Question

Closed book and closed notes.

3. Basic Calculators are permitted.

4. Read all instructions and questions carefully.

5. Show all your work.

6. Please place your Coquitlam College Identification Card face up and visible on your desk.

7. Electronic devices including cellular phones must be turned off and put away during the exam.

8. Any student who has a cell phone or other unauthorized electronic device (i.e. laptop, and et cetera.) on their person or around their desk during this exam will be guilty of cheating and receive an "F" for the course.

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QUESTION

MARKS EARNED

MARKS AVAILABLE

1

10

2

10

3

10

4

10

5

30

TOTAL

70

QUESTION 1 (10 Points)

Answer each of the following questions by drawing a graph that represents the initial equilibrium condition and the resulting new situation from the effect. Label the graphs carefully and provide a written explanation as well.

a. Consider the market for reusable coffee mugs that is initially in a market equilibrium. Suppose that a more efficient production process has been developed, which reduces the cost of production and that people are now more aware of environmental impacts so they try to reduce and reuse. Given these events, what will happen to the equilibrium price and quantity in the market for coffee mugs?

b. Consider the market for hoodies that is initially in a market equilibrium. Suppose that hoodies are becoming more popular, while concurrently, the number of people that plan to purchase any hoodies decreases. Given these events, what will happen to the equilibrium price and quantity in the market for hoodies?

QUESTION 2 (10 Points)

Answer each of the following questions by providing a written explanation.

a. The price elasticity of demand for pencils is equal to 1. What does the statement mean if the price of a pencil decreases by 20%? What type of good is a pencil?

b. The income elasticity of demand for pencils is equal to 2. What does the statement mean if income increases by 10%? What type of good is a pencil?

c. The cross price elasticity of demand for pencils and pens is +2. What does the statement mean if the price of a pen decreases by 5%? What is the relationship between the two goods?

d. The cross price elasticity of demand for pencils and erasers is -3. What does the statement mean if the price of an eraser increases by 10%? What is the relationship between the two goods?

QUESTION 3 (10 Points)

Answer each of the following questions by determining if the statement is true or false and provide your reasoning.

a. The price elasticity of demand for gasoline in the short term is more elastic than it would be in the long term.

b. The price elasticity of wine is more elastic for a low-income individual than a high-income individual.

c. The burden of a tax is higher on the consumer if the demand is elastic and the supply is inelastic.

d. When the ceiling price is below the equilibrium price, then the change in producer surplus is positive.

QUESTION 4 (10 Points)

Answer each of the following questions by showing any calculations required or by providing a written explanation.

Suppose that in a year a European car manufacturer can produce 600,000 sedans or 100,000 trucks, while a Canadian car manufacturer can produce 300,000 sedans or 300,000 trucks.

a. (2 points) The two countries are currently not engaged in international trade. Suppose that each country allocate half a year in the production of each good, what will be the total world production of cars and trucks in a year?

b. (4 points) What is the opportunity cost of producing a sedan in terms of a truck and the opportunity cost of producing a truck in terms of a sedan for both countries?

c. (2 points) Which country should specialize in sedan? In trucks?

d. (2 points) If both countries were to specialize and open to trade, what will be the total world production of cars and trucks in a year?

QUESTION 5 (30 Points)

Answer each of the following questions by showing any calculations required or by providing a written explanation.

Jasper works for the government and his job is to analyze the market for apples. He found that the market demand function for apples is QD = 50 - 5p and the market supply for apples is QS = 10 + p, where Q is the quantity of apples demanded/supplied and p is the price of apple per pound. The government is looking to limit the production of apples and is considering various intervention options.

a. (3 points) Suppose that John initially does not know the demand function nor the supply function for applies, but he has the following information through observing the market. He notice that when the price of apples increased from $4.00 to $4.10 per pound, the quantity of applies demanded fell from 30 to 28 pounds. What is the elasticity of demand for apples? Is it elastic, unit-elastic, or inelastic? Using this estimate, by how much would price increase if the quantity demanded to be restricted to 20 pounds from 25 pounds (a 20% decrease in the quantity demanded of apples)

b. (9 points) Given the demand and supply functions, determine the current equilibrium price and quantity for apples. Graph the market equilibrium for apples. What is the consumer surplus (CS), producer surplus (PS), total surplus (TS), government revenue (GR), and dead weight loss (DWL) at the equilibrium?

c. (8 points) The first option is to implement a production quota that restricts the production of apples from the current equilibrium supply to 20 pounds of apples. What is the consumer surplus (CS), producer surplus (PS), total surplus (TS), government revenue (GR), and dead weight loss (DWL) with this quota? Show the effects of the quota on a diagram, and label the welfare measures, if applicable.

d. (8 points) The other option is to implement a tax of $2.67 on the producer. What is the consumer surplus (CS), producer surplus (PS), total surplus (TS), government revenue (GR), and dead weight loss (DWL) with this tax on the producer? Show the effects of the tax on a diagram, and label the welfare measures, if applicable.

e. (2 points) Which government intervention (a quota or a tax) would the consumers and the producers prefer, if they had to choose?

Answer 1

Question1

(a) After environment awareness equilibrium quantity and price of mugs decreases to Q' and P' respectively. And equilibrium point shifts down and becomes E'.

(b) After the popularity demand curve shifts to DD' and equilibrium point become E'. Equilibrium price and quantity increases to P' and Q' respectively.