Fall 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

New Q= 1.8 million; change in CS= +$7.5 million; change in PS= -$9.5 million; DWL= $2 million.

Question 2

(a) Household B is CD and g=0.3; derivation and diagram omitted.

(b) New X= 26; new Y= 91; overall change in revenue= -$33, creates a deficit and does not break even; CV= -$27 so the household is better off; change in SS= -$6, an overall loss.

Question 3

(a) Derivation omitted; demand for X= d*M/(d*Px+Py); demand for Y= M/(d*Px+Py); household C has PC preferences; d= 1.5.

(b) New X= 150, new Y= 100; change in revenue overall= +$588; CV= $728 so the household is worse off; change in SS= -$140, an overall loss.

Question 4

Initial X= 625; initial Y= 750; new X= 520; change in revenue= +$2600; CV= $3007, so the household is worse off; income effect= -60; substitution effect= -45.

Question 5

C0= $93.8k; C1= $68.8k; saves $26.2k; diagram omitted.