Fall 2012 Exam 1 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

(a) P = 100, Q = 2,000, Qai = 100, Qbi = 10. 

(b) Pd = 90, Ps = 102, Q = 2,200, Qai = 110, Qbi = 11; Change in CS = $21,000, Change in PS = $4,200, Change in revenue = -$26,400, DWL = $1,200.

Question 2

Pc = 20, Qc = 480, Pd = 12, Qd = 600, cost of subsidy in C = $2,400, revenue raised in D = $1,200.  The analyst is wrong: the policy leads to a budgetary loss of $1,200.

Question 3

Domestic Q = 600, total consumption = 900, imports = 300.  Change in domestic PS = $5,500, change in CS = -$9,500, change in revenue = $3,000, DWL = $1,000.

Question 4

Q with the control in place = 2,000; Q without the control = 4,000; P without the control = $2,000; net change in CS from removing the control = $1M; change in PS = $1.5M; overall gain = $2.5M. Producers initially in the market gain from the increase in P; consumers initially in the market lose from the price increase; new producers entering the market gain PS; new consumers entering the market gain CS.  The ceiling is NOT good for tenants overall: as a group, they gain from its removal.  The increase in CS from new consumers ($2M) exceeds the lost CS ($1M) to those initially in the market.

Question 5

Policy 1: revenue = $32,000; DWL = $4,000; DWL/R = 13%.

Policy 2: revenue = $30,000; DWL = $5,000; DWL/R = 17%.

Policy 2 is decidedly worse: it raises less revenue and imposes a greater DWL.  Because the demand for Y is much more elastic than the demand for X, it's better to tax X more heavily than to split the tax between the two goods.