PAI 723 Economics for Public Decisions > Exams from Previous Semesters

Spring 2019 Exam 1 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) Market results: P=$160; Q=22,400. Individual results: `Q_{ai}`=80; `Q_{ci}`=16. Graph: omitted.

(b) Market results: `P^d`=$146; `P^s`=$176; Q=24,640. Individual results: `Q_{ai}`=108; `Q_{bi}`=254. Welfare impacts: `\Delta CS_{ai}`= +$1316; `\Delta PS_{ci}`= +$2688. Subsidy spending received as a result of the $14 decline in `P^d`: type-A=$14*108=$1512; type-B=$14*254=$3556. Effective tax rates: `ETR_{ai}`=-3.8%; `ETR_{bi}`=-4.4%. Subsidy is regressive since the amount received by high income households is a larger percentage of their income.

Question 2

Market results: P=$180; Q consumed=8800; `Q_C`=4000; `Q_R`=4800. Welfare results: `\Delta CS`= +$168k; `\Delta PS_C`= -$90k; `\Delta PS_R`= $0; `\Delta Rev`= -$96k (subsidy is only on `Q_R`); `\Delta Ext`= +$36k (due to change in `Q_R`); `\Delta SS`= +$18k. The policy produces a net gain overall.

Question 3

Initial equilibrium: P=$15; Q=100. New equilibrium: `P^d`=$16; `P^s`=$13; Q=80. Welfare analysis: `\Delta Rev`=+$240; fraction borne by buyers=`\Delta P^d`/tax=1/3; fraction borne by sellers=`\Delta P^s`/tax=2/3. Sellers bear most of the burden.

Question 4

Extra revenue in L=$20,000; `WTA_H`=$175; new `Q_L`=800; new `Q_H`=360; new revenue in L=$24,000; new subsidy in H=$23,400; new net=$600 surplus. Gain in revenue=$4000; reduction in subsidy=$6600; lowering the subsidy is the larger of the two effects and accounts for more than half of the net improvement in the budget.

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Peter J Wilcoxen, The Maxwell School, Syracuse University
Revised 02/25/2019