University of Toronto

Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
Term Test 1: 20122013
Solutions: Full
While you wait for the exam to start, please ll in the information below and
complete the FRONT and BACK of the Scantron form.
DO NOT OPEN THIS TEST BOOKLET UNTIL INSTRUCTED.
Last Name:
First Name:
Student Number:
Indicate the tutorial
you attend:

Tuesday 10am-11am (UC 144 John)

Tuesday 10am-11am (UC 144 John)

Tuesday 11am-12pm (UC 144 David)

(Your test will be

Tuesday 12pm-1pm (UC 161 David)
returned to you in

Wednesday 10am-11am (MP137 Peter)
the tutorial you indicate.)

Wednesday 11am-12pm (LM161 Peter)

Wednesday 2pm-3pm (CR 403 Helen)

Wednesday 3pm-4pm (CR 403 Helen)

Thursday 2pm-3pm (BA B024 Shiny)

Thursday 3pm-4pm (BA B024 Shiny)

General Instructions
1. 50 minutes. 100 points. Allocate your time wisely!
2. Aids allowed: a simple (i.e., non-graphing) calculator.
3. Non-Multiple Choice questions: write answers in pen in this test booklet.
Scantron Instructions
Answer MULTIPLE CHOICE questions on supplied Scantron sheet.
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 5 marks. No deductions for incorrect answers.
Multiple choice marks are based entirely on the Scantron.
Any writing in this test booklet will not be considered.
Please Do Not Write in this Space
Part II 1. / 6 Marks Part I / 55 Marks
2. / 6 Marks Part III 1. / 7 Marks
3. / 6 Marks 2. / 10 Marks
4. / 6 Marks
5. / 4 Marks Total /100 Marks
201210 1 Term Test 1: Solutions: Full
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
TEST VERSION A
I. [55 Marks] Multiple Choice Questions: Indicate answer on Scantron.
1. [5 Marks] In each of the following graphs, assume the short-run supply curve is correct, and
{P

, Q

} describes the current market price and quantity. In which graph is the long-run
supply curve correctly depicted?
(a) (b) (c)
(d) (e)
2. [5 Marks] Yirgachee is a particularly tasty Ethiopian coee. What can explain an increase
in the price of Yirgachee coupled with a decrease in the amount consumers spend on
Yirgachee?
A. Unfortunate weather causes a bad coee growing season in Kenya. (Assume positive
cross-price elasticity between Ethiopian and Kenyan coees.)
B. A binding minimum wage law in Ethiopia increases wages Ethiopian coee growers must
pay their workers.
C. Starbucks decides to increase its purchases of Yirgachee.
D. An increase in Chinese incomes. (Assume a positive income elasticity for Yirgachee.)
E. Perfect weather in Ethiopia increases the amount of coee per coee bush.
201210 2 Term Test 1: Solutions: Full
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
3. [5 Marks] Which of the following events may increase consumer surplus in the widget
market?
A. If incomes decrease and widgets are inferior.
B. A decrease in the price of a substitute for widgets.
C. A binding price oor in the widget market.
D. An increase in price if widgets are inelastically demanded.
E. An increase in price if widgets are elastically demanded.
4. [5 Marks] The Gazzale Coee Bar: You must pay a daily fee, and then the price per cup
is $1.75. Table 1 indicates how your marginal benet changes with each cup. What is the
maximal daily fee you are willing to pay The Gazzale Coee Bar?
Cup MWTP
1 $3.00
2 $2.50
3 $2.00
4 $1.50
5 $1.00
6 $0.50
Table 1: Marginal willingness to pay per cup.
A. $0.00
B. $2.25
C. $3.00
D. $5.50
E. $10.50
5. [5 Marks] A binding price oor is implemented. Which best describes the resulting equi-
librium:
A. The quantity buyers are willing to buy will equal the quantity suppliers are willing to
sell at the equilibrium price.
B. More inelastic demand will lead to a larger decrease in quantity.
C. More elastic demand will lead to a larger decrease in quantity.
D. More inelastic supply will lead to a larger decrease in quantity.
E. More elastic supply will lead to a larger decrease in quantity.
201210 3 Term Test 1: Solutions: Full
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
6. [5 Marks] Valuing the NY Yankee game at $70 Mo bought a ticket at $50. Galens WTP
is $120, so he oers Mo $90. A ticket broker with a client willing to pay $140 oers Mo
$80. Assuming all oers to purchase the ticket are rm (i.e., non-negotiable), what is Mos
opportunity cost of attending the game?
A. $50.00
B. $70.00
C. $80.00
D. $90.00
E. $140.00
7. [5 Marks] Absent government intervention, neither supply nor demand is perfectly elastic
or inelastic. Assume Canada already has a binding quota on the quantity of wine that can
be imported from Boblandia. It then places a $1 excise tax on each bottle of Boblandia
wine, payable by the seller. If the quota is still binding after the excise tax, then as a
result of the excise tax:
A. The retail price of Boblandia wine will not increase.
B. The retail price of Boblandia wine will increase, but by less than $0.50.
C. The retail price of Boblandia wine will increase by more than $0.50, but less than $1.00.
D. The retail price of Boblandia wine will increase by $1.00.
E. The retail price will increase, but we cannot tell whether the increase will be more than
or less than $0.50.
8. [5 Marks] In 2011, Coleman spent $300 on gasoline. Assuming an income elasticity of
demand of .5 and no price changes, how much does he spend in 2012 if his income decreases
by 10%?
A. $270
B. $285
C. $300
D. $315
E. $330
201210 4 Term Test 1: Solutions: Full
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
9. [5 Marks] When might we have excess demand even though the market is in equilibrium?
A. An excise tax.
B. A lump-sum tax.
C. A binding quota.
D. A binding price oor.
E. A binding price ceiling.
s
s
d
10. [5 Marks] Gazzalestan and Boblandia can each produce either cars or clothing. Figure 1
depicts each countrys Production Possibility Frontier (PPF). Before trade each produces
and consumes both goods. Which of the following trades is both feasible and may leave
both countries better o?
Figure 1: PPFs for Gazzalestan and Boblandia.
A. One country ships 30 units of clothing to the other in exchange for 50 cars.
B. One country ships 15 units of clothing to the other in exchange for 35 cars.
C. One country ships 10 units of clothing to the other in exchange for 25 cars.
D. One country ships 15 units of clothing to the other in exchange for 20 cars.
E. One country ships 15 units of clothing to the other in exchange for 10 cars.
201210 5 Term Test 1: Solutions: Full
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
11. [5 Marks] Demand is given by Q(P
b
) = 100P
b
, and supply is innitely elastic at P = 50.
The current tax is $20 per unit transacted. What will be the eect of reducing the tax?
A. It will increase government revenue, and will increase deadweight loss.
B. It will increase government revenue, and will decrease deadweight loss.
C. It will decrease government revenue, and will increase deadweight loss.
D. It will decrease government revenue, and will decrease deadweight loss.
E. May increase or decrease government revenue, but will decrease deadweight loss.
1
1
Note for any T > 0, it must be the case that

%Q
%P
b

> 1 as we are on the top half of the demand curve depicted

in Figure 2. The policy maker is interested in the relationship between Q and T. Given that at T = 20 we are on
the bottom half of the demand curve in Figure 3, it must be the case that

%Q
%T

< 1.
201210 6 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. [28 Marks] In language comprehensible to a math-literate college graduate who has never
taken economics, briey but accurately explain each of the following.
1. [6 Marks] Explain the dierence between the marginal willingness to pay for the fth cup
of coee (MWTP(5)) and the willingness to pay for ve cups of coee (WTP(5)). Explain
why economists focus on the former.
2. [6 Marks] Explain the dierence between elastic and inelastic demand. How does this
explain when a price increase will increases total revenue?
3. [6 Marks] Explain the dierence between absolute and comparative advantage. Explain
why this distinction explains gains from trade.
2
4. [6 Marks] Explain the distinction between a direct cost and an opportunity cost. How
does this help explain an increase in college enrollment when tuition is increasing and many
cannot nd employment?
5. [4 Marks] Explain the dierence between a change in supply and a change in the quantity
supplied.
2
That is, relative productivities matter.
201210 7 Term Test 1: Solutions: Full
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
III. [17 Marks] Demand is given by Q
d
(P
b
) = 21P
b
, whereas supply is given by Q
s
(P
s
) =
3
2
P
s
9.
1. [7 Marks] Assuming a competitive market with a tax T = 5, solve for the equilibrium
quantity (Q

t
), the total price that buyers pay (P

b
) and the net price that sellers receive
(P

s
201210 8 Term Test 1: Solutions: Full
University of Toronto
Department of Economics
ECO100: Introductory Economics
Robert Gazzale, PhD
2. [10 Marks] In Figure 4, the bold lines correspond to the demand and supply equations
used on the previous page. The tax is also depicted, although perhaps not obviously.
(Important: You can get full marks for this question without having done the previous
questions.)
Figure 4: So Many Letters.
Using letters and roman numerals from Figure 4, identify each of the following equilibrium
outcomes:
A. P

b,t
Price buyer pays in market with taxes ii
B. P

s,t
Price seller receives in market with taxes iv
C. Q

t
Quantity transacted in market with taxes vi
D. Consumer surplus in market with taxes A
E. Government surplus in market with taxes H+N
F. Reduction in consumer surplus due taxes H+I
G. Deadweight loss due taxes O+I
201210 9 Term Test 1: Solutions: Full