Grade 11 Economics Unit #2: Consumer Theory and Personal Financial Planning Practice Test and Answer Key

Transcription

1 Name: Grade 11 Economics Unit #2: Consumer Theory and Personal Financial Planning Practice Test and Answer Key Note: Section #1 of the actual test will contain multiple-choice questions. You can practice this type of question within the Mastery Learning Lab. Section 2: Calculations and Analyses (Knowledge / Application / Communication) (32 Marks) 1. i) Sally has a $1, bond that pays 5% interest; however, new bonds are being issued on the market that are offering 5.5% interest. Explain what Sally will have to do if she wishes to sell her bond on the market now. (2 marks) ii) What is the exact price Sally will have to make her bond in order to make it competitive on the current bond market? (2 marks) Page 1

2 2. The formula for calculating future value of an investment is: FV = PV (1+r) n Where: FV = future value PV = present value r = periodic interest rate (interest per compounding period) n = number of compounding periods a) Compounded Monthly Calculate the future value of a $12, investment, invested for 10 years, compounded monthly, at an interest rate of 4%. (2 marks) b) Compounded Annually Calculate the future value of a $12, investment, invested for 10 years, compounded annually, at an interest rate of 4%. (2 marks) Check your calculations: 3. According to the Rule of 72, how long would it take for an investment to double at an interest rate of 5%? (2 marks) Page 2

3 4. As of 2014, the annual contribution limit for Registered Retirement Savings Plans is the lesser amount of a) 18% of taxable income, or b) $24,270. If Billy earned $150, of taxable income in 2014, then what is his RRSP limit for 2014? (2 marks) 5. Given the information provided on the graph illustrated below, illustrate (2 marks) AND calculate the value of (2 marks) the consumer surplus. Please show your work. (4 marks) Page 3

4 6. The price of iphone increases from $ to $ a unit. This change in price causes quantity demanded to decrease from 1200 units a year to 900 units a year. i) Calculate the price elasticity of demand. (Use the ARC approach.) (3 marks) Check your calculations: ii) Calculate the change in total revenue resulting from this change in price. (2 marks) iii) Did it make sense for the Apple to increase the price of their iphone? What would the change in total revenue alone tell you about the elasticity of the demand curve? (3 marks) Page 4

5 7. Use the table below to complete the following tasks: i) Calculate the marginal utility per dollar for product A and product B. (2 marks) ii) Given a budget of $43.00, determine the quantity of product A and the quantity of product B that one would consume in order to maximize their utility. (2 marks) Quantity of Product A: Quantity of Product B: Product A Costs $5.00 a Unit Quantity A Utility A Utility Per Dollar A Product B Costs $3.00 a Unit Quantity B Utility B Utility Per Dollar B iii) Explain how you determined the quantities of each product to purchase. What principle did you use? Why does this principle work? (4 marks) Page 5

6 ANSWER KEY Section 2: Calculations and Analyses (Knowledge / Application / Communication) (32 Marks) 1. i) Sally has a $1, bond that pays 5% interest; however, new bonds are being issued on the market that are offering 5.5% interest. Explain what Sally will have to do if she wishes to sell her bond on the market now. (2 marks) Sally cannot increase the interest rate her bond offers, so she will have to reduce the price of her bond so that its face value plus interest will provide a return that is the equivalent of the current interest rate of 5.5%. She can do this by figuring out what $1, (1.05 x $1,000.00) is 5.5% of. This is easily calculated by dividing $1, by ii) What is the exact price Sally will have to make her bond in order to make it competitive on the current bond market? (2 marks) $1, / = $ $ Page 6

7 2. The formula for calculating future value of an investment is: FV = PV (1+r) n Where: FV = future value PV = present value r = periodic interest rate (interest per compounding period) n = number of compounding periods a) Compounded Monthly Calculate the future value of a $12, investment, invested for 10 years, compounded monthly, at an interest rate of 4%. (4 marks) FV = PV (1+r) n = 12, x ( ) 120 = 12, x = $17, $17, Notes: i) The periodic interest rate in this case is 4% divided by 12 (months). i.e / 12 = ii) The number of compounding period in this case is 10 (years) x 12 (months). i.e. 10 x 12 = 120 b) Compounded Annually Calculate the future value of a $12, investment, invested for 10 years, compounded annually, at an interest rate of 4%. (4 marks) FV = PV (1+r) n = 12, x (1.04) 10 = 12, x = $17, Notes: i) The periodic interest rate is just 4% per year because there is only one compounding period per year in this case. ii) The number of compounding period in this case is 10 (years), again $17, because there is only one compounding period per year in this case. Check your calculations: Page 7

8 3. According to the Rule of 72, how long would it take for an investment to double at an interest rate of 5%? (2 marks) 72 / 5 = years 4. As of 2014, the annual contribution limit for Registered Retirement Savings Plans is the lesser amount of a) 18% of taxable income, or b) $24,270. If Billy earned $150, of taxable income in 2014, then what is his RRSP limit for 2014? (2 marks) = lesser of 0.18 x $150,000.00, or $24,270. = 0.18 x $150, = 27, (This is greater than $24, ) $24, Thus, $24, is the tax limit. 5. Given the information provided on the graph illustrated below, illustrate (2 marks) AND calculate the value of (2 marks) the consumer surplus. Please show your work. (4 marks) = 30 x (12-6) 2 = 30 x 6 2 = = Page 8

9 6. The price of iphone increases from $ to $ a unit. This change in price causes quantity demanded to decrease from 1200 units a year to 900 units a year. i) Calculate the price elasticity of demand. (Use the ARC approach.) (3 marks) = = = Check your calculations: ii) Calculate the change in total revenue resulting from this change in price. (2 marks) Before: $ x 1200 units = $840, After: $ x 900 units = $720, Loss of $120, iii) Did it make sense for the Apple to increase the price of their iphone? What would the change in total revenue alone tell you about the elasticity of the demand curve? (3 marks) No. It didn t make sense. The loss of sales was more than proportionate to the increase in price, and so more money was lost in sales than gained by the increase in price. This tells us that the demand curve is elastic because an increase in price resulted in a more than proportional loss in sales, thus leading to the decline in total revenue. Page 9

10 7. Use the table below to complete the following tasks: i) Calculate the marginal utility per dollar for product A and product B. (2 marks) ii) Given a budget of $43.00, determine the quantity of product A and the quantity of product B that one would consume in order to maximize their utility. (2 marks) Quantity of Product A: Quantity of Product B: Product A Costs $5.00 a Unit Quantity A Utility A Utility Per Dollar A Product B Costs $3.00 a Unit Quantity B Utility B Utility Per Dollar B iii) Explain how you determined the quantities of each product to purchase. What principle did you use? Why does this principle work? (4 marks) I applied the equimarginal principle by finding out how many units of each product I could purchase with my entire budget while distributing my funds so that the marginal utility per dollar for the last unit of each product that I purchased was the same (in this case, 6 utils). Thus, I could spend my entire $43.00 budget by purchasing 5 units of Product A (5 units x $5.00 = $25.00) and purchasing 6 units of Product B (6 units x $3.00 = $18.00). I chose this distribution because the last unit of each product I purchased gave me the same marginal utility per dollar (2 utils per dollar). Note: There are other combinations that net the same utils per dollar, but these other combinations don t allow me to spend my entire budget. Page 10