# July 2015 1

July 2015 1
ECON1000 Open Campus
Worksheet #2 (Covers Units 5 to 7) – worth 5%
Question 1 (10 marks)
A recent study found that the demand and supply schedules for Frisbees are as follows:
Price per Frisbee Qty. demanded (millions) Qty. Supplied (millions)
\$11 1 15
10 2 12
9 4 9
8 6 6
7 8 3
6 10 1
a) What are the equilibrium price and quantity of Frisbees? 2 marks
b) Frisbee manufacturers persuade the government that Frisbee production improves
scientist’s understanding of aerodynamics and thus is important for national
security. A price of \$2 above the equilibrium price is imposed.
i) What type of price restriction is this? 1 mark
ii) What is the new market price? 1 mark
iii) How many Frisbees are sold? 1 mark
c) Irate college students demand a reduction in the price of Frisbees. In light of this,
the government votes to reduce price by \$1 below the equilibrium price.
i) What type of price restriction is this? 1 mark
ii) What is the new market price? 1 mark
iii) How many Frisbees are sold? 1mark
d) Discuss TWO unintended consequences of imposing a binding price ceiling on
the market. 2 marks
Question 2 (15 marks)
Suppose that the government imposes a tax of \$12 per unit on cigarettes.
a) Draw a supply and demand diagram of the market for cigarettes without the tax.
Show the price paid by consumers, the price received by producers and the
quantity of cigarettes sold. 2 marks
b) Draw a supply and demand diagram for the cigarette market with the tax. Show
the price paid by consumers, the price received by producers and the quantity of
cigarettes sold. 4 marks
c) Provide an explanation for the difference in the price paid by the consumer, the
price paid by the producer and the quantity of cigarettes sold before and after the
tax. 3 mark
d) Explain the impact on the consumer surplus, producer surplus and total surplus
due to the imposition of the tax on cigarettes. 6 marks
July 2015 2
Question 3 (10 marks)
Determine the type of externality, if any. Explain
a) A barking dog in the backyard. 2 marks
b) A student reading a novel in her apartment. 2 marks
c) A homeowner repaints his house. 2 marks
d) A neighbor accepts a payment of \$1000 to allow his neighbor to have an outdoor
party with a loud live band. 2 marks
e) A crying baby on an airplane. 2 marks
Question 4 (15 marks)
a) Provide an example of each of the three types of market failure – public goods,
externality and asymmetric information. (NOTE: Do not use market failure
examples mentioned in the unit readings) 3 marks
b) For each example indicate why the market fails and put forward one remedy to
the problem. 9 marks
c) Define the tragedy of the commons in your own words. 1 mark
d) Why are fishes in the ocean an example of a resource that suffers from the tragedy
of the commons but cattle grazing in a farmer’s pasture does not suffer from the
tragedy of the commons? 2 marks
Question 4 (15 marks)
a) For each of the following, say whether they are normally measured in Gross
domestic product and explain why. 7.5 marks
(i) The sale of a current year model used car.
(ii) The services of manicurists given in the current year.
(iii) The profits of a foreign owned corporation operating in the domestic
economy.
(iv) The work done in other countries by the normal residents of a country.
(v) The cooking of meals for home consumption.
b) In your own words distinguish between a country’s gross domestic product and
gross national product. 2 marks
c) Identify THREE limitations of using gross domestic product as a measure of well
being of a country. 3 marks
d) Identify ONE alternate method to gross domestic and explain why you believe the
chosen method is a more suitable measure of well-being. 2.5 marks
TOTAL MARKS = 65