Download Test Questions - October 26, 2007 - Version A

ECMA04H
First Term Test - October 26, 2007
Time: 90 minutes
Professors Michael Krashinsky and Gordon Cleveland
Version A
Instructions: PLEASE READ CAREFULLY
1. On the Scantron answer sheet, you must
 PRINT your last name and first name
 enter your student number as the identification number
 FILL IN THE BUBBLES under your name and student number
 FILL IN THE BUBBLE ASSOCIATED WITH YOUR TEST VERSION
NOTE - THIS IS VERSION A
2. If you fail to carry out all the tasks indicated in part 1, 4 marks will be deducted
from your final score.
3. This exam consists of 25 multiple choice questions (and a 26th which will
confirm your exam version). For each question, choose the correct answer. If two
multiple choice answers both seem to be approximately correct, choose the best of
the two answers. Enter the answers to the multiple choice questions on the
Scantron sheet provided to you by filling in the appropriate bubble. If the
bubbles are not filled in on the Scantron sheet, there will be no marks given
for answers. Each correct answer is worth 4 marks (except for question 26, where
the correct answer simply confirms your exam version); incorrect answers receive 0
marks.
4. When entering your answers on the Scantron sheet:
 Use a medium (HB) pencil
 Fill in the bubble neatly and completely
 Erase any changes as completely as possible
 Be very careful to place each answer in the correct place
Note: this exam consists of 9 pages, including this cover page. Make sure that all 9
pages are included in your exam, and notify an invigilator immediately if any are
missing.
Page 2 of 9
ECMA04H FIRST TERM TEST
October 26, 2007
This term test consists of 25 questions (plus a 26th identifier question). Answer each question by choosing
the best alternative and indicating your choice in the appropriate place on the scantron sheet provided with
this exam (it is the only thing you will turn in at the end of the exam). You may take the rest of the exam
away with you, so you can use the fronts and back of these pages for your rough work. If you wish to keep
a record of your answers, make a note of them on the exam. The scantron sheet will not be returned to
you, but correct answers will be posted, and your grade will be communicated to you through the intranet.
Each correct answer to questions 1 through 25 is worth 4 marks (there is no deduction for wrong answers).
1-4. A country produces goods X and Y and has the following equation for its production possibilities
frontier (or production possibilities curve):
Y = 30 - [30/(30 - X)]
Questions 1 through 4 concern this country.
1. The point X = 10, Y = 28 is:
A) attainable and efficient
D) unattainable and efficient
B) attainable and inefficient
E) imaginable and feasible
C) unattainable
F) none of the above
2. You are told that the economy is producing efficiently and has chosen to produce and consume 20 units
of X and 27 units of Y. At this point on the production possibilities frontier, you can use calculus to obtain
the opportunity cost of X as:
A) 3
F) 10/3
B) 1/3
G) 1.5
C) 9
H) 2/3
D) 1/9
I) 20/27
E) 0.3
J) 27/20
3. Now you are told that the economy is producing efficiently and has chosen to produce and consume 28
units of X. At this point on the production possibilities frontier, you can use calculus to obtain the
opportunity cost of Y as:
A) 15
F) 1/2
B) 1/15
G) 28/15
C) 7.5
H) 15/28
D) 2/15
I) 14
E) 2
J) 7
4. Suppose that those in charge of this economy want to maximize the value of the output produced. Each
unit of X sells for $5 and each unit of Y sells for $6, so that the value of the output can be represented by
the equation V = 5X + 6Y The point on the PPF that will maximize the value of the output involves the
production of how many units of X ?
A) 0
F) 20
B) 5
G) 22.5
C) 10
H) 24
D) 15
I) 25
E) 18
J) 27
Page 3 of 9
5. A graduating high school student is trying to decide whether or not to go to university. If the student
goes to university, she will move into an apartment with some friends near campus. If the student does not
go to university, she will get a job and will also move into the apartment with her friends. The opportunity
cost of going to school includes which of the following items?
I) the cost of tuition and books at the university
II) the cost of the apartment and food
III) the value of the leisure time foregone because of the need to study at university
A) only I
F) II & III
B) only II
G) I, II & III
C) only III
D) I & II
H) none of the three
E) I & III
6-10. The market for pizza (which we will assume is produced in a competitive industry) is in equilibrium,
and its short run supply and demand schedules have the usual shapes. Pizza is a normal good and you can
safely ignore any effects of income on the demand for related goods. Beer is a complementary good to
pizza, and submarine sandwiches are a substitute good for pizza. Questions 6 through 10 concern this
market in the short run, and each question should be considered in isolation from the others (that is, in each
question assume that the changes described in the other questions have not occurred). In all cases, P* and
Q* refer to the equilibrium price and quantity of pizza.
6. The price of beer rises. As a result, in the market for pizza:
A) P* and Q* both rise
B) P* and Q* both fall
C) P* rises and Q* falls
*
*
*
D) P falls and Q rises
E) P rises, but we do not know exactly what happens to Q*
*
F) P falls, but we do not know exactly what happens to Q*
G) Q* rises, but we do not know exactly what happens to P*
H) Q* falls, but we do not know exactly what happens to P*
I) either P* and Q* both rise, or P* and Q* both fall, or neither changes
J) either P* rises and Q* falls, or P* falls and Q* rises, or neither changes
7. Wages in the pizza delivery industry fall. At the same time, the price of submarine sandwiches falls.
As a result, in the market for pizza:
A) P* and Q* both rise
B) P* and Q* both fall
C) P* rises and Q* falls
*
*
*
D) P falls and Q rises
E) P rises, but we do not know exactly what happens to Q*
*
F) P falls, but we do not know exactly what happens to Q*
G) Q* rises, but we do not know exactly what happens to P*
H) Q* falls, but we do not know exactly what happens to P*
I) either P* and Q* both rise, or P* and Q* both fall, or neither changes
J) either P* rises and Q* falls, or P* falls and Q* rises, or neither changes
Page 4 of 9
8. Wages in the pizza delivery industry rise. At the same time, a technological innovation in the design of
pizza ovens lowers the resources and time required to produce pizzas. As a result, in the market for pizza:
A) P* and Q* both rise
B) P* and Q* both fall
C) P* rises and Q* falls
*
*
*
D) P falls and Q rises
E) P rises, but we do not know exactly what happens to Q*
*
F) P falls, but we do not know exactly what happens to Q*
G) Q* rises, but we do not know exactly what happens to P*
H) Q* falls, but we do not know exactly what happens to P*
I) either P* and Q* both rise, or P* and Q* both fall, or neither changes
J) either P* rises and Q* falls, or P* falls and Q* rises, or neither changes
9. A story appears in the papers which reports on scientific research which proves that eating pizza raises
intelligence, leads to better paying jobs, and causes those eating pizza to attract better looking spouses. At
the same time, consumer incomes rise. As a result, in the market for pizza:
A) P* and Q* both rise
B) P* and Q* both fall
C) P* rises and Q* falls
*
*
*
D) P falls and Q rises
E) P rises, but we do not know exactly what happens to Q*
F) P* falls, but we do not know exactly what happens to Q*
G) Q* rises, but we do not know exactly what happens to P*
H) Q* falls, but we do not know exactly what happens to P*
I) either P* and Q* both rise, or P* and Q* both fall, or neither changes
J) either P* rises and Q* falls, or P* falls and Q* rises, or neither changes
10. The price of pepperoni, a key ingredient in the making of pizza, rises. At the same time, the price of
beer falls. As a result, in the market for pizza:
A) P* and Q* both rise
B) P* and Q* both fall
C) P* rises and Q* falls
*
*
*
D) P falls and Q rises
E) P rises, but we do not know exactly what happens to Q*
F) P* falls, but we do not know exactly what happens to Q*
G) Q* rises, but we do not know exactly what happens to P*
H) Q* falls, but we do not know exactly what happens to P*
I) either P* and Q* both rise, or P* and Q* both fall, or neither changes
J) either P* rises and Q* falls, or P* falls and Q* rises, or neither changes
Page 5 of 9
Supply Curve of Labour
11. In your later studies in economics, you will
W
learn that supply curves for labour can be
“backward bending” (that is, can be negatively
sloped if a rise in the wage rate leads workers to
want to work less in order to take more vacations
and more leisure time). Such a supply curve is
represented at the right, where w is the wage rate
per hour and L is the number of hours of labour.
The demand curve for labour (representing the
number of hours of labour demanded by firms
which hire these workers) can be assumed to be
L
downward sloping, as usual in this course.
Which of the following statements about the stability of this situation is (are) generally true?
I) This labour market will be stable if the demand curve is flatter than the supply curve.
II) This labour market is inherently unstable.
III) This labour market will be stable if a rise in wages leads to excess supply of hours of work.
A) only I
F) II & III
B) only II
G) I, II & III
C) only III
D) I & II
H) none of the three
E) I & III
12. The government sets an effective minimum wage for workers. Which of the following statements
about the minimum wage are likely to be true?
I) Unemployment rates for low-skill workers are likely to decrease.
II) Employers may respond by buying more machines to replace low-skill workers.
III) All low-skill workers will be made better off by such a policy.
A) only I
F) II & III
B) only II
G) I, II & III
C) only III
D) I & II
H) none of the three
E) I & III
Page 6 of 9
13-16. A consumer has a demand curve for a good X given by the following function:
P
= 12 - (1/3)X
= 9.5 - (1/8)X
0  X  12
12  X  76
where X is the number units purchased each month and P is measured in dollars. The demand function is
shown in the diagram below. The good cannot be stored, but must be used in the month it is purchased.
Questions 13 through 16 concern this consumer.
Price
12
8
0
12
76
Quantity
13. If the price of X is set at $4 per unit, the consumer surplus gained by this consumer each month
through purchasing X will be:
A) $24
F) $96
B) $48
G) $72
C) $64
H) $112
D) $136
I) $120
E) $176
J) $312
14. One month, this consumer receives a special promotional offer through the mail offering a special deal
for one month only: instead of having to pay $4 per unit, the consumer will be allowed to consume
unlimited amounts of this good X if the consumer makes an all-inclusive payment of $????.
Unfortunately, as you can see, the amount of the all-inclusive fee is missing, having been obscured by a
printing error. Intrigued, the consumer decides to call up the company to find out what the missing allinclusive payment is. Given what we have learned, we predict that the consumer will decide to take the
special promotional offer only if the fee is less than:
A) $4
F) $96
B) $64
G) $72
C) $120
H) $121
D) $136
I) $312
E) $176
J) $240
15. Now forget about the all-inclusive fee and return to the initial situation in which the consumer is
charged a price of $4 per unit. Suppose that the government imposes a tax of $5 per unit on this good, and
that the effect of the tax falls entirely on consumers (so that the price paid by consumers rises to $9). The
tax revenue raised by such a tax would be:
A) $5
F) $30
B) $10
G) $40
C) $15
H) $45
D) $20
I) $50
E) $25
J) $60
16. Continue with the tax described in question 15. The deadweight loss associated with such a tax would
be:
A) $64
F) $24
B) $45
G) $13.50
C) $76
H) $58.50
D) $77.50
I) $81
E) $87.50
J) $136
Page 7 of 9
17-18. A consumer has a utility function for a good X given by the following function:
U = 10X - (2/3)X3/2
where X is the quantity of the good purchased each month (quantity need not be an integer) and U is
measured in dollars. Questions 17 and 18 concern this consumer.
17. If the price of X is set at $4 per unit, the quantity of the good purchased by this consumer each month
will be:
A) 1
F) 16
B) 2
G) 25
C) 4
H) 36
D) 6
I) 49
E) 9
J) 64
18. If the price of X is set at $4 per unit, the consumer surplus gained by this consumer each month
through purchasing X will be:
A) $0
F) $144
B) $36
G) $160
C) $72
H) $180
D) $108
I) $288
E) $116
J) $360
19. Which of the following statements about elasticity and total expenditure by consumers is (are)
generally true?
I) If the elasticity of demand is one, changes in price will have little or no effect on the total
amount spent on the good by consumers.
II) If the demand is elastic, a rise in price will in general cause the total amount spent on the
good by consumers to fall.
III) If the demand is inelastic and producers try to sell more of the good, the total revenue received
by producers will generally rise.
A) only I
F) II & III
B) only II
G) I, II & III
C) only III
D) I & II
H) none of the three
E) I & III
Page 8 of 9
20-22. The market for widgets has the following supply and demand curves:
Supply:
P = 200 + 0.1Q
Demand:
P = 600 - 0.3Q
Initially, the market is in equilibrium at P = $300, Q = 1000. Questions 20 through 22 concern this
market.
20. The government places a $24 per unit tax on the buyers of widgets. At the new equilibrium, the price
paid by buyers (including the tax paid) will be:
A) $300
F) $312
B) $304
G) $316
C) $306
H) $318
D) $308
I) $320
E) $310
J) $324
21. Again, the government places a $24 per unit tax on the buyers of widgets. At the new equilibrium, the
price received by sellers will be:
A) $300
F) $286
B) $296
G) $284
C) $294
H) $282
D) $292
I) $280
E) $288
J) $276
22. Now suppose that the government alters its policy so that the $24 per unit tax is now placed on the
sellers of widgets instead of on the buyers. Economic theory tells us the following:
A) the buyers’ share and the sellers’ share are reversed by the change in policy
B) the buyers’ share and the sellers’ share are not affected by the change in policy
C) the shares are affected by the change in policy, but exactly how depends on the elasticities
D) the shares are affected by the change in policy, but exactly how depends on excess demand
E) the shares are affected by the change in policy, but exactly how depends on excess supply
F) the shares are affected by the change in policy, but exactly how depends on utility
G) none of the above
Page 9 of 9
23-25. In the long run, a firm producing skyhooks has the following production function:
q = (K0.5 + L0.5)2
where q is output, K is physical capital, and L is labour. In the short run, the firm has plant and equipment
that in total account for 16 units of physical capital. Questions 23 through 25 concern this firm.
23. In the short run, when L=9, the marginal product of labour is:
A) 1
F) 13
B) 9
G) 4/3
C) 3
H) 7/3
D) 1/9
I) 3/4
E) 1/3
J) 3/7
24. Suppose that the price of labour is $11 per unit and the price of capital is $4 per unit. In the short run,
when L=4, the average cost (also called the average total cost) (computed to the nearest penny) is:
A) $11.00
F) $27.00
B) $4.00
G) $9.00
C) $15.00
H) $18.00
D) $0.42
I) $5.00
E) $3.00
J) $5.56
25. Suppose that the price of labour is $11 per unit and the price of capital is $4 per unit. In the short run,
when L=4, the marginal cost (computed to the nearest penny) is:
A) $0
F) $1.22
B) $11.00
G) $2.44
C) $3.33
H) $4.50
D) $3.67
I) $5.00
E) $0.75
J) $5.56
26. What is the version of the exam which you have just written? Hint - your correct answer is A
A) Version A
B) Version B