Econ1001 Mid-semester exam, S111 p.

1 (W)

ECON1001 – Introductory Microeconomics

Midterm exam

Semester 1 2011

Time allowed: 60 minutes plus 5 minutes reading time.

Family name: _______________________

First/ given names: _______________________

Student number: _______________________

Student signature: _______________________

Lecturer & Stream: _______________________

Please ensure that this exam paper consists of 12 pages consisting of 15 multiple
choice questions (Part A) and 2 short answer questions (Part B).
Each question in Part A is worth 1 mark.
The question in Part B is worth 15 marks in total.
You must answer all questions in the exam.
INSTRUCTIONS:
(i) Students are to place their name, student number and signature on this paper in the
spaces provided. Your name and student number must also be placed on the
computer answer sheet in the appropriate spaces.
(ii) Students return the exam paper with the computer answer paper placed inside this
exam paper.
(iii) The multiple choice questions must be answered on the computer sheet that you have
been given. The short answer questions are to be answered in the spaces provided for
in the exam paper.
(iv) Students are reminded that academic misconduct of any kind (copying answers from
other students, using notes or other means of communication unless specifically
allowed by the instructor etc) will result in a report to the University. It is the
student’s responsibility to ensure that any actions you do during the exam do not
constitute academic misconduct. If you are unsure of any aspect of behaviour that
may constitute academic misconduct it is your responsibility to check with the
instructor.
(v) NON PROGRAMMABLE CALCULATORS CAN BE USED IN THIS EXAM.
(vi) MOBILE PHONES AND OTHER COMMUNICATION DEVICES MUST BE
TURNED OFF
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Part A – Multiple Choice ANSWER ALL QUESTIONS (Each question is worth 1 point).
Choose the one alternative that best completes the statement or answers the question

1. What is the colour of your exam paper?

a. white.
b. green.
c. pink.
d. yellow.
e. blue.

2. Consumer surplus is the difference between:

a. the minimum quantity consumers are willing to buy and the amount they
actually buy.
b. total utility and marginal utility for every unit of a good consumed.
c. the total marginal benefit for every unit of a good consumed and total
expenditures on the good.
d. total revenue and total cost in a market for a good.
e. the area above the supply curve but below the market price.

3. A corporation differs from a partnership in that the corporation:

a. is usually owned by people who enjoy limited liability.
b. has a lower debt ratio.
c. is characterised by tax-exempt profits.
d. is required to own a seat on a stock exchange.
e. has a higher debt ratio.

4. The firm’s supply curve for shoes in a competitive market is upward-sloping because:
a. costs of production of each extra unit rises so producers must receive a
higher price to produce more.
b. input prices rise when output rises.
c. when consumers want to buy more shoes, they are willing to pay more.
d. total costs of production go up when production increases.
e. firms are price takers.

5. John has a limited budget. He is choosing between buying a computer or a holiday in

Bali, both of which cost the same. He can only afford one of them. Which of the
following statements about his opportunity cost is correct?
a. The opportunity cost of a holiday in Bali is the money John pays for the
holiday.
b. The opportunity cost of the holiday is the same as the opportunity cost of the
computer since John can only afford one or the other.
c. The opportunity cost of going on the holiday is not buying the computer.
d. The opportunity cost of choosing between the holiday and the computer is
everything else that John could have bought instead.
e. Both a and c are correct.
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6. Suppose that we have a downward sloping demand curve and an upward sloping
supply curve. If there is an increase in demand and a decrease in supply, then we
expect:
a. the equilibrium price to definitely increase and the equilibrium quantity to
definitely decrease.
b. the equilibrium price to definitely increase and the equilibrium quantity to
definitely increase.
c. the equilibrium price to definitely decrease and the equilibrium quantity to
definitely decrease.
d. the equilibrium price to definitely decrease and the equilibrium quantity to
definitely increase.
e. none of the above.

7. Assume that the own price elasticity of demand equals 0.2 (ed = 0.2). Given a 10 per
cent increase in price, there will occur
a. 20 per cent increase in the quantity demanded.
b. 2 per cent decrease in the quantity demanded.
c. 20 per cent decrease in the quantity demanded.
d. 2 per cent increase in the quantity demanded.
e. information on the original price and quantity are required to answer this
question.

8. Consider if two goods are substitutes for one another. Suppose that a shock causes the
prices of one of the goods to increase. Ceteris paribus, we would expect the price of
the other good to:
a. increase.
b. decrease.
c. remain unchanged.
d. change in an unpredictable manner.
e. none of the above, more information is required to answer the question.
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9. Suppose that in the diagram D1 and S1 relate to current market in the tyre industry.
Assume there is a decrease of taxes on cars (ceteris paribus).

S2

P4 S1
P3

P2
P1

D2

D1

Q1 Q2 Q3 Q4
Quantity

The most likely new equilibrium price and quantity of tyres would be
a. P1; Q3.
b. P2; Q4.
c. P3; Q1
d. P4; Q2..
e. none of the above.

10. Suppose that a PR representative for a certain industry claims that requiring pollution
control equipment in this industry will result in costs that will be passed entirely to
consumers. What condition must apply for this claim to be true? (Assume that the
supply curve has a positive slope but is not vertical.).
a. The price elasticity of demand is zero.
b. The price elasticity of demand is infinite.
c. The industry is not competitive.
d. The market demand curve will shift to the right because consumers care about
the environment.
e. The claim will never be true under any circumstances.
 Econ1001 Mid-semester exam, S111 p. 5 (W)

11. Last year, Keith’s income was $20,000. He regularly used public transport, and he
purchased 20 kilos of beef last year. This year his income is $60,000. He drives a car
and he has purchased 40 kilos of beef. Which of the following statements is true
(ceteris paribus)?
a. Beef is a luxury good, and public transport is a normal good.
b. Keith’s demand for beef is price elastic and his demand for public transport is
price inelastic.
c. Beef and income are complements, but public transport and income are
substitutes.
d. Beef and cars are normal goods, and public transport is an inferior good.
e. Beef and public transport are complementary goods.

12. Consider the valuations placed on a rare Van Gough Painting by the following
individuals

Individual Valuation
Augustus 200
Brutus 150
Caesar 180
Don 230
Eric 50

In a second price auction:

a. Augustus wins but has a negative surplus of $30.
b. Augustus wins and has a surplus of $0.
c. Don wins and has a surplus of $50.
d. Don wins and has a surplus of $30.
e. Eric makes the highest bid and wins the auction but earns a zero surplus.

13. Consider a competitive market with non-identical consumers. Which of the following
is true?
a. Everyone pays the same price and the marginal valuation is the same for
different individuals for the last item consumed.
b. Everyone pays the same price but the marginal valuation may be different for
different individuals for the last item consumed.
c. Individuals may consume different amounts and the marginal valuations on the
last item consumed is the same for different individuals.
d. Individuals may consume the same amount but the marginal valuation on the
last item consumed may be different for different individuals.
e. Both a and c are correct.
 Econ1001 Mid-semester exam, S111 p. 6 (W)

14. Consider the following demand curves depicted in the diagram below (note that D2
and D3 have the same slope).

D3

a D2 D1

At a price of p:

a. D1 is more elastic than D2 ; D2 is more elastic than D3

b. D3 is more elastic than D2 ; D2 is more elastic than D1.
c. D3 has the same elasticity as D2 ; D2 is more elastic than D1.
d. D1 has the same elasticity as D2 ; D2 is more elastic than D3.
e. More information is required to answer the question.

15. Consider a market with 100 identical consumers and 100 identical firms. The demand
curve for each individual is given by the following: p=10-q. The supply curve for
each firm is given by the following: p=q. In the market equilibrium:
a. price is equal to 5 and quantity is equal to 5.
b. price is equal to 5 and quantity is equal to 500.
c. price is equal to 500 and quantity is equal to 5.
d. price is equal to 500 and quantity is equal to 500.
e. none of the above.

THE SPACE ON THIS PAGE BELOW THIS LINE MAY BE USED FOR
WORKING. ANY WRITING ON THIS PAGE WILL NOT BE MARKED.
 Econ1001 Mid-semester exam, S111 p. 7 (W)

Part B
Question 1 - ANSWER ALL PARTS OF THE QUESTION. Write down your answer in the
space provided. Please make use of both algebra and diagrams in order to illustrate
your answers.

Robinson and Crusoe live on a desert island. They spend their time either fishing or
collecting coconuts. In one hour, Robinson can catch seven fish or harvest five coconuts.
Crusoe, in one hour can catch only four fish, or harvest three coconuts.

a) What is each individual’s opportunity cost of fish, expressed in terms of coconuts?

Who has an absolute advantage in the production of coconuts? Who has a
comparative advantage in the production of coconuts? (3 marks)

Opportunity cost of fish for Robinson, 5/7 coconuts.

Opportunity cost of fish for Crusoe, 3/4 coconuts.

Robinson has absolute advantage in coconuts (5 > 3).

Crusoe has comparative advantage in coconuts (4/3 < 7/5).

 Econ1001 Mid-semester exam, S111 p. 8 (W)

b) Assume each individual has ten hours per day to devote to fishing and harvesting
coconuts. Draw the production possibilities curve (PPC) for this two-good
economy over the duration of a day in the axes below. NOTE THAT FULL
MARKS REQUIRE YOU TO LABEL THE DIAGRAM CLEARLY AND
COMPLETELY (2 marks)

Coconuts Slope = -5/7

80
Complete specialisation

30 Slope = -3/4

70 110
Fish
 Econ1001 Mid-semester exam, S111 p. 9 (W)

c) Now assume a third individual, Gilligan, arrives on the island. Gilligan can catch
six fish per hour, or harvest six coconuts per hour. Assuming again that each
individual has ten hours per day to devote to fishing and harvesting coconuts,
draw the PPC for the two-good economy over the duration of a day. NOTE
THAT FULL MARKS REQUIRE YOU TO LABEL THE DIAGRAM
CLEARLY AND COMPLETELY (2 marks)

Slope = -5/7
Coconuts
140
Slope = -3/4
90
Slope = -1
60

70 110 170
Fish
 Econ1001 Mid-semester exam, S111 p. 10 (W)

Question 2 - ANSWER ALL PARTS OF THE QUESTION. Write down your

answer in the space provided. Please make use of both algebra and diagrams in
order to illustrate your answers.

Consider the following supply and demand curve:

Demand: Q = 80 − 2 p .
Supply: Q = p − 10 .

a) Find the price and quantity at the market equilibrium? Find consumer and
producer surplus at the market equilibrium. Show these in the axes below. NOTE
THAT FULL MARKS REQUIRE YOU TO LABEL THE DIAGRAM
CLEARLY AND COMPLETELY (3 marks)

In equilibrium, the quantity supplied equals quantity demanded:

QS=QD, i.e. 80-2p = p-10 and thus the market is in equilibrium at p*=30, Q*=20.

Consumer surplus = area under the demand curve and above the price paid (green triangle
in figure above). Hence, CS = ½ x 20 x (40-30) = 100
Producer surplus = area above the supply curve and below the market price (purple
triangle in figure above). Hence, PS = ½ x 20 x (30-10) = 200
(Total surplus = CS + PS = 300)
 Econ1001 Mid-semester exam, S111 p. 11 (W)

b) Suppose the government imposes a price ceiling in this market of 20. What is the
new value of consumer surplus, producer surplus and the resultant deadweight
loss? Show these in the axes below. NOTE THAT FULL MARKS REQUIRE
YOU TO LABEL THE DIAGRAM CLEARLY AND COMPLETELY (3 marks)

Price ceiling at p=20, which is a binding price ceiling since the market price in
equilibrium is p*=30.
At p=20, the quantity supplied and exchanged is Qs=10 (while the quantity demanded is
Qd=40, thus there is a shortage of 30). Note, at that quantity traded, consumers are
willing to pay a price of 35.

Consumer surplus (green area) = ½ x (10x5) + 15x10 = 175

Producer surplus (purple area) = ½ x (20-10) x 10 = 50
(Total surplus = CS + PS = 225)
Hence, the deadweight loss (DWL, orange area) = ½ x 20 x (35-20) = 75
Alternatively, you can compare the total surplus in the competitive market with the total
surplus generated under the price ceiling = 300 – 225 = 75.
 Econ1001 Mid-semester exam, S111 p. 12 (W)

c) In the Case Study 2.9 (If you get a home loan, thank an economist) the impact of
the removal of a price ceiling on home loans in Australia during the 1980s was
discussed. Who benefitted from the removal of this price ceiling? Why? Who lost
as a result from the removal of this price ceiling? Why? (Answer the question in
the space provided below) (2 marks)

Background: under the price ceiling, the quantity of loans provided in the market is
below what would be provided in a competitive loan market, and the interest rate (price)
charged on home loans is lower. Given the shortage of loans, rationing allows banks to
allocate the available loans to households who have a higher probability of repayment to
reduce the risk of default (higher income households).

(1) Who benefits from removal of the price ceiling? Why?

1/ low income households benefit since they now manage to obtain a loan – at
least those households that are willing to pay the market equilibrium price
(increase in consumer surplus).
2/ Banks benefit since they can charge a higher price (interest rate) and provide
more loans. Producer surplus rises.
(2) Who loses? Why?
High income households lose out since they can now obtain the same quantity of
loans, but they need to pay a higher interest rate on these loans (loss of consumer
surplus).

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