Spring 2014 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

Plan A: PV cost=$136k; PV benefit=$173k; NPV=$37k.

Plan B: PV cost=$50k; PV benefit=$100k; NPV=$50k.

The agency should adopt plan B.

Question 2

Plan A: PV cost=$100m; PV benefit=$123m; NPV=$23m.

Plan B: PV cost=$200m; PV benefit under M=$123m (same as plan A); PV benefit under S=$491m (4 times scenario M); expected PV benefit=$215m; expected NPV=$15m.

The city should adopt plan A.

Question 3

(a),(b) Market equilibrium: P=$100, MCa=$100; Q=100; only firm A produces.

(c),(d) Efficient Q and Psub: Q=150, Psub=$0, MCa=$150; only firm A produces.

(e) Efficient subsidy per unit: $150.

(f) Cost of subsidy: $22,500.

(g) Welfare gain: $2,500

Note: Firm B played no role due to a typo in the question.  The problem was designed with MCa=4*Qa rather than 1*Qa.  With the steeper MCa curve, firm B would still not have produced at the market equilibrium but it would have produced at the efficient Q.

Question 4

(a) Market equilibrium: Pm=$100, Qm=2000; efficient equilibrium: Pe=$150, Qe=1000.

(b) Efficient tax rate: $100.

(c) Change in CS=-$75k.

(d) Change in Ps=-$75k.

(e) Change in revenue=+$100k.

(f) Change in externality=+$75k

(g) Net gain=$25k.

Question 5

(a),(b) New equilibrium in E: Pe=$9, Qe=1200; new equilibrium in D: Pd=$120, Qd=80.

(c),(d) New tax revenue=$1600; new subsidy cost=$1200; net gain=$400.  Policy does pay for itself.

(e) Net gain in E=$100; net gain in D=$200; overall gain=$300.