaller the tax burden of the tax on consumers b) the more elastic the demand curve, the smaller the reduction in industry output c) the more inelastic the demand curve, the smaller the tax revenue received by the government d) the more elastic the demand curve, the greater the price increase for consumers e) none of the above are correct 10. Suppose all farmers grow both wheat and oats for sale. If the price of oats increases, we would predict that farmers would react in such a way that, ceteris paribus, a) the supply of wheat would increase causing the price of wheat to fall b) the supply of wheat would decrease causing the price of wheat to rise c) the price of wheat would not be affected d) the price of wheat might rise or fall but the supply of wheat would definitely fall. e) the price of wheat would fall 11. Which one of the following statements is correct: a) marginal product is at a maximum when marginal product equals average product b) average product is at a maximum when average product equals marginal product c) marginal product is at a maximum when a ray from the origin is tangent to the total physical product curve d) marginal product will reach a maximum when total product reaches a maximum e) none of the above 12. If the total cost of producing one unit of output is $1,000 and marginal cost of that unit is $250, the average fixed cost of producing two units of output is a) $375 b) $500 c) $750 d) $1,250 e) none of the above Page 3 of 16 13. An increase in household income and a technological change that improves production will cause which of the following scenarios in the market for a normal good? a) price and quantity would both be higher b) price and quantity would both be lower c) price might be higher or lower but the new equilibrium quantity would be higher d) price would be lower but the new equilibrium quantity would be higher e) price and quantity could be lower or higher 14. Diminishing returns in the short-run begin immediately after a) total product is at a maximum b) average product is at a maximum c) marginal product is at a maximum d) average variable costs are at a minimum e) average costs are at a minimum 15. If the demand for sugar decreases when the price of honey falls, then sugar a) is a normal good b) is an inferior good c) is a substitute for honey in consumption d) is a complement of honey in consumption e) is a complement of honey in production 16. If potatoes are a Giffen good, then an increase in the price of potatoes will cause a) an increase in the demand for potatoes b) a decrease in the quantity demanded of potatoes c) a decrease in the demand for potatoes d) an increase in the quantity demanded of potatoes e) a decrease in money income 17. The demand for shrimp would decrease if a) the price of shrimps increases b) disposable incomes increase and shrimp was a normal good c) disposable incomes decrease and shrimp was an inferior good d) the price of white wine (a complementary good) decreases e) the price of salmon (a substitute good) decreases 18. If the price elasticity of demand for tape decks is -0.5, then a 20% increase in price will a) reduce quantity demanded by 40% b) reduce quantity demanded by 5% c) increase total expenditure d) increase quantity demanded by 40% e) increase quantity demanded by 10% 19. If the price elasticity of demand for opera was inelastic, then total receipts from opera a) increase with a rise in price of opera b) decrease with a rise in price of opera c) increase with a fall in price of opera d) increase with a fall in price of ballet e) increase with an increase in income 20. When marginal product is at a maximum a) average product is falling b) marginal product equals average product c) total product is at a maximum d) marginal cost is at a maximum e) marginal cost is at a minimum Page 4 of 16 Solutions to Multiple Choice Questions 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 e c e b d c b c e b b a c c c d e c a e PART II (20 marks) Instructions: • Answer true or false to the following statements and explain your answers in the space provided (if space is not sufficient, continue on the back of the previous page). • Draw the appropriate diagram or diagrams to assist your answer.
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