The Maxwell School

Syracuse University

Syracuse University

The Maxwell School

Syracuse University

Syracuse University

Here are notes on the solution. This is not a complete answer to the exercise but it will let you check your work.

- The overall market without a hurricane looks like the diagram below. The price is $5, total consumption is 95, firm A supplies 18, and firm B supplies 77.
- After the hurricane hits and firm B is knocked off line, the market equilibrium would look like the graph below. The price would rise to $12, total consumption would fall to 60, and firm A's output would rise to 60.
- A price ceiling imposed at the original $5 price would cause the quantity to drop back to firm A's original quantity: 18. Relative to the post-hurricane equilibrium in 2, the change in PS would be a loss of areas A and B in the diagram below. The change in CS would be a gain of A and a loss of C.

The value of X is the WTP when Q is 18, which is $20.40. Computing the areas:

A = $7*18 = $126

B = 0.5*$7*(60-18) = $147

C = 0.5*($20.40-$12)*(60-18) = $176.40

Calculating the changes in PS, CS and SS:

`\Delta PS` = -($126 + $147) = -$273

`\Delta CS` = $126 - $176.40 = -$50.40

`\Delta SS` = -$273 - $50.40 = -$323.40

As expected, the price control reduces social surplus. - Interestingly, this particular policy makes
*both*suppliers*and*consumers worse off overall: consumers, who are the intended beneficiaries of the policy, see their CS*fall*under the control.

With that said, consumers who are able to buy gasoline are better off under the price control. However, MUCH less gasoline is available (60 down to 18, a drop of 70%), so many consumers will be hurt by being unable to buy gas. On balance, the harm suffered by people unable to buy gas exceeds the benefits to those who can.

- `MRS = (200-170)/(20-22) = -15 "hp"/"mpg"`
- Yes, although his preferences are unusual (he dislikes horsepower and fuel efficiency), they are complete (ranks all cars) and transitive (C>A>D>B>E>F).
- The graphs are shown below. For some of the people, too little information is given to determine the slopes of their indifference curves precisely.
Person 1 regards hp and mpg as perfect substitutes at a 15:1 ratio; Person 2 cares only (or mostly) about mpg; and person 3 cares only (or mostly) about hp. Person 4's preferences are odd: he basically likes poor quality cars: low hp and low mpg. Because 4's preferences are complete and transitive, however, they are rational.

- The graph is shown below. All bundles in set A are feasible. The slope of the budget constraint, `m`, is:

`m = -P_n/P_m = -16/8 = -2`

- Assuming the tickets cannot be sold, the new budget constraint looks as shown below. The free tickets have added the bundles in area B to the original feasible set.
- The new budget constraint is shown below and the new feasible set is shaded. Note that the x-intercept is not affected. For reference, the original BC is also shown.
- Adding the time constraint to the original diagram produces the graph below. The slope of the time constraint is -10/3 = -3.33, which is steeper than the money BC. The student's feasible set is the shaded area, which extends from the origin up to 9 movies, down along the money BC to the point where the two BCs cross, down along the time constraint to 3 novels, and then back to the origin.

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URL: http://wilcoxen.maxwell.insightworks.com/pages/3667.html

Peter J Wilcoxen, The Maxwell School, Syracuse University

Revised 10/17/2018

URL: http://wilcoxen.maxwell.insightworks.com/pages/3667.html

Peter J Wilcoxen, The Maxwell School, Syracuse University

Revised 10/17/2018