ECON Come to the PASS workshop with your mock exam complete. During the workshop you can work with other students to review your work.

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1 It is most beneficial to you to write this mock midterm UNDER EXAM CONDITIONS. This means: Complete the midterm in 1.5 hour(s). Work on your own. Keep your notes and textbook closed. Attempt every question. After the time limit, go back over your work with a different colour or on a separate piece of paper and try to do the questions you are unsure of. Record your ideas in the margins to remind yourself of what you were thinking when you take it up at PASS. The purpose of this mock exam is to give you practice answering questions in a timed setting and to help you to gauge which aspects of the course content you know well and which are in need of further development and review. Use this mock exam as a learning tool in preparing for the actual exam. Please note: Come to the PASS workshop with your mock exam complete. During the workshop you can work with other students to review your work. Often, there is not enough time to review the entire exam in the PASS workshop. Decide which questions you most want to review the Facilitator may ask students to vote on which questions they want to discuss in detail. Facilitators do not bring copies of the mock exam to the session. Please print out and complete the exam before you attend. Facilitators do not produce or distribute an answer key for mock exams. Facilitators help students to work together to compare and assess the answers they have. If you are not able to attend the PASS workshop, you can work alone or with others in the class. Good Luck writing the Mock Exam!! Dates and locations of mock exam take-up: Wed. October 18 th UC 282 & Fri. October 20 th ME 4499

2 Section I (60 marks) You must answer only 6 of 12 questions in this section. 1. You win $100 in a hockey pool. You have a choice between spending the money now or putting it away for a year in a bank account that pays 5 % interest. What is the opportunity cost of spending $100 now? 2. Describe some of the tradeoffs faced by each of the following. a. A family deciding whether to buy a new car b. A member of Parliament deciding how much to spend on national parks c. A company president deciding whether to open a new factory d. A professor deciding how much to prepare for class 3. Imagine a society that produces military goods and consumer goods, which we ll call guns and butter. a. Draw a production possibilities frontier for guns and butter. Explain why it most likely has a bowed-out shape. b. Show a point that is impossible for the economy to achieve. Show a point that is feasible but inefficient. c. Imagine that the society has two political parties, called the Hawks (who want a strong military) and the Doves (who want a smaller military). Show a point on your production possibilities frontier that the hawks might choose and a point that the Doves might choose. d. Imagine that an aggressive neighboring country reduces the size of its military. As a result, both the Hawks and the Doves reduce

3 e. their desired production of guns by the same amount. Which party would get the bigger peace dividend measured by the increase in butter production? Explain 4. Draw a circular-flow diagram. Identify the parts of the model that correspond to the flow of goods and services and the flow of dollars for each of the following activities. a. Kaddy pays a storekeeper $1 for a litre of milk. b. Albert earns $7 per hour working at a fast-food restaurant. c. Nicole spends $10 to see a movie. d. Nancy earns $ from her 10% ownership of Acme Industrial 5. The following table describes the production possibilities of two cities: Red Sweaters per Worker per hour Blue Sweaters per Worker per hour Montreal 3 3 Toronto 2 1 a. Without trade, what is the price of blue sweaters (in terms of red sweaters) in Montreal? What is the price in Toronto? b. Which city has an absolute advantage in the production of each colour of sweater? Which city has a comparative advantage in the production of each colour of sweater? c. If the cities trade with each other, which colour of sweater will each export?

4 6. Canadian and Japanese workers can each produce 4 cars per year. A Canadian worker can produce 10 tonnes of grain per year, whereas a Japanese worker can produce 5 tonnes of grain per year. To keep things simple, assume that each country has 100 million workers. a. Construct a table to represent this information. b. Graph the production possibilities frontier of the Canadian and Japanese economies. c. For Canada, what is the opportunity cost of a car? Of grain? For Japan, what is the opportunity cost of a car? Of grain? d. Which country has an absolute advantage in producing cars? In producing grain? e. Which country has a comparative advantage in producing cars? In producing grain? f. Without trade half of each country s workers produce cars and half produce grain. What quantities of cars and grain does each country produce? g. Starting from a position without trade, give an example in which trade makes each country better off. 7. Market research shows the following about the market for chocolate bars. The demand schedule can be represented by the equation Qd= P, where Qd is quantity demanded and P is price. The supply schedule can be represented by the equation Qs= P, where Qs is quantity supplied. a. Calculate the equilibrium price and quantity in the market or chocolate bars.

5 b. Say that as a response to a major industry ad campaign, the demand schedule for chocolate bars shifted to the right, as represented by the equation Qd= P. What happens to the equilibrium price and quantity of chocolate bars in this case? c. Returning to the original demand schedule, say that the price of cocoa beans, a major ingredient in the production of chocolate bars, increased because of a drought in sub-saharan Africa, a major producer of cocoa, changing the supply schedule to Qs= P. What happens to the equilibrium price and quantity in this case? 8. Consider the market for minivans. For each of the events listed below, identify which of the determinants of demand or supply is increased or decreased. Then show the effect on the price and quantity of minivans. a. People decide to have more children. b. A strike by steelworkers raises steel prices. c. Engineers develop new automated machinery for the production of minivans. d. The price of SUV s rises. e. A stock market crash lowers people s wealth. 9. Suppose that your demand schedule for DVDs is as follows: Price Quantity Demanded (Income= $10 000) Quantity Demanded (Income= $12 000) $

6 $ $ $ $ a. Use the midpoint method to calculate your price elasticity of demand as the price of DVDs increases from $8 to $10 if i) your income is $10 000, and ii) if your income is $ b. Calculate your income elasticity of demand as your income increases from $ to $ if i) your price is $12 and ii) if the price is $ Pharmaceutical drugs have an inelastic demand, and computers have an elastic demand. Suppose that a technological advance doubles the supply of both products (that is, quantity supplied at each price is twice what it was). a. What happens to the equilibrium price and quantity in each market? b. Which product experiences a greater change in price? c. Which product experiences a greater change in quantity? d. What happens to total consumer spending on each product? 11. A recent study found that the demand and supply schedules for Frisbees are as follows:

7 Price per Frisbee Quantity Demanded Quantity Supplied $11 1 million 15 million $10 2 million 12 million $9 4 million 9 million $8 6 million 6 million $7 8 million 3 million $6 10 million 1 million a. What are the equilibrium price and quantity? b. Frisbees manufacturers persuade the government that Frisbee production improves scientists understanding of aerodynamics and thus is important for national security. A concerned Parliament votes to impose a price floor $2 above the equilibrium price. What is the new market price? How many Frisbees are sold? c. Irritated students march on Ottawa and demand a reduction in the price of Frisbees. An even more concerned Parliament votes to repeal the price floor and impose a price ceiling $1 below the former price floor. What is the new market price? How many Frisbees are sold? 12. The government has decided that the free-market price of cheese is too low. a. Suppose the government imposes a binding price floor in the cheese market. Use a supply-and-demand diagram to show the effect of this policy on the price of cheese and the quantity of cheese sold. Is there a shortage or surplus of cheese?

8 b. Farmers complain that the price floor has reduced their total revenue. Is this possible? Explain. c. In response to farmers complaints, the government agrees to purchase all of the surplus cheese at the price floor. Compared to the basic price floor, who benefits from this new policy? Who loses? Section II (40 Marks) You must answer only 2 out of 4 questions in this section. 1. Economics is primarily concerned with the allocation of scarce resources which have alternative uses. Use a production possibility curve to help you explain this statement, and to discuss economic efficiency. 2. Are government price ceilings more important for regulating elastic or inelastic goods? Explain. 3. If you were Prime Minister, would you be more interested in your economic adviser s positive views or their normative views? Why? 4. Min. wage laws are enacted when policymakers believe that the market wage rate is unfair to workers, and their introduction is viewed as one way to raise the income of the working poor. Think about both sides of the argument and the effects on the working population and the effects on employers. Which age group is most affected by minwage laws? How can the benefits received and the costs incurred of a min-wage law be measured? Should policymakers use min-wage laws as a tool to raise the income of the working poor and increase society s overall level of welfare?