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ECMA04H
First Term Test - October 17, 2009 Time: 90 minutes
Professor 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 26
th
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
answers are not written on this 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 (do not use a red pen)
! Fill in the bubble neatly and completely (this is important)
! Erase any changes as completely as possible
! Be very careful to place each answer in the correct place

Note: this exam consists of 8 pages, including this cover page. Make sure that all 8
pages are included in your exam, and notify an invigilator immediately if any are
missing.
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ECMA04 FIRST TERM TEST October 17, 2009

This term test consists of 25 questions. Answer each question by choosing the best alternative and
indicating your choice by filling in the appropriate bubble on the Scantron sheet - 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 question sheet. The answer sheet (Scantron) will not be returned to you, but the
answers will be posted on the course website (www.utsc.utoronto.ca/~cleveland), and of course your
mark will be posted on the Intranet. Each correct answer is worth 4 marks (there is no deduction for
wrong answers).


1"3. A country produces goods X and Y and has the following equation for its production possibilities
frontier: Y = 4(900 X
2
)
0.5
, 0<=X<=30
Questions 1 through 3 concern this country.

1. You are told that the economy is producing efficiently and has chosen to produce and consume 18 units
of X and 96 units of Y. At this point on the production possibilities frontier, you can use calculus to
obtain the opportunity cost of Y as:
A) 1/3 B) 1/2 C) 2/3 D) 1 E) 3 F) 4 1/3 G) 5!
H) 6 2/3 I) 7 3/8 J) none of the above

2. Now you are told that the economy is producing efficiently and has chosen to produce and consume 24
units of X. At this point on the production possibilities frontier, you can use calculus to obtain the
opportunity cost of X as:
A) 2 B) 2 ! C) 3/2 D) 4! E) 4.66 F) 5 1/3 G) 6!
H) 7 1/3 I) 7 3/8 J) none of the above


3. Suppose that those in charge of this economy want to maximize the utility of the residents of the
country, where utility can be computed according to the equation U = XY
2
The point on the PPF that
will maximize the value of the output involves the production of how many units of X (rounding to one
decimal place)?
A) 4.3 B) 6.7 C) 12.3 D) 17.3 E) 19.5 F) 22.7
G) 24.3 H) 26.1 I) 26.7 J) none of the above
3


4-5. The Department of Management at a major Canadian university has two main outputs: better
students and good research, represented by Y and X. We can assume that this department has a fixed
amount of faculty and other resources to use. The production possibilities frontier for this Department is
shown on the diagram below, along with several points, each of which represents a combination of X and
Y. Questions 4 and 5 deal with this diagram.













4. Fred Cooper, head of the Department of Management, thinks that as the pressure to publish more
research increases, the trade-off between students and research is getting worse. In terms of the diagram,
Fred is thinking about a movement from:
A) a point like A to a point like B or C B) a point like A to a point like D
C) a point like B or C to a point like D D) a point like B or C to a point like A
E) a point like D to a point like A F) a point like D to a point like B or C
G) a point like B to a point like C H) a point like C to a point like B
I) none of the above

5. The Vice Principal of Research at the University disagrees with Fred. He believes that faculty
members are not working hard enough at either teaching or research. Relating this to the diagram, we
might say that the Vice Principal is recommending that the Department of Management should move
from:
A) a point like A to a point like B or C B) a point like A to a point like D
C) a point like B or C to a point like D D) a point like B or C to a point like A
E) a point like D to a point like A F) a point like D to a point like B or C
G) a point like B to a point like C H) a point like C to a point like B
I) none of the above
Y better
students
X - research
C
B
A
D
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6"9. The market for potatoes is perfectly competitive , and is in equilibrium. Its short run supply and
demand schedules have the usual shapes. Potatoes are an inferior good and you can safely ignore any
effects of income on the demand for related goods. Ketchup (or catsup) is a complementary good to
potatoes, and spaghetti is a substitute good for potatoes. Questions 6 through 9 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 potatoes.

6. Due to the collapse of the stock market and impending recession, consumers incomes fall. At the same
time, the price of ketchup falls. As a result, in the market for potatoes:
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. The cost of potato harvesting machines rises. At the same time, the price of spaghetti falls. As a result,
in the market for potatoes:
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


8. Now, as the result of a baby boom and higher immigration, the population grows. At the same time,
due to positive economic policies, family incomes grow. As a result, in the market for potatoes:
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
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9. Many of the workers who harvest potatoes are brought into Canada on temporary visas. As a result of
changes in the labour legislation that affects these workers, wages of these workers rise. At the same
time, a technological innovation in potato harvesting makes this process more efficient, and cheaper. As a
result, in the market for potatoes:
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


10-13. The market for widgets has the following supply and demand curves:
Supply: P = 40 + 0.2Q
Demand: P = 100 - 0.1Q
Initially, the market is in equilibrium at P = $80, Q = 200. Questions 10 to 13 concern this market.

10. The government places a $12 per unit tax on the buyers of widgets. At the new equilibrium, the price
received by sellers will be:
A) $68 B) $70 C) $71 D) $72 E) $73 F) $74
G) $75 H) $76 I) $77 J) $78


11. Consider again the same $12 per unit tax on the buyers of widgets. At the new equilibrium, the price
paid by buyers (including the tax paid) will be:
A) $78 B) $79 C) $80 D) $81 E) $82 F) $83
G) $84 H) $86 I) $88 J) $90

12. How much is the excess burden due to the tax?
A) $80 B) $120 C) $140 D) $160 E) $180 F) $200
G) $220 H) $240 I) $260 J) $280

13. How much would the excess burden of this $12 tax be if the equation of the original supply curve had
been: Supply: P = 40 + 0.5Q ?

A) $80 B) $120 C) $140 D) $160 E) $180 F) $200
G) $220 H) $240 I) $260 J) $280


14. A (different) market is in equilibrium at the point P = $200, Q = 5000. You are told that at that point,
the elasticity of demand is 7.5 and the elasticity of supply is 2.5. If a $1 per unit tax is placed on consumers
in this market, then you know that the fraction (i.e., proportion) of the tax (rounded to the nearest two
decimal places) that falls on consumers (buyers) will be:
A) 0 B) 0.10 C) 0.25 D) 0.33 E) 0.50 F) 0.67
G) 0.75 H) 0.88 I) 0.90 J) 1.00





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15"19. A consumer has a utility function for a good X given by the following function:
U = 72 72(1 + .5X)
-1
= 72 72/(1 + .5X) , with 0<=X<=70
where X is the number units purchased each month and U is measured in dollars, and utility reaches its
maximum when X = 70 units. The good cannot be stored, but must be used in the month it is purchased.
Questions 15 through 19 concern this consumer.

15. If the price of X is set at $0.25 per unit, the number of units of X purchased by this consumer each
month will be:
A) 0 B) 2 C) 4 D) 8 E) 11 F) 18 G) 22
H) 26 I) 36 J) 40


16. If the price of X is set at $0.25 per unit, the consumer surplus gained by this consumer each month
through purchasing X will be:
A) $0 B) $10.00 C) $18.00 D) $22.50 E) $33.00 F) $40.50
G) $48.00 H) $54.00 I) $60.50 J) $70.00

17. If the price of X is set at $9.00 per unit, the number of units of X purchased by this consumer each
month (rounding to two decimal places) will be:
A) 0 B) 2 C) 4 D) 8 E) 11 F) 18 G) 22
H) 26 I) 36 J) 40


18. If the price of X is set at $9.00 per unit, the consumer surplus gained by this consumer each month
through purchasing X (rounding to two decimal places) will be:
A) $0 B) $10.00 C) $18.00 D) $22.50 E) $33.00 F) $40.50
G) $48.00 H) $54.00 I) $60.50 J) $70.00

19. 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 $0.25 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 all-inclusive payment
is. Given what we have learned, we predict that the consumer will decide to take the special promotional
offer only if the fee (rounding to two decimal places) is less than:
A) $0 B) $1.00 C) $4.00 D) $6.50 E) $9.50 F) $10.50
G) $12.00 H) $14.00 I) $20.50 J) $30.00















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20. Which of the following statements about the elasticity of demand are likely to be true?
I) the elasticity of demand is generally larger in the short run than in the long run
II) if the elasticity of demand is perfectly inelastic, the buyer bears all of the burden of a tax
III) if the elasticity of supply is perfectly inelastic, the buyer bears all of the burden of a tax
A) only I B) only II C) only III D) I & II
E) I & III F) II & III G) I, II & III H) none of the three

21-22. You are given the following demand curve for an industry:
P = 10 .025Q
Questions 21 and 22 concern this demand curve.

21. At the point on the demand curve where P = 6, the elasticity of demand, expressed as a positive number,
is:
A) 1/4 B) 1/3 C) 1/2 D) 2/3 E) 1 F) 1!
G) 2 H) 3 I) 4 J) 5

22. At the point on the demand curve where Q = 300, the elasticity of demand, expressed as a positive
number, is:
A) 1/4 B) 1/3 C) 1/2 D) 2/3 E) 1 F) 1!
G) 2 H) 3 I) 4 J) 5

23. (This demand curve is not the same as in questions 21 and 22!) An industry is operating at a point on
the demand curve where the price facing consumers is $20. We are told that the elasticity of demand,
expressed as a positive number, is 1/3. The industry hires us as a consultant, and asks us to figure out the
impact on the revenue collected by the industry when the quantity of output is raised by 1 unit. When we
get home, we realize that we have not been told the current output of the industry (but we do know that it is
a lot more than 1 unit, so that the proposed quantity increase is a small fraction of the current quantity).
Can we still work out the effect on revenue, and if so what is it?
A) yes, revenue will rise by approximately $10 B) yes, revenue will rise by approximately $20
C) yes, revenue will rise by approximately $30 D) yes, revenue will rise by approximately $40
E) yes, revenue will rise by approximately $50 F) yes, revenue will rise by approximately $60
G) yes, revenue will fall by approximately $50 H) yes, revenue will fall by approximately $40
I) yes, revenue will fall by approximately $30 J) yes, revenue will fall by approximately $20
















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24. The following statements provide an interpretation of the concept consumer surplus. Consumer surplus can
accurately be described as:
I) the surplus charged to consumers over and above the equilibrium price.
II) the total utility received by consumers.
III) a measure of the net benefit to consumers from consuming a good.
A) only I B) only II C) only III D) I & II E) I & III
F) II & III G) I, II & III H) none of the three

25. All other factors being equal, the more elastic the supply curve for a commodity:
I) the larger the revenue raised through taxation.
II) the smaller the buyers share of the tax.
III) the larger the excess burden of the tax.
A) only I B) only II C) only III D) I & II E) I & III
F) II & III G) I, II & III H) none of the three


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 C) Version C D) Version D