Spring 2011 Exam 2 Solution

Here are the final numerical results for each section of the exam.  You can use them to check your work if you do the exam for practice.  If you have trouble with the problems, or don't get the answers shown here, stop by during office hours or make and appointment and we can go over them.

Question 1

(1) Qa total = 520; Qa1 = 240; Qa2 = 160; Qa3 = 120; TCA = $124,800.

(2) Tax = $480; TC1 = $192,000; TC2 = $211,200; TC3 = $220,800.

(3) P = $480; Qp1 = 313 1/3; Qp2 = 353 1/3; Qp3 = 373 1/3.

(4) Qp = 620; P = $720; TC1 = $10,000; TC2 = $86,400; TC3 = $64,800; TCA = $161,200.

(5) DWL = $36,400; 29% of minimum cost approach.

Question 2

(1) Qp1 = 200; Qp2 = 600; (Total abatement is 1200); P = $40. 

(2) Qa total = 800.

(3) P actual = $60; Qa1 = 600; Qa2 = 600; (Total abatement is 1200); Source 2 sells 200 permits to source 1 for $12,000; DWL = $4,000.

(4) Tax = $40; Qa1 = 400; Qa2 = 400; Qa total = 800; DWL = 0.

(5) The tax system is efficient because it ensures that MCA = MBA and hence achieves the efficient amount of abatement.  The permit system fixes the amount of abatement at 1200 and, in this case, causes the MCA to exceed the MBA.

Question 3

(1) Qa = 150; Qp = 450 ; MCA = MBA = $850.

(2) P = 850; Total permits demanded = 462; Extra permits = 12.

(3) P = $790; Extra permits = 0.

Question 4

(1) Qa0 = 200; Qa1 = 800; Qa2 = 1100; P0 = $200; P1 = $800; P2 = $1100; TCA0 = $20,000; TCA1 = $320,000; TCA2 = $605,000; PV = $331,250.

(2) P0 = $300; P1 = $600; P2 = $1200; Qp0 = 700; Qp1 = 900; Qp2 = 500; Period 0 banks 100 permits; Period 2 uses 100 saved by period 1 and borrows another 100 (borrows 200 total); Period 3 banks 100; TCA0 = $45,000; TCA1 = $180,000; TCA2 = $720,000; PV = $315,000.