Fall 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

(1a) Household C is Cobb-Douglas; a=0.7.

(1b) X=175; Y=25.

(1c) Graph.

Question 2

(2a) Derivation omitted; result is M=U*(Px/a)^a*(Py/(1-a))^(1-a).

(2b) 2011 expenditure for 2010 utility = $1355.

(2c) Actual income is $1500 so the household is better off by $145.

Question 3

(3a) Derivation omitted; results are Y=M/(b*Px+Py) and X=b*M/(b*Px+Py).

(3b) Household A has perfect complements preferences; b=3.

(3c) X=150, Y=50.

Question 4

(4a) X=100, Y=100.

(4b) CV=$850; worse off.

(4c) Revenue = $640.

(4d) DWL = $210.

Question 5

(5a) X at the new equilibrium = 71.1; X at the compensated equilibrium = 90; substitution effect = -10; income effect = -18.9.

(5b)-(5e) Graph.

Question 6

(6a) CV for CD household = -$10.6 (a gain); CV for the PC household = $5 (a loss).

(6b) A benefits because it is willing to shift strongly away from the newly taxed good Y toward the newly subsidized good X.  That is, it avoids a lot of the tax and picks up a lot of the subsidy.  B is hurt because it is unwilling to substitute.

(6c) A would favor (because it gains) and B would oppose (it loses).