PRINCIPLES OF eCONOMICS

Final Exam: Sample #1

Duration - 3 hours

No Aids Allowed Non-programmable calculators only

INSTRUCTIONS:

This examination consists of TWO PARTS

Part I 10 diagrammatic/calculation questions of which you are expected to answer any eight (10 marks each for a total of 80%). If you answer more than 8 questions, only the worst 8 marks will be counted.

Part II 10 multiple choice questions worth 2 marks each for a total of 20%. Wrong answers will not be deducted from right in grading Part II.

All questions are to be answered in the spaces provided in this question paper booklet
Do not remove any pages or add any pages. No additional paper will be supplied.
The blank backs of pages may be used for rough work. Show your work where applicable.

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

Student Name: ______________________________________________________ (Family Name) (Given Name)

Student Number: ______________________________

There are 14 pages to the exam.

PART I: Diagrammatic/Calculation Answer only 8 of the 10 questions in Part I

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

1. Production Possibilities Curve (10 marks)

A country with only labour and capital as resources has the following production possibilities for units of cotton and iron.
|Options |A |B |C |D |E |
|Cotton |800 |700 |500 |400 |0 |
|Iron |0 |200 |400 |500 |600 |

1 mark: I intercept = 600 and C intercept = 800

1 mark: Concave PPC1

a) Sketch the country's production possibilities curve (PPCo) in the space below the table with iron on the vertical axis. (2 marks) b) The opportunity cost of increasing cotton production from 700 to 800 units is 200 units of iron ? (1 mark)
1 mark: correct answer but give no mark if iron isn’t specified c) The opportunity cost per unit of increasing iron production from 500 to 600 units is 400/100 = 4 units of cotton ? (1 mark)
1 mark: correct answer
d) Is opportunity cost decreasing, constant, or increasing when iron production increases from 200 to 500 units? Justify your answer (2 marks)

1 mark: opportunity cost is constant
1 mark: Show OC is 1C for 1I from 200 to 400 (200 cost 200) and from 400 to 500 (100 cost 100)

e) Suppose that technological change increases the output of iron by 50% for each amount of resource but does not change cotton production. i) Sketch in your above diagram the production possibilities curve (PPC1) that results from this technological change. (2 marks) 1 mark: Iron intercept is 900 1 mark: no change in cotton intercept ii) What is the opportunity cost of increasing Cotton output from 400 to 500 after the technological change? (1 mark) 1 mark: OC = 1.5*(500 – 400) = 150 Iron or from 750 – 600

iii) Pick any point on your original production possibility curve (PPCo) and label it A. Suppose that society chooses to produce more cloth and less iron relative to ‘A’ from the production possibilities represented by your curve PPC1. Designate such a point ‘B’. (1 mark)
1 mark: a point on PPC1 with less iron than original point on PPCo

2. Demand and Supply (10 marks)

The diagrams below represent the original equilibrium position for Polyester Carpets, an inferior good. Wool Carpets are a substitute in consumption for Polyester Carpets and Furniture is a complement in consumption. Remainders are a complement in production and Indoor/Outdoor Carpet is a substitute in production for Polyester