1. ECON BC1003x and y
Introduction to Economic Reasoning
Midterm Exam - Spring 2011
Answer all questions. You have 75 minutes. You can use the calculator. Explain all answers, you will
not receive any credit for merely writting an answer from the calculator.
1) List the five key determinants of price elasticity of demand and explain how each determinant indicates if
demand tends to be elastic or inelastic.
2) The table below shows the number of labor hours required to produce a personal computer and a bale of cotton in
New Zealand and South Korea.
Personal Cotton (bales)
Computer
New Zealand 80 hours 6 hours
South Korea 60 hours 4 hours
2) a. Which country has an absolute advantage in the production of personal computer?
b. Which country has an absolute advantage in the production of cotton?
c. What is New Zealand's opportunity cost of producing one personal computer?
d. What is South Korea's opportunity cost of producing one personal computer?
e. What is New Zealand's opportunity cost of producing one pound of cotton?
f. What is South Korea's opportunity cost of producing one pound of cotton?
g. If each country specializes in the production of the product in which it has a
comparative advantage, who should produce personal computers?
h. If each country specializes in the production of the product in which it has a
comparative advantage, who should produce cotton?
3) Since 1953 the United States has imposed a quota to limit the imports of peanuts. The Figure below illustrates the impact
of the quota.
a. Without the quota, the domestic price of peanuts equals the world price which is $2.00 per pound. What is the quantity of
peanuts supplied by domestic producers in the absence of a quota?
b. If there was no quota, how many pounds of peanuts would domestic consumers purchase and what quantity would be
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2. imported?
c. With a quota in place, the new price is $2.75, calculate the change in consumer surplus. Explain whether the consumer
suprlus has increased or decreased with the quota in place.
d. With the quota in place, what is the change in producer surplus. Explain whether the producer suprlus has increased or
decreased with the quota in place.
e. What is the quantity of units imported with the quota in place. Calculate the amount of revenue going to foreign
producers.
f. Define the deadweight loss and compute it.
3)
A) B) C) D)
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