Spring 2018 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

Maximum minimum wage=$12 at new Q of 950,000; `\Delta CS`=-$1.95 million; `\Delta PS`=$1.875 million; `\Delta SS`=-$75,000 or DWL=$75,000.

Question 2

(a) Household C is CD; b=0.4; derivation and diagram omitted.

(b) `M_2`=$1760; new X=64; new Y=132; `\Delta Rev`=+$40, slightly better than neutral; `M_3`=$1817; CV=$57.4, household is worse off; `\Delta SS`=-$17.4.

Question 3

(a) Derivation omitted; demands are: `Y = M/(h*P_x+P_y)` and `X=(h*M)/(h*P_x+P_y)`. Household B has PC preferences; h=3.

(b) `M_2`=$3567; `X_2`=261; `Y_2`=87; `\Delta Rev`=+$320, less close to neutral than Q2: there's now a much larger gain in revenue. The reason is that the household consumes much more X and less Y, and doesn't change its consumption very much. `M_3`=$3895; CV=$328; household is worse off; `\Delta SS`=-$8. Diagram omitted.

Question 4

Initial equilibrium: `X_1`=175; `Y_1`=175. New `X_2`=315. Cost of the subsidy to the government: `\Delta Rev`=-$1260; `M_3`=$3360; CV=-$840, so the household is better off; `X_3`=252; substitution effect=+77; income effect=+63. Extra credit: household A via checking the demand equations.

Question 5

PVI=$168,000; `C_0`=$100,800; `C_1`=$84,000; saves $19,200; graph omitted.