Microeconomics (Econ 101) – 1 st Midterm (2013)

Time: 75 minutes

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Name ___________________________; Student ID _________________________

Have Fun!
Multiple Choice Questions (7)
Graph and Written Exercises (2)
Q1. If goods X and Y are complements in production, then a rise in price of good X
A. Shifts the supply for both goods to the left
B. Sifts the supply of good X to the left and good Y to the right
C. Movement along the supply graph for good X and a right shift in the supply of good Y
D. Movement along both supply graphs
E. Shift the supply of good X to the right and good Y to the left
Q2. Tick all those that would shift the production possibility frontier outside
___ Decision to fully utilize unemployed resources
___ An increase in labor force
___ Increase in the stock of Capital
Q 3. As the price of good A rises, the demand for good B shifts right then which of these statements are true
A. A is a factor used in the production of B
B. A and B are complements in production.
C. A and B are complements
D. A and B are substitutes
E. A and B are substitutes in production.
Q4. As the price of good A rises, the supply of good B shifts left. Which of the following statements are true
A. A is a factor used in the production of B
B. A and B are complements in production.
C. A and B are complements
D. A and B are substitutes
E. A and B are substitutes in production.
Q5. (3 points) As depicted in the following graph - a tax of $20 is imposed on the _______of MP3 players and this
generates ______ in revenue and __________in dead weight loss.

A) Consumers, $80, $20

Q6. If A & B are substitutes and the cost of an input used in the production of A increases, the price of
i) A and B rise; ii) B rises but A falls; iii) B falls but A rises; iv) A rises but B stays the same.
Q7. If “A” represents the demand graph for coffee, for students that can easily substitute between coffee and tea
then the demand graph, for those students that don’t have substitutes for coffee, must be ______ (B/C).
Extra Sheet for Rough Work / Material on this sheet will not be graded / so please keep your answers concise
and in spaces provided for the answer.
Question 1 (30 points)
Nike(inc), decides to bring back an old line of men’s shoe ware in the year 2014. They hire you, as the financial
stagiest to finalize the price that would maximize their profits.
They hand you the data from previous year (1994) on price and ‘quantity demanded’ for this line of shoe. After
plotting these numbers you come up with a demand function for these shoes:

a) (2 points) (Fill in the blank) The Demand equation is: QD= 700 - (____) p
(hint: confirm your answer by checking QD for p=10 from your equation and matching it with the graph)
b) Calculate the total revenue at different points on the graph (Just fill in the blanks) (3 points)
Total Revenue at Price $10 is _________;
Total Revenue at price $30 is _________;
Total Revenue at price $50 is _________;
Then, you analyze the change in total revenue. (just circle one) (1 point)
Total Revenue (increases/decreases) as price is increased from $10 to $30
Total Revenue (increases/decreases) as price is increased from $30 to $50
You were about to do this exercise for all the 1000s of points on the demand curve, but then you suddenly
remembered your econ 101 lectures, and realized that there was an easy way to answer this-price elasticity of
demand!
c) Let “P” be the price where the demand function has unit elasticity.
(For following parts just circle the right answer)
i. For prices above this price ”P” demand is (elastic/inelastic) (1 point)
ii. For prices below this price “P” demand is (elastic/inelastic) (1 point)
iii. Above this price ”P”, total revenue (increases/decreases) as the price is increased. (2 points)
iv. Below this price ”P”, total revenue (increases / decreases) as the price is decreased (2 points)
v. Find (and prove) the price “P” at which the demand is unit elastic (please show your work here). (4 points)
“P”=________
vi. Total Revenue is maximized at price __$______________ (1 point) (no need to prove just fill in the blank)

d) You realize that the data for the demand function is from the year 1994, and in the last 20 years the Canadian
economy has grown, and the GDP per capita has increased by 20%. Given that the income elasticity of demand for
Nike shoes is 5, how does this change the demand equation, and the demand graph?
The new demand equation is ____________________ (2 points); and at price 30$ the Q is ________ (1 point)
(Please show changes on the following graph and explain your answer in 1 to 2 sentences). (3 points)

e) Show what happens to the demand function on the graph and the demand equation if the govt. imposes a
consumer tax of 20 dollars on each pair of shoe.
The new demand equation is _________________________(2 points), and at price 30$ the Q is ______(1 point)
(Please show changes on the following graph and explain your answer in 1 to 2 sentences). (3 points)
Answer
For the second question you have a choice between question2, 3 or 4.

Question 2 (8 points)
On October 17, 1973, the Organization of Arab Petroleum Exporting Countries (OPEC) declared an embargo on
the shipment of oil to those countries that had supported Israel in its conflict with Egypt. With one stroke, the total
dependence of the industrialized world on oil, especially the US, became painfully clear. The effects of the
embargo were immediate. The retail price of a gallon of gasoline rose from a national average of 40 cents in May
1973 to 60 cents in June 1974. President Nixon (a controlling man that he was) decided to set a price ceiling at 50
cents.
Illustrate using supply and demand graph the effect on equilibrium quantity and quantity sold of gasoline as the
embargo came into effect. And then after the embargo, (on the same graph) show what happens to the quantity of
gasoline sold as Nixon imposes the price ceiling. Is there any dead weight loss from the above two events? Show
on your graph and explain in two to three lines. (you are not required to show changes in consumer or producer
surplus)

Question 3 (8 points)
Illustrate the following with supply and demand curve. In 2000, the economy expanded, increasing the demand for
labor and pushing up wages. What happened to the level of employment - show on the graph? Are the consumers
(businesses employing labor) better or worst off after the economic expansion of 2000? (Hint: Shade the regions
that represent the change in consumer surplus from before and after - for the old equilibrium quantity)

Question 4 (8 points)
Before the East European economic reforms the price of bread was regulated below the market equilibrium. With
reforms came deregulations and free markets and the price of bread rose sharply. Illustrate using the supply and
demand functions how did the total surplus change. (Make sure you show and discuss each component of the
surplus including dead weight loss)

Answer to Question _____ (2 or 3 or 4)