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PRINCIPLES OF MICROECONOMICS

Midterm Test #1: Sample #2 Answers

Time Allowed: 50 Minutes

This total marks in this test are 50. The test is divided into two parts:

Part I - problem format - is worth 40 marks (80% of the total mark of 50)

Part II - multiple choice- is worth 10 marks (20% of the total mark of 50)

(5 multiple choice questions worth 2 marks each)

Show your work where applicable.

YOU MUST USE PEN INSTEAD OF PENCIL

Print your name and student number clearly on the front of the exam and on any loose pages.

Name: _______________________________________

(Family Name) (Given Name)

Student #: ______________________

There are 6 pages to the exam.

Only pages 1-2 are available for preview. Some parts have been intentionally blurred.

Principles of Economics: Midterm Test #1: Sample #2 Answers

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Part I

Place your answers (and work where necessary) in the space provided.

Clearly label all axes, curves, and points.

1. Production Possibilities Curve (10 marks)

Ontario, with only labour and capital as resources, has the following production possibilities

for Buses and Cars.

a) 1 mark: Diagram with Bus intercept = 45,000 and Car intercept = 125,000

1 mark: Concave (to origin) PPC

b) 1 mark: no change in Bus intercept and new PPC concave to the origin

1 mark: increase in Car intercept to 135,000

a) Sketch the country's production possibilities curve (PPCo) in the space below the table with

Buses on the vertical axis. (2 marks)

b) The opportunity cost of increasing Car production from 65,000 to 95,000 units is

12,000 Buses (must say Buses) ? (1 mark)

c) The opportunity cost of increasing Buses production from 30,000 to 40,000 units is

40,000 Cars ? (1 mark)

d) What is the opportunity cost/unit of increasing Car production from 95,000 to 131,000

units? Show your work. (2 marks)

1 mark: Opportunity Cost for the option = 18,000 Buses

1 mark: Opportunity Cost/unit = 0.6 Buses from 18,000/30,000

e) What is the opportunity cost of increased output from 25,000 Buses and 65,000 Cars to

18,000 Buses and 95,000 Cars? (1 mark)

1 mark: OC = 7,000 Buses

f) Suppose that technological change increases the output of Cars by 8% for each amount of

resource but does not effect Bus production.

i) Sketch (particularly the intercepts) in your above diagram the production

possibilities curve (PPC1) that results from this technological change. (2 marks)

ii) What is the opportunity cost of increasing Bus output from 40,000 to 45,000

units after technological change raises Car output by 8%? (1 mark)

1 mark: 27,000 Cars from something like 1.08*25,000

Buses

45,000

40,000

30,000

18,000

0

Cars

0

25,000

65,000

95,000

125,000

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