ECMA04H

First Term Test - October 20, 2010 Time: 90 minutes

Prof. 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
! 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 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.


Page 2 of 8
ECMA04H FIRST TERM TEST October 20, 2010

This term test consists of 25 questions (plus a 26
th
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 this test booklet. The scantron sheet will not be
returned to you, but correct answers will be posted on the course website, and your grade will be available
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. A point on the graph of a demand curve has co-ordinates P
1
and Q
1
. Which of the following three
interpretations of this point (on the demand curve) are correct?:
I. The maximum price that any consumer is willing to pay for this good is P
1
and the minimum amount
this consumer is willing to purchase at that price is Q
1
of the good.
II. At the price P
1
, the maximum amount of the good that consumers are willing to purchase is Q
1
of the
good.
III. Although some consumers are willing to pay more than P
1
for this good, the maximum price
consumers are willing to pay for the last unit of the good (i.e., the Q
1
th unit of the good) is P
1
.

(A) Only statement I is correct
(B) Only statement II is correct
(C) Only statement III is correct
(D) Statements I and II are both correct
(E) Statements I and III are both correct
(F) Statements II and III are both correct
(G) Statements I and II and III are all correct
(H) None of the statements are correct


2. If the government decides to levy a small excise tax on the buyers in a perfectly competitive market in
which the elasticity of demand is greater than the elasticity of supply, then we can conclude that:
(A) The buyers will bear all of the tax
(B) The sellers will bear all of the tax
(C) The buyers will bear more of the tax than sellers
(D) The sellers will bear more of the tax than buyers
(E) The government will bear most of the tax
(F) It is not possible to tell who will bear most of the tax without additional information
(G) The tax will be shared equally between the buyers and the sellers
(H) There will be a smaller amount of excess burden than there would have been if the elasticity of supply
is greater than the elasticity of demand
(I) all of the above
(J) none of the above













Page 3 of 8
3. The price of a particular good falls by a small amount, and as a result the total amount of money spent
purchasing this good decreases. We can conclude that:
(A) In the neighbourhood of the original price, the supply curve of this good is elastic
(B) In the neighbourhood of the original price, the supply curve of this good is inelastic
(C) In the neighbourhood of the original price, the supply curve of this good is perfectly elastic
(D) In the neighbourhood of the original price, the supply curve of this good is perfectly inelastic
(E) In the neighbourhood of the original price, the demand curve of this good is elastic
(F) In the neighbourhood of the original price, the demand curve of this good is inelastic
(G) In the neighbourhood of the original price, the demand curve of this good is perfectly elastic
(H) In the neighbourhood of the original price, the demand curve of this good is perfectly inelastic
(I) In the neighbourhood of the original price, the demand curve of this good is unit elastic
(J) None of the above



4. When a perfectly competitive market reaches equilibrium, which of the following statements are true:
I. The quantity of the good supplied by suppliers is just equal to the quantity of the good that consumers
wish to purchase.
II. All consumers will get to consume the amount of the good they are willing to consume at that price
and all suppliers will get to supply the amount of the good they are willing to supply at that equilibrium
price
III. There will be no consumers who want to change their consumption behaviour and no suppliers who
wish to change their supply decisions.
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


5-8. A country produces goods X and Y and has the following equation for its production possibilities
frontier (or production possibilities curve):
Y = 30 - .3(1+2X)
2

Questions 5 through 8 concern this country.

5. The point X = 2.5, Y = 20.2 is:
A) attainable and efficient B) attainable and inefficient C) unattainable
D) unattainable and efficient E) imaginable and feasible F) none of the above

6. You are told that the economy is producing efficiently and has chosen to produce and consume 2 units
of X and 22.5 units of Y. At this point on the production possibilities frontier, you can use calculus to
obtain the opportunity cost of X as:
A) 1.4 B) 2.8 C) 3.0 D) 4.8 E) 5.0
F) 5.8 G) 6.0 H) 6.4 I) 7.2 J) none of the above



Page 4 of 8
7. Now you are told that the economy is producing efficiently and has chosen to produce and consume
2.5 units of X. At this point on the production possibilities frontier, you can use calculus to obtain the
opportunity cost of Y as:
A) 12/5 B) 5/12 C) 2 D) 1/2 E) 1
F) 14/5 G) 5/14 H) 16/5 I) 5/36 J) 36/5

8. Suppose that those in charge of this economy want to maximize the value of the output produced.
Each unit of X sells for $6 and each unit of Y sells for $1, so that the value of the output can be
represented by the equation V = 6X + Y The point on the PPF that will maximize the value of the
output involves the production of how many units of X?
A) 0 B) 1 C) 2 D) 3 E) 4
F) 5 G) 6 H) 7 I) 8 J) 9

9. Which of the following statement(s) about production possibilities frontiers (PPFs) is (are) generally
true?
I) the changing slope of the PPF illustrates the concept of increasing costs
II) the second derivative of the PPF illustrates the concept of scarcity of resources
III) the slope of the PPF illustrates the concept of opportunity costs
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


10-14. The market for broccoli (which we will assume is a competitive industry) is in equilibrium, and its
short run supply and demand schedules have the usual shapes. Broccoli is a normal good and you can
safely ignore any effects of income on the demand for related goods. Cheese sauce is a complementary
good to broccoli, and asparagus is a substitute good for broccoli. Questions 10 through 14 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 broccoli.

10. The price of asparagus rises. As a result, in the market for broccoli:
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 8
11. Wages in the broccoli industry rise. At the same time, the price of cheese sauce falls. As a result, in
the market for broccoli:
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

12. The price of cheese sauce rises. At the same time, a technological innovation occurs which lowers
the resources and time required to produce broccoli. As a result, in the market for broccoli:
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

13. A story appears in the papers which reports on scientific research which proves that broccoli eaters
die younger than other Canadians. At the same time, consumer incomes rise significantly. As a result, in
the market for broccoli:
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

14. Wages in the broccoli industry rise. At the same time, a technological innovation occurs which
lowers the resources and time required to produce broccoli. As a result, in the market for broccoli:
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 6 of 8


15. Suppose that we are discussing a supply and demand diagram in which the curves have their usual
slopes (demand slopes down and supply slopes up). The equilibrium price is stable because:
A) excess supply and excess demand both cause price to rise
B) excess supply and excess demand both cause price to fall
C) excess demand causes price to rise and excess supply causes price to fall
D) excess demand causes price to fall and excess supply causes price to rise
E) consumers and producers both have revealed preferences
F) consumers have diminishing marginal revenue while sellers face increasing costs
G) none of the above

16-18. A consumer has a demand curve for a good given by the following function:
P = 8 - (1/2)Q 0 " Q " 12
P = 3 - (1/12)Q 12 " Q " 36
where Q 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 16 through 18 concern this consumer.




















16. If the price of this good is set at $1 per unit, the consumer surplus gained by this consumer each
month through purchasing it will be:
A) $0 B) $8 C) $14 D) $24 E) $30
F) $36 G) $48 H) $54 I) $64 J) $84

36
0
8
30 24 18 12 6
P
2
4
6


Page 7 of 8
17. 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 $1 per unit, the consumer will be allowed to consume
unlimited amounts of this good 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 is less than:
A) $0 B) $8 C) $14 D) $24 E) $30
F) $36 G) $48 H) $54 I) $64 J) $84


18. Now forget about the all-inclusive fee and return to the initial situation in which the consumer is
charged a price of $1 per unit. Suppose that the government imposes a tax of $3 per unit on this good,
and that the effect of the tax falls entirely on consumers. The deadweight loss associated with such a tax
would be:
A) $0 B) $8 C) $14 D) $24 E) $30
F) $36 G) $48 H) $54 I) $64 J) $84

19-20. A consumer has a utility function for a good X given by the following function:
U = 48(X + 8)
1/3
- 96
where X is the quantity of the good purchased each month (quantity need not be an integer) and U is
measured in dollars. Questions 19 and 20 concern this consumer.

19. If the price of X is set at $1 per unit, the quantity of the good purchased by this consumer each month
will be:
A) 10 B) 16 C) 24 D) 36 E) 48
F) 56 G) 60 H) 64 I) 72 J) 96

20. If the price of X is set at $1 per unit, the consumer surplus gained by this consumer each month
through purchasing X will be:
A) $0 B) $20 C) $40 D) $56 E) $80
F) $96 G) $108 H) $112 I) $120 J) none of the above


21. Which of the following statements about elasticity and total expenditure by consumers is (are)
generally true?
I) If the elasticity of demand is one, a change in price of $1 will lead to a change in quantity of
approximately one unit.
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 B) only II C) only III D) I & II E) I & III
F) II & III G) I, II & III H) none of the three



Page 8 of 8
22-23. You are given the following demand curve for an industry:
P = (100 + 8b) - 2bQ
where b is a parameter which defines the demand curve (that is, b is a constant, but you are not told
exactly what the value of b is). You are told that b is positive. You may observe that if P = 100, then Q =
4 whatever the value of b. Questions 22 and 23 concern this demand curve.

22. If b = 2/8, then at the point on the demand curve where Q = 51 and P = $76.50, the elasticity of
demand, expressed as a positive number, is:
A) 5/1 B) 1/5 C) 5/2 D) 2/5 E) 5/6
F) 6/5 G) 5/9 H) 9/5 I) 4/12 J) 12/4

23. In order to have the elasticity of demand be equal to 2.5 at the point on the demand curve where Q = 4
and P = 100, the value of b must be:
A) 5/1 B) 1/5 C) 5/2 D) 2/5 E) 5/6
F) 6/5 G) 5/9 H) 9/5 I) 4/12 J) 12/4

24-25. The market for widgets has the following supply and demand curves:
Supply: P = 100 + (1/4)Q
Demand: P = 1000 - 2Q
Initially, the market is in equilibrium at P = $200, Q = 400. Questions 24 and 25 concern this market.

24. The government places a $36 per unit tax on the buyers of widgets. At the new equilibrium, the price
paid by buyers (including the tax paid) will be:
A) $164 B) $182 C) $196 D) $204 E) $216
F) $218 G) $224 H) $230 I) $232 J) $236

25. Again, the government places a $36 per unit tax on the buyers of widgets. At the new equilibrium,
the price received by sellers will be:
A) $164 B) $182 C) $196 D) $204 E) $216
F) $218 G) $224 H) $230 I) $232 J) $236


26. What is the version of the exam that you have just written? Hint - your correct answer is A
A) Version A B) Version B C) Version C D) Version D