University of Toronto

Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
Term Test 1: Form Code: A: 20132014
Solutions: Full
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General Instructions
1. 100 minutes. 100 points. Allocate your time wisely!
2. Aids allowed: a simple (i.e., non-graphing, non-programmable) calculator.
3. Non-Multiple Choice questions: write answers in pen in this test booklet.
Scantron Instructions
Answer MULTIPLE CHOICE questions on supplied Scantron sheet (bubble form).
Fill in all information on both sides of the form.
Your Form Code is A.
Pencil recommended for Scantron. Black or blue ink can be used, but not erased!
Each Multiple Choice question is worth 3 marks. No deductions for incorrect answers.
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Part I / 51 Marks Page 10. / 10 Marks
Page 8. / 10 Marks Page 11. / 12 Marks
Page 9. / 10 Marks Page 12. / 7 Marks
Total /100 Marks
20131028A 1 Term Test 1: Solutions: Full
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
TEST VERSION A
I. [51 Marks] Multiple Choice Questions: Indicate answer on Scantron.
1. [3 Marks] Each of the following graphs depicts the demand curves for two consumers.
Which graph correctly depicts the market demand curve for a market consisting only of
these consumers? (There is no choice e!)
(a) (b)
(c) (d)
2. [3 Marks] Table 1 gives total costs as a function of Quantity produced. At which
per-unit price do you produce exactly three units?
Total
Quantity Cost
1 $15
2 $27
3 $41
4 $57
5 $75
Table 1: Total cost as a function of quantity produced.
20131028A 2 Term Test 1: Solutions: Full
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
A. $13.50 per unit
B. $14.50 per unit
C. $16.50 per unit
D. $41.50 per unit
E. It is never rational to produce exactly three units.
3. [3 Marks] In April, you paid $50 for a September Jays game. Now that the game is
here you realize: 1) you will have to pay $5 for transportation to the game; 2) Fairooz is
willing to pay you $15 for the ticket; and 3) if you do not go to the game you can work
and make $25. Which of the following is true?
A. Because you purchased the ticket, you will go to the game.
B. You only go to the game if you believe you will get $50 or more in enjoyment value.
C. You only go to the game if you believe you will get $45 or more in enjoyment value.
D. You only go to the game if you believe you will get $40 or more in enjoyment value.
E. You only go to the game if you believe you will get $5 or more in enjoyment value.
4. [3 Marks] A plumber spends all of his time either unclogging toilets or installing faucets.
What is the eect of purchasing a machine that reduces the time required to unclog each
toilet?
A. Opportunity cost of toilet unclogging: increases; Opportunity cost of faucet instal-
lation: no change.
B. Opportunity cost of toilet unclogging: decreases; Opportunity cost of faucet instal-
lation: no change.
C. Opportunity cost of toilet unclogging: increases; Opportunity cost of faucet instal-
lation: decreases.
D. Opportunity cost of toilet unclogging: decreases; Opportunity cost of faucet instal-
lation: decreases.
E. None of the above.
5. [3 Marks] It takes Marco 20 minutes to fold a load of laundry and 2 minutes to change
a diaper. It takes Ragan 30 minutes to fold a load of laundry and 4 minutes to change
a diaper.
A. Marco has both an absolute and a comparative advantage in both chores.
B. Ragan does not have a comparative advantage in either chore.
20131028A 3 Term Test 1: Solutions: Full
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
C. Ragan has a comparative advantage in folding laundry.
D. Ragan has a comparative advantage in changing diapers.
E. In order to gure out who has the comparative advantage, we need to know how
often diapers need to be changed relative to the number of loads of laundry.
6. [3 Marks] Consider an economy with three producers, each of whom can produce either
wine or cheese. Each faces a constant opportunity cost of producing a unit of wine: 1 unit
of cheese for producer 1; 2 cheeses for producer 2 and 3 cheeses for producer 3. If current
production is ecient with 2 producers specializing in wine, what is the opportunity cost
of an extra unit of wine?
A. 3 units of cheese.
B. 2 units of cheese.
C. 1 unit of cheese.
D. Unable to determine with information given.
E. None of the above.
7. [3 Marks] We both currently consume both lines of code and pages of documentation.
In one hour, you can write 20 lines of computer code or write 4 pages of documentation.
The proposed trade: you give me 3 lines of code for each page of documentation I give
you. In which case will the proposed trade makes us both better o?
A. In one hour, I can write 10 lines of computer code or write 2 pages of documentation.
B. In one hour, I can write 80 lines of computer code or write 8 pages of documentation.
C. In one hour, I can write 12 lines of computer code or write 6 pages of documentation.
D. In one hour, I can write 40 lines of computer code or write 10 pages of documentation.
E. In one hour, I can write 30 lines of computer code or write 4 pages of documentation.
.
8. [3 Marks] Assume all supply and demand curves have the usual slopes, and those with
a management PhD can either teach at a business school or work in banking. If banks
increase their demand for management PhDs , what will be the eect on the supply curve
(of workers with a management PhD) facing business schools?
A. The supply curve will shift up and to the right.
B. The supply curve will shift up and to the left.
C. The supply curve will shift down and to the left.
D. The supply curve will not shift.
E. None of the above.
20131028A 4 Term Test 1: Solutions: Full
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
9. [3 Marks] Assume that over the past year, there has been an increase in the price of
tea and an increase in the cost of labour in coee-producing countries. Assuming coee
and tea are substitutes, what will be the eect of these changes in the coee market?
A. An increase in the equilibrium price and quantity.
B. An increase in the equilibrium price, but a decrease in the equilibrium quantity.
C. An increase in the equilibrium price, but the equilibrium quantity could either in-
crease or decrease.
D. An increase in the equilibrium quantity, but the equilibrium price could either in-
crease or decrease.
E. None of the above.
10. [3 Marks] Supply is given by Q
s
= 3 + P and demand by Q
d
= 15
P
3
. Which of the
following is true if the market is perfectly competitive?
A. {P = 5, Q
s
= 8} is an equilibrium.
B. {P = 9, Q
s
= 12} is an equilibrium.
C. {P = 12, Q
d
= 11} is an equilibrium.
D. A, B and C are all true.
E. None of the above are true.
11. [3 Marks] According to Jans plan, she will spend all of her income, purchasing 20 units
of X and 30 units of Y . She notes that the 20th unit of X gives her 200 units of utility,
whereas the 30th unit of Y gives her 300 units of utility. What should Jan do to maximize
utility?
A. Jan should purchase more than 20 units of X and fewer than 30 units than Y .
B. Jan should purchase fewer than 20 units of X and more than 30 units than Y .
C. Jan should purchase 20 units of X and 30 units of Y .
D. We have insucient information to answer this question.
E. None of the above.
12. [3 Marks] You rationally adjusted your purchases in response to a change in either prices
or income. As a result of your adjustment, the marginal utility from your last unit of X
increased while the marginal utility from your last unit of Y decreased. Under standard
assumptions about marginal utility, which of the following could have caused this?
20131028A 5 Term Test 1: Solutions: Full
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
A. An increase in the price of X when X and Y are complements.
B. An increase in the price of X when X and Y are substitutes.
C. An increase in the price of Y when X and Y are substitutes.
D. An increase in the price of Y and a decrease in the price of X.
E. An increase in income when X is normal and Y is inferior.
13. [3 Marks] Assume a (permanent) 5% increase in the price of X. Which of the following
is not true?
A. Quantity demanded of X will likely be higher in 1 year than in 5 years.
B. We will see a larger reduction in the equilibrium quantity of X if close substitutes
to X also increase in price.
C. We will see an increase in the in the equilibrium quantity of X if it is a Gien good.
D. Total expenditures on X will increase if X is inelastically demanded.
E. A subsequent 8% reduction in the equilibrium quantity of X would mean that it is
elastically demanded.
14. [3 Marks] Income elasticity of beer has been estimated at -0.1. Currently, income is 50
and quantity demanded is 100 units. Assuming no changes in prices, what will be the
quantity demand if income increases to 52?
A. 96.
B. 98.
C. 102.
D. 104.
E. None of the above.
=
15. [3 Marks] Assume i) labour is the only variable factor of production; ii) you can buy as
much labour as you want at $10 per hour; and iii) the market for your output is perfectly
competitive. At P
0
, your rm produces Q
0
and makes an economic prot. Which of
the following is the result of short-run prot maximization if the price of your output
decreases?
A. Production increases and the average product of labour decreases.
B. Production increases and the average product of labour has increased.
C. Production increases and the average product of labour has not changed.
D. Production decreases and the average product of labour has decreased.
E. Production decreases and the average product of labour has increased.
20131028A 6 Term Test 1: Solutions: Full
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
16. [3 Marks] Consider a farm. In each of the following situations, assume labour and seeds
can be varied while the tractor and the amount of land is xed. Which of the following
can explain situation 2 having higher variable costs of producing 100 units than situation
1, but a lower total cost of producing 100 units.
A. Situation 2 has more productive, but more expensive, seeds.
B. Situation 2 has more productive and less expensive seeds.
C. Situation 2 has a less productive, but less expensive tractor.
D. Situation 2 has a more productive and more expensive tractor.
E. Situation 2 has an increase in the tax that you pay for your land.
17. [3 Marks] Assume no change in the LRATC.
1
All rms in a perfectly competitive
market have access to the same technology and input prices. Production entails a $1000
per period xed cost. A rm sells 1000 units a price of $10, incurring an average of $8
per unit in variable costs.
A. The rm must increase output to increase short-run prots.
B. The rm must decrease output to increase short-run prots.
C. Assuming this rm is maximizing short run prots, it will produce less in future
periods as the market price will decrease in the long run.
D. Assuming this rm is maximizing short run prots, it will produce more in future
periods as the market price will increase in the long run.
E. Assuming this rm is maximizing short run prots, it will continue to produce 1000
units in the long run.
1
Long-Run Average Total Cost curve.
20131028A 7 Term Test 1: Solutions: Full
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
USE A PEN FOR THE FOLLOWING SECTIONS
II. [20 Marks] For each of the following, indicate True, False or Uncertain and concisely
explain. All of the marks are earned for the explanation.
(1) [5 Marks] Valentines Day is a holiday where lovers give each other gifts, including
owers. Each year, the holiday brings large increases in both the price of roses and the
quantity transacted. TFU: Roses therefore violate the law of demand.
(2) [5 Marks] Assume rationality as dened by an economist. Barts demand is given by
Q
b
(P) = 20 P, whereas Homers is given by Q
h
(P) = 10 P. TFU: If both face the
same prices, then Bart values his last cup more than Homer values his last cup.
(3) [5 Marks] Assume diminishing marginal benet. Ezekiel entered, and won, a drawing
for free lifetime violin lessons. He wants to improve his playing, and the 968th lesson will
denitely improve his playing. TFU: He should take at least 968 lessons.
(4) [5 Marks] You just purchased a food truck for $20,000. If you hire someone to operate
the truck for one year, you will incur $75,000 in expenses and bring in $85,000 in revenues
without requiring any of your time. TFU: You should open a food business using your
truck.
III. [29 Marks] Short answer.
(1) [5 Marks] You go to Java Bob in order to purchase one scone and some coee. Coee
is $2.00 for the rst cup, and $1.00 for each additional cup. A scone costs normally costs
$3.00, but costs only $2.50 if you purchase 2 or more cups of coee. In the following
table, indicate the marginal cost of acquiring each cup of coee.
Cups of Marginal
Coee Cost
1
2
3
20131028A 8 Term Test 1: Solutions: Full
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
Cups of Marginal
Coee Cost
1 $2.00
2 $0.50
3 $1.00
Figure 1: Solution.
(2) [5 Marks] Briey explain why it is reasonable to assume a particular wheat farmer faces
perfectly (innitely) elastic demand even though the market quantity of wheat demanded
increases as the price decreases.
(3) [6 Marks] Demand is given by P(Q) = MWTP(Q) = 100
Q
4
. What price maximizes
total expenditures on this product?
Second, we could set elasticity equal to 1 and solve.
(4) [6 Marks] Each of the 10 rms in a perfectly competitive market has marginal cost
given by MC(q
i
) = 15 +
q
i
2
. What is the market supply function (market quantity as a
function of market price)?

(5) [7 Marks] Assume that the technology/rm size that minimizes the LRATC curve gives
TOTAL cost as a function of quantity as TC(q
i
) = 100+15q
i
+
q
2
i
4
and marginal cost as
MC(q
i
) = 15 +
q
i
2
. Assuming a perfectly competitive market where all rms have access
to these cost functions, what is the long-run equilibrium price?
20131028A 9 Term Test 1: Solutions: Full
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
20131028A 10 Term Test 1: Solutions: Full