The Maxwell School
Syracuse University
Syracuse University
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.
(1) Q1=250, Q2=100, Q3=50. Total cost of abatement=$100,000.
(2) Tax rate=$500. Total cost of compliance to each firm: TCC1=$237,500, TCC2=$75,000, TCC3=$87,500.
(3) Permit price=$500. Initial permit allocation: Qp1=355, QP2=110, QP3=135.
(1) Qa=800, Qp=1200, MCA=$920, MBA=$920.
(2) The equilibrium is at the price ceiling and extra permits are demanded. Pp=$920, total permits demanded=1500, extra permits purchased=300.
(3) The equilibrium is at the price floor and surplus permits are purchased by the government. Pp=$810, total permits demanded by sources=1100, permits bought up to maintain the price floor=100.
(1) Equilibrium with no banking or borrowing:
| Period | Pp | Permits Granted |
Permits Used |
Permits Banked |
Permit Balance |
TCA |
| 0 | $600 | 700 | 700 | 0 | 0 | $90k |
| 1 | $2000 | 1000 | 1000 | 0 | 0 | $1M |
| 2 | $3000 | 2500 | 2500 | 0 | 0 | $2.25M |
PV of TCA=$1.152M
(2) Equilibrium with full banking and borrowing:
| Period | Pp | Permits Granted |
Permits Used |
Permits Banked |
Permit Balance |
TCA |
| 0 | $800 | 700 | 600 | 100 | 100 | $160k |
| 1 | $1600 | 1000 | 1200 | -200 | -100 | $640k |
| 2 | $3200 | 2500 | 2400 | 100 | 0 | $2.56M |
PV of TCA=$1.120M
(3) Equilibrium with banking but no borrowing:
| Period | Pp | Permits Granted |
Permits Used |
Permits Banked |
Permit Balance |
TCA |
| 0 | $867 | 700 | 567 | 133 | 133 | |
| 1 | $1733 | 1000 | 1133 | -133 | 0 | |
| 2 | $3000 | 2500 | 2500 | 0 | 0 |
PV of TCA: $1.126M
(1) Equilibrium without the backstop:
| Period | R | MEC | P | Q |
| 0 | $200 | $600 | $800 | 100 |
| 1 | $400 | $400 | $800 | 1200 |
| 2 | $800 | $200 | $1000 | 3000 |
| Total | 4300 |
(2) Equilibrium with the backstop in period 2 only:
| Period | R | MEC | P | Q |
| 0 | $100 | $600 | $700 | 150 |
| 1 | $200 | $400 | $600 | 1400 |
| 2 | $400 | $200 | $600 | 3400 |
Since the price in period 0 is still above the backstop's cost it will be used there as well. As a result, the royalty in period 0 will drop to 0 and all of the original resource will be used in periods 1 and 2. The equilibrium is shown below. For reference the quantities of the raw and backstop resource produced in each period are also shown.
| Period | R | MEC | P | Q | Q raw | Q backstop |
| 0 | $0 | $600 | $600 | 200 | 0 | 200 |
| 1 | $200 | $400 | $600 | 1400 | 1400 | 0 |
| 2 | $400 | $200 | $600 | 3400 | 2900 | 500 |
| Total | 5000 | 4300 | 700 |
Amount of resource from the backstop=700