# 2008 MIDTERM 1 QUESTIONS

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University of Toronto Scarborough

Economics for Management Studies

MGEA02H3

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Summer

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1
ECMA04H
First Term Test - October 25, 2008 Time: 90 minutes
Professor Gordon Cleveland
Version A
Instructions: PLEASE READ CAREFULLY
1. On the Scantron answer sheet, you must
→ PRINT your last name and first name
→ enter your student number as the identification number
→ FILL IN THE BUBBLES under your name and student number
→ FILL IN THE BUBBLE ASSOCIATED WITH YOUR TEST VERSION
NOTE - THIS IS VERSION A
2. If you fail to carry out all the tasks indicated in part 1, 4 marks will be deducted
from your final score.
th
3. This exam consists of 25 multiple choice questions (and a 26 which will
confirm your exam version). For each question, choose the correct answer. If two
multiple choice answers both seem to be approximately correct, choose the best of
the two answers. Enter the answers to the multiple choice questions on the
Scantron sheet provided to you by filling in the appropriate bubble. If
answers are not written on this sheet, there will be no marks given for
answers. Each correct answer is worth 4 marks (except for question 26, where the
correct answer simply confirms your exam version); incorrect answers receive 0
marks.
4. When entering your answers on the Scantron sheet:
→ Use a medium (HB) pencil (do not use a red pen)
→ Fill in the bubble neatly and completely (this is important)
→ Erase any changes as completely as possible
→ Be very careful to place each answer in the correct place
Note: this exam consists of 9 pages, including this cover page. Make sure that all 9
pages are included in your exam, and notify an invigilator immediately if any are
missing. 2
ECMA04 FIRST TERM TEST October 25, 2008
This term test consists of 25 questions. Answer each question by choosing the best alternative and
indicating your choice by filling in the appropriate bubble on the Scantron sheet - it is the only thing you
will turn in at the end of the exam. You may take the rest of the exam away with you, so you can use the
fronts and back of these pages for your rough work. If you wish to keep a record of your answers, make a
note of them on the exam question sheet. The answer sheet (Scantron) will not be returned to you, but the
answers will be posted on the Intranet, and of course your mark will be posted on the Intranet. Each
correct answer is worth 4 marks (there is no deduction for wrong answers).
1−3. A country produces goods X and Y and has the following equation for its production possibilities
frontier: Y + 4X = 1600 or Y = [1600 - 4X ] 2 0.5
Questions 1 through 3 concern this country.
1. You are told that the economy is producing efficiently and has chosen to produce and consume 12 units
of X and 32 units of Y. At this point on the production possibilities frontier, you can use calculus to
obtain the opportunity cost of Y as:
A) 2 B) 1/2 C) 3/2 D) 2/3 E) 3 F) 1/3 G) 1/4
H) 8/3 I) 3/8 J) none of the above
2. Now you are told that the economy is producing efficiently and has chosen to produce and consume 16
units of X. At this point on the production possibilities frontier, you can use calculus to obtain the
opportunity cost of X as:
A) 2 B) 1/2 C) 3/2 D) 2/3 E) 3 F) 1/3 G) 1/4
H) 8/3 I) 3/8 J) none of the above
3. Suppose that those in charge of this economy want to maximize the utility of the residents of the
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country, where utility can be computed according to the equation U = 3XY The point on the PPF that
will maximize the value of the output involves the production of how many units of X (rounding to two
decimal places)?
A) 4.58 B) 6.71 C) 8.94 D) 10.41 E) 11.55 F) 12.48
G) 12.83 H) 13.45 I) 15.46 J) none of the above 3
4-5. The Canadian economy can produce two goods, represented by X and Y. The production
possibilities frontier is shown on the diagram below, along with several points, each of which represents a
combination of X and Y. Questions 4 and 5 deal with this diagram.
Y
D
B
C
A
X
4. Sherry Cooper, chief economist of BMO, has suggested that Canada will go into recession if the
government and Bank of Canada do not take immediate steps to avoid it. Relating this to the diagram, we
might say that Ms. Cooper is issuing a warning about a move from:
A) a point like A to a point like B or C B) a point like A to a point like D
C) a point like B or C to a point like D D) a point like B or C to a point like A
E) a point like D to a point like A F) a point like D to a point like B or C
G) a point like B to a point like C H) a point like C to a point like B
I) none of the above
5. An economist is recommending that Canadian firms should adopt new productive technologies which
would enhance economic growth. Relating this to the diagram, we might say that the economist is
recommending that the Canadian economy should move from:
A) a point like A to a point like B or C B) a point like A to a point like D
C) a point like B or C to a point like D D) a point like B or C to a point like A
E) a point like D to a point like A F) a point like D to a point like B or C
G) a point like B to a point like C H) a point like C to a point like B
I) none of the above 4
6−9. The market for large sport utility vehicles (i.e., SUV’s) (which we will assume is a competitive
industry) is in equilibrium, and its short run supply and demand schedules have the usual shapes. Large
SUV’s are a normal good and you can safely ignore any effects of income on the demand for related
goods. Gasoline is a complementary good to SUV’s, and small cars are a substitute good for SUV’s.
Questions 6 through 9 concern this market in the short run, and each question should be considered in
isolation from the others (that is, in each question assume that the changes described in the other
* *
questions have not occurred). In all cases, P and Q refer to the equilibrium price and quantity of large
SUV’s.
6. Due to the collapse of the stock market and impending recession, consumers incomes fall. As a result,
in the market for large SUV’s:
* * * *
A) P and Q both rise B) P and Q both fall
C) P rises and Q falls D) P falls and Q rises
* *
E) P rises, but we do not know exactly what happens to Q
* *
F) P falls, but we do not know exactly what happens to Q
G) Q rises, but we do not know exactly what happens to P *
* *
H) Q falls, but we do not know exactly what happens to P
* * * *
I) either P and Q both rise, or P and Q both fall, or neither changes
J) either P rises and Q falls, or P falls and Q rises, or neither changes
7. Wages in the industry that produces SUV’s fall. At the same time, the price of gasoline falls. As a
result, in the market for SUV’s:
* * * *
A) P and Q both rise B) P and Q both fall
C) P rises and Q falls D) P falls and Q rises
* *
E) P rises, but we do not know exactly what happens to Q
* *
F) P falls, but we do not know exactly what happens to Q
G) Q rises, but we do not know exactly what happens to P *
* *
H) Q falls, but we do not know exactly what happens to P
* * * *
I) either P and Q both rise, or P and Q both fall, or neither changes
J) either P rises and Q falls, or P falls and Q rises, or neither changes
8. Now, the OPEC cartel gets together to reduce the supply of oil, so that gasoline prices rise. At the
same time, a technological innovation occurs which lowers the price of energy-efficient small cars. As a
result, in the market for SUV’s:
* * * *
A) P and Q both rise B) P and Q both fall
C) P rises and Q falls D) P falls and Q rises
* *
E) P rises, but we do not know exactly what happens to Q
* *
F) P falls, but we do not know exactly what happens to Q
G) Q rises, but we do not know exactly what happens to P *
H) Q falls, but we do not know exactly what happens to P *
* * * *
I) either P and Q both rise, or P and Q both fall, or neither changes
* * *

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