UNIVERSITY OF VICTORIA Midterm #1 EXAM October 21, 2014 V1

Transcription

1 Economics 03 A0 age 1 UNIVERSITY OF VICTORIA idterm #1 EXA October 1, 014 V1 Course Name & No.: Economics 03 Sections(s): A01 CRN: Instructor: Duration: Betty J. Jones Johnson 45 minutes NAE: STUDENT NUBER: V00 This exam has a total of pages including this cover page. Students must count the number of pages and report any discrepancy immediately to the Invigilator. This exam is to be answered: _X_ on the exam paper. arking Scheme: 1) 15 marks ) 6 marks 3) 9 marks 4) Bonus marks aterials Allowed: Non-programmable calculator

2 Economics 03 A0 age 1. (p. 14) The marginal benefit of a good x is given by the equation B = 40 - x, and its marginal cost C = 10 + x, with x in kilograms and B and C in $/kilogram. The optimal level of x (in kilograms) is A. 0 B. 10 C. 15 D. 0 E. 30. The costs of going to college are: tuition $4000; books $1000; accommodation $5000; food $000; lost income from work $18,000. You must pay for your food whether you live at school or at home.. (p. 7) Suppose that at school you can work part time and make $5,000 at a job you would do for free. You could get free accommodation at home, but must live on campus if you go to school. What is the total cost of going to school? A. $10,000 B. $1,000 C. $3,000 D. $8,000 E. $30, (p. 33) Economists generally agree that welfare is necessarily enhanced in society when A. those helped by a resource reallocation are helped more than those hurt by the same reallocation. B. at least someone is helped and no one is hurt. C. the poor are made better off by at least the same amount as the rich are made worse off. D. B and C. 4. (p. 37) ost economists are against rent control in a competitive market because it can, for all of the following reasons except, A. lead to shortages. B. encourage landlords not to maintain apartments. C. discourage new apartments. D. encourage new apartments. 5. (p. 45) In the spinach market, demand is given by = Q and supply is given by = 10 + Q, where is in $/tonne and Q is in tonnes. What is the equilibrium price, in $/tonne? A. 10 B. 30 C. 70 D. 90 E. 100

3 Economics 03 A0 age 3 6. (p. 40) Which of the following reflects a change in the quantity demanded? A. eople buy more computers as prices fall. B. eople buy more computers because of a surge in the economy. C. eople buy more computers because of a change in tastes. D. eople buy more computers because their incomes have increased. 7. (p. 60) The budget constraint shown here is consistent with a pricing policy that involves: A. a reduction in the price of x for large quantities purchased B. an increase in the price of x for large quantities purchased. C. a reduction in the price of y for large quantities purchased. D. a price change of x and a nominal income increase for the consumer. E. A and C. 8. (p. 67) The marginal rate of substitution between two goods is A. the absolute value of the slope of the indifference curve. B. the tradeoff between the two goods under consideration at any particular point. C. the total utility derived at any point. D. all answers. E. A and B. 9. (p. 67) The marginal rate of substitution between two goods is A. the absolute value of the slope of the indifference curve. B. the tradeoff between the two goods under consideration at any particular point. C. the total utility derived at any point. D. all answers. E. A and B.

4 Economics 03 A0 age (p. 69) The graph of the budget line below has dollars on the vertical axis and units of food on the horizontal axis, and consumption occurs at E. Which statement is false? A. The vertical intercept represents all money available for purchasing. B. The distance OA shows the amount of money spent on OD amount of food. C. If the amount of money available is known in this graph, then the price of food in dollars per unit is known also. D. The price of food is OB/100. E. The proportion of the budget spent on food is AB/OB. 11. (p. 8) ax U. Tillity has the utility function U = X 3 Y. When X (on the horizontal axis) = 16 units and Y (on the vertical axis) = 48 units, the marginal rate of substitution of the indifference curve passing through this point is A. 1/9 B. 1/3 C. 1 D. 3 E (p. 115) rice-elasticity of demand is A. the percentage change in price divided by the percentage change in quantity demanded. B. the percentage change in quantity demanded divided by the percentage change in price. C. the change in quantity demanded divided by the change in price. D. the change in price divided by the change in quantity demanded. 13. (p. 11) The point on a downward-sloping linear demand curve where revenue is maximized is A. where elasticity equals -1. B. where elasticity equals 0. C. where elasticity equals infinity. D. where the price is the highest. E. wher36. (p. 104) Sketch the income and substitution effects of a price increase for good X.

5 Economics 03 A0 age (p. 568) According to the "invisible hand" theorem, under the assumptions stated in the text, A. non-market forces can prevent markets from guiding consumers to the contract curve. B. an equilibrium produced by competitive markets will exhaust all gains from exchange. C. government action is sometimes needed as an invisible hand to guide the economy toward efficiency. D. all answers. 15. (p. 570) In equilibrium with an Edgeworth production box A. L/K = L/K. B. one is on the contract curve. C. the production of one good cannot increase without decreasing the production of the other. D. all answers. art II: arks: 15arks 1. (p. 104) a) Sketch the income and substitution effects of a price increase for good X. (3 arks)

6 Economics 03 A0 age 6 Rotate the budget line around the higher indifference curve from its original tangency until it reaches a slope of -. The new tangency point will divide the overall change in quantity between the substitution and income effects. The longer arrow above is the substitution effect and the shorter arrow is the income effect. b). (p. 104) Based on your sketch, is good X a normal or inferior good? Why?(1 mark) Good X is a normal good, because as nominal income drops with prices constant, the quantity is reduced.

7 Economics 03 A0 age 7 c). (p. 104) From the graph given, sketch two points on an individual demand curve that you draw directly below the graph presented. ( marks) Question : (9 marks) The GrapeVine Grow-op Distributors concludes that the demand function for its product is: Q= R where Q is the quantity demanded of its product, is the price of its product, R is the price of its rival s product, and is per capita disposable income (in dollars). Currently, =$81, R=$1 and =$54,65. a) What is the price elasticity of demand for the firm s product? Use price elasticity of demand formula for a point: Solving for Q=195-5(81)+85(1)+0.75(54,65) Q=47,34 Q Q Q Q = -5(81/47,34) = b) What is the income elasticity of demand for the firm s product? Q (Use income elasticity of demand formula for a point: 0.75 (54,65/47,34) =0.75(1.1544)= ) Q c) What is the cross elasticity of demand between its product and its rival s product. Q R (Use Cross elasticity of demand formula for a point:.) Q 85 (1/47,34) =85( )=0.19 R Bonus: ( marks) The supply curve for T-shirts is given by the equation = 6Q. The demand curve is given by the equation = 18 3Q. a. What are the equilibrium price and quantity? b. At a price to buyers of $18/shirt, how much of a surplus or a shortage will there be? c. At a price to buyers of $6/shirt, how much of a surplus or a shortage will there be? d. Determine the area of dead-weight-loss at =$15. a) Setting supply and demand equal: = 6Q = 18-3Q; hence 9Q = 18, and Q = shirts, with = $1/shirt.

8 Economics 03 A0 age 8 b) At $18/shirt, quantity supplied = /6 = 3 shirts, and quantity demanded = (18-)/3 = 0 shirts. There will be an excess supply of 3 shirts. c) At $6/shirt, quantity supplied = /6 = 1 shirt, and quantity demanded = (18-)/3 = 4 shirts. There will be an excess demand of 3 shirts rice supply DWL 6 demand Quantity

9 Economics 03 A0 age 9 RS Y X U constant YX RS U U x y x y Y D y x y X Budget line Q Q Q Q Q Q oint Elasticity of Demand D Q ( Q1 Q ) ( ) Q Q Q Arc Elasticity of Demand s Q Q Q Q oint rice Elasticity of Supply s Q ( Q1 Q ) ( ) Q Q Q Arc rice Elasticity of Supply X X 0 X 1 Income 0 1 X X 0 1 X 0 1 Income elasticity of demand B A X Income elasticity of demand X B A B A A B Arc cross-price elasticity of demand x b b ac 4 a. Quadratic formula