Spring 2016 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

(a) New Q = 1.8 M; change in CS (to firms) = -$9.5 M; change in PS (to workers) = +$8.9 M; change in SS = -$600k.

Question 2

(a) Household C has Cobb-Douglas preferences; g = 0.75.

(b) Graph omitted but it should show the budget constraint, equilibrium, and at least one indifference curve.

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

Question 3

(a) New bundle: X = 153; Y = 34; subsidy cost for X = $306; tax revenue from Y = $204; revenue from lump sum tax = $336; net government revenue = $234; yes, the policy does a bit better than breaking even.

(b) CV = $277; household is worse off.

Question 4

(a) Household B has perfect complements preferences; d = 3.

(b) Derivation omitted; result is X = d*M/(d*Px+Py) and Y = M/(d*Px+Py).  Also ok to insert 3 for d.

(c) New equilibrium: X = 153, Y = 51; CV = $76 (household is worse off); net revenue = $204 - $132 = $72; change in SS = $72 - $76 = -$4. Diagram omitted but it should show the budget constraint, equilibrium, and at least one indifference curve.

Question 5

(a) Initial equilibrium: X = 150, Y = 50; new X = 80.

(b) CV = $521; household is worse off.

(c) Income effect = -26.2; substitution effect = -43.8.

Question 6

(a) PVI = $211,818; Co = $52,955; C1 = $174,750; borrows $22,955.

(b) Graph omitted.  Should show the endowment point, budget constraint, PVI, final equilibrium, and at least one indifference curve.