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2017 Term Test 1

Microeconomics (University of Toronto)

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University of Toronto ECO101: Principles of Microeconomics

Department of Economics Robert Gazzale, PhD

Term Test 1: Form Code: A: 2017

While you wait for the exam to start,
please complete the FRONT and BACK of the Bubble Form.

DO NOT OPEN THIS TEST BOOKLET UNTIL INSTRUCTED.

General Instructions
1. 105 minutes. 106 marks. Allocate your time wisely!
2. This test booklet: 53 Multiple choice marks.
3. Other test booklet: 53 short answer and calculation marks.
4. Multiple-choice questions: choose best answer.
5. Aids allowed: a non-graphing, non-programmable calculator; a straight edge (i.e., ruler).
6. Abbreviations: CS = consumer surplus. PS = producer surplus. TS = total surplus.
DWL = deadweight loss.  = own-price elasticity of demand.
Bubble Sheet Instructions
• Answer MULTIPLE CHOICE questions on supplied Bubble Form.
• Fill in all information on both sides of the form.
• Your Form Code is A.
• Pencil recommended for Bubble Form. Black or blue ink can be used, but not erased!
• Marks earned for correctly answering a question is clearly indicated.
No deductions for incorrect answers.
• Multiple choice marks are based entirely on the Bubble Form.
Any writing in this test booklet will not be considered.

20171009A 1 Term Test 1

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University of Toronto ECO101: Principles of Microeconomics

Department of Economics Robert Gazzale, PhD

FORM CODE A

I. [53 Marks] Multiple Choice Questions: Indicate answer on Bubble Form.

1. [1 Marks] Look up a couple of centimetres. What is your Form Code?

A. A
B. B
C. C
D. D

Album Value

Birth of the Cool $26

Giant Steps $22
Yardbird Suite $18
Take Five $14

Table 1: Your personal valuation of four different Jazz classics..

2. [2 Marks] The price of a each album is $10 and you have a $20 iTunes credit which
expires tonight. Table 1 gives your value of each of four different albums. Based on this
information, what is the opportunity cost, in dollars, of purchasing Herbie Hancock’s
Maiden Voyage?
A. $26
B. $22
C. $18
D. $16
E. $10

3. [2 Marks] The price of a frog is $10, but you receive a 10% discount of you purchase
three or more frogs. What is the marginal (explicit) cost of the third frog?
A. $27
B. $10
C. $9
D. $7

20171009A 2 Term Test 1

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University of Toronto ECO101: Principles of Microeconomics

Department of Economics Robert Gazzale, PhD

4. [2 Marks] Assume competitive markets where supply and demand curves have the usual
slopes. Both Uber and the TTC are ways to get from one place in the city to another.
What are the predicted effects in the Uber market if there is an increase in the per-trip
price of taking the TTC?
A. ↑ P; ↑ Q.
B. ↑ P; ↓ Q.
C. ↓ P; ↑ Q.
D. ↓ P; ↓ Q.

5. [2 Marks] In order to increase quantity purchased by 2%, the app seller needed to
decrease price by 1%. What can we say about elasticity of demand?
A. Demand is perfectly inelastic.
B. Demand is inelastic, but not perfectly inelastic.
C. Demand is unit elastic.
D. Demand is elastic, but not perfectly elastic.
E. Demand is perfectly elastic.

6. [2 Marks] You only had to pay $8 for the frog for which you value at $10. If Prof. G. forces
you to give the frog to Amina, who values the frog at $7, what is the change in total
surplus?
A. −$10
B. −$3
C. −$2
D. −$1
E. +$7

7. [3 Marks] Old data plan: $40 per month, first 10GB are free, $10 per GB for each GB
after 10 GBs. You used 17 GBs every month. New data plan: $65 per month, first 15
GBs are free, $10 per GB after 15 GBs. Based on this data and standard assumptions:
A. Your new plan has increased the marginal (explicit) cost of the 17th GB.
B. Your new plan has decreased the marginal (explicit) cost of the 17th GB.
C. You will now use less than 17 GBs of data each month.
D. You will now use more than 17 GBs of data each month.
E. You will continue to use 17 GBs of data each month.

20171009A 3 Term Test 1

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University of Toronto ECO101: Principles of Microeconomics

Department of Economics Robert Gazzale, PhD

8. [3 Marks] You reserved a hotel room for 3 nights at $150 per night. If you do not cancel,
you pay when you check out. If you cancel at least 24 hours before check-in, you pay a
$50 cancellation fee but do not have to pay for the room. If you cancel less than 24 hours
before check in, you pay for one night. It is 48 hours before check-in, what are your sunk
costs?
A. $0.
B. $50.
C. $100
D. $150
E. $450

9. [3 Marks] You have been given Raptors tickets for 6 games.1 Table 2 shows your total
benefit as a function of number of Raptors games you attend. If you can sell any ticket
for $27, how many games do you attend?

Number of Total
Games Benefit
1 $35
2 $65
3 $90
4 $110
5 $125
6 $135

Table 2: Total benefit as a function of games attended.

A. 2.
B. 3.
C. 4.
D. 5.
E. 6.

1
The Raptors are Toronto’s professional basketball team.

20171009A 4 Term Test 1

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University of Toronto ECO101: Principles of Microeconomics

Department of Economics Robert Gazzale, PhD

Scarves Hats
Florence 0.75 per hour 0.25 per hour
Tatyana 1 per hour 0.50 per hour

Table 3: Knitting productivity.

10. [3 Marks] Refer to Table 3. Which of the following is true?

A. Florence has a comparative advantage in both hats and scarves.
B. Tatyana has a comparative advantage in both hats and scarves.
C. Both Florence and Tatyana should specialize in scarves.
D. Florence has an absolute advantage in both hats and scarves.
E. Tatyana has an absolute advantage in both hats and scarves.

11. [3 Marks] Refer to Table 3. Assuming Florence is currently at an efficient point of

production, what is the opportunity cost of knitting another scarf?
1
A. 4 of a hat.
1
B. 3 of a hat.
3
C. 4 of a hat.
4
D. 3 hats.
E. 3 hats.

12. [3 Marks] Refer to Table 3. Which of the following trades might be accepted by both
Florence and Tatyana?
A. Tatyana sends 5 scarves to Florence in exchange for 2 hats.
B. Tatyana sends 7 scarves to Florence in exchange for 2 hats.
C. Tatyana sends 2 scarves to Florence in exchange for 2 hats.
D. Florence sends 5 scarves to Tatyana in exchange for 2 hats.
E. Florence sends 7 scarves to Tatyana in exchange for 2 hats.

20171009A 5 Term Test 1

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University of Toronto ECO101: Principles of Microeconomics

Department of Economics Robert Gazzale, PhD

13. [3 Marks] Assume markets are perfectly competitive with supply and demand curves
having the usual slopes. Further, assume coffee is an normal good. What are the pre-
dicted changes in equilibrium price (P ∗ ) and quantity (Q∗ ) resulting from a) an decrease
in incomes in coffee consuming countries; combined with b) a decrease in wages paid to
workers in coffee producing countries?
A. P∗ may ↑ or ↓. Q∗ may ↑ or ↓.
B. P∗ may ↑ or ↓. Q∗ will ↓.
C. P∗ will ↓. Q∗ may ↑ or ↓.
D. P∗ will ↓. Q∗ will ↓.
E. P∗ may ↑ or ↓. Q∗ will ↑.

Marginal Cost

Nights Akbar Bob Zorab

1 $100 $108 $116

2 $110 $118 $126
3 $130 $138 $146

Table 4: Each of three individuals can rent his apartment for up to three nights. Each person’s
marginal cost for each night is listed in the table.

14. [3 Marks] Refer to Table 4. At which per-night market price are exactly three nights
supplied in total?
A. $112.
B. $116.50.
C. $117.
D. $131
E. $147

15. [3 Marks] AirBnB allows apartment owners to rent their apartments to tourists. Which
of the following will cause a movement along the demand curve (as opposed to shifting
the demand curve) for AirBnB rentals in Toronto?
A. An increase in tourist incomes.
B. Regulations limiting how often an owner can rent out her place.
C. A decrease in the price of flights to and from Toronto.
D. An increase in the price of flights to and from Toronto.
E. An increase in the number of hotel rooms available in Toronto.

20171009A 6 Term Test 1

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University of Toronto ECO101: Principles of Microeconomics

Department of Economics Robert Gazzale, PhD

16. [3 Marks] Demand is characterized by P (Q) = M T W P = 100 − Q4 . What is (absolute

value of) elasticity of demand at P = $75? (Use the point or “calculus” method of
calculating elasticity.)
3
A. 16 = 0.1875
1
B. 4 = 0.25
C. 43 = 0.75
D. 3.
E. 4.

17. [3 Marks] You own BobCo, which sells two apps: BobCalc and BobGraph. Your em-
ployee tells you that income elasticity of demand for BobCalc is −0.5. What can you
infer?
A. BobCalc is a normal good.
B. BobCalc is an inferior good.
C. Bob Calc and BobGraph are substitutes.
D. Bob Calc and BobGraph are complements.
E. Your employee made an error and should have reported the absolute value.

q Jemima Eunice
1 $100 $60
2 $85 $50
3 $70 $35
4 $55 $25
5 $40 $15
6 $25 $5

Table 5: Marginal willingness to pay for running shoes for two marathon champions.

18. [3 Marks] Refer to Table 5, which shows marginal willingness to pay as a function of
quantity for two marathon champions. What is consumer surplus if the price of a pair
of running shoes is $55?
A. $370.
B. $275.
C. $100.
D. $95.
E. $55.

20171009A 7 Term Test 1

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University of Toronto ECO101: Principles of Microeconomics

Department of Economics Robert Gazzale, PhD

19. [3 Marks] Assume all benefits accrue to buyers and all costs are borne by sellers. Assume
coffee and tea are substitutes, and all markets are perfectly competitive where supply
and demand curves have the usual slope. If a disease destroys 25% of tea production,
what are the surplus effects in the coffee market?
A. TS ↑; PS ↑.
B. TS ↑; PS ↓.
C. TS ↓; PS ↑.
D. TS ↓; PS ↓.
E. TS ↑ or ↓; PS ↑.

20. [3 Marks] You go to the store expecting to pay $10 for one frog. Arriving at the store,
you realize that you get a student discount and only need to pay $8. Assuming you still
only purchase one frog, how does this discount effect this transaction’s surplus?
A. CS: ↑; TS: ↑
B. CS: ↑; TS: ↓
C. CS: ↑; TS: may ↑ or ↓
D. PS: ↓; TS: may ↑ or ↓
E. PS: ↓; TS: no change.

20171009A 8 Term Test 1

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