Spring 2017 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) Best wage of the two = $10; change in employment = -500,000 workers; new employment = 9.5 million; change in CS = -$19.5 million; change in PS = +$18.75 million; change in SS = -$750,000.

Question 2

(a) Household C is CD and g = 0.5; derivation and diagram omitted.

(b) New X = 75; new Y = 42; net impact on budget is $420 - $300 - $300 = -$180; policy does not break even; CV = -$51; household is better off.  Not required but the change in SS is -$129.

Question 3

(a) Derivation omitted; demand for Y = M/(d*Px+Py); demand for X = d*M/(d*Px+Py); household A has PC preferences with d = 2.

(b) New income = $5194; new X = 196; new Y = 98; net impact on the budget = $980 - $784 - $94 = $102; CV = $106; change in SS = -$4; diagram omitted.

Question 4

(a) Initial X = 225; initial Y = 225; new value of X = 120; revenue = $480; CV = $720; substitution effect = -81; income effect = -24.

Question 5

(a) PVI without training = $180k; PVI with training = $200k; should do the training; C0 = 80k; C1 = 144k; borrows $20k; diagram omitted.