Spring 2013 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) Market equilibrium: P=$10, Q=4000.  Individual quantities: Qai=40; Qxi=150; Qyi=1000.

(b) New market equilibrium: Ps=$9, Pd=$14, Q=3600.  Individual quantities: Qai=36, Qxi=135, Qyi=900.  Tax revenue: $18,000. Burden to an individual of each type: type A buyer=$4 per unit ($14-$10) or $144 total, type X seller=$1 per unit ($10-$9) or $135 total, type Y seller=$1 per unit or $900 total.

Question 2

New market equilibrium: P=$450, Q=1100.  New domestic production=480, new imports=620. Changes in surplus: CS=+$52,500 (gain); PS for domestic producers=-$27,000 (loss); PS for importers=$0 (no change); government revenue=-$20,000 (loss). Net effect is a gain of $5,500.

Question 3

Extra revenue or loss with original prices: X=$800,000 (revenue), Y=-$800,000 (loss). Since the two match, the firm is still breaking even.  New quantities with revised prices: Qx=1200, Qy=1900. Change in CS: X=+$880,000, Y=-$780,000, total=+$100,000. The current policy (without a change in prices) is a cross-subsidy from people with disease X to those with disease Y.

Question 4

Maximum wage=$9.  Net gain to workers=$970,000 ($975,000 gain to job keepers less a $5,000 loss to job losers). An intermediate step in this calculation is solving for the WTA by workers at the new employment, which is $7.60.

Question 5

Revenue from tax on X=$240,000.  Savings from eliminating the subsidy on Y=$200,000. DWL created by the tax on X=$30,000 (loss).  DWL eliminated by removing the subsidy on Y=$11,111 (gain).  Both policies satisfy the budget requirement but removing the subsidy is substantially better: instead of causing inefficiency, it eliminates an existing inefficiency and produces a net gain.