Fall 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) P=$160, Q=48,000; `Q_{Ai}`=480; `Q_{Ci}`=120; graph omitted.

(b) Market results: `P^s`=$156; `P^d`=$168; Q=46,400. Individual results: `Q_{Ai}`=464, `Q_{Bi}`=232, `\Delta CS_{Ai}`=-$3776. Percent of tax borne by each group: buyers=8/12=67%, sellers=4/12=33%. Effective tax rates: `ETR_{Ai}`=4.6%, `ETR_{Bi}`=6.2%; tax is regressive since the effective tax rate is higher for the group with lower income.

Question 2

Tariff needed=$100; new P=$300; new total Q consumed=6000; new `Q_L`=2000; new `Q_F`=4000; `\Delta CS`=-$800k; `Delta PS`=+$150k; `\Delta Rev`=+$400k; `\Delta SS`=-$250k. The policy is very expensive for what it delivers: the cost in lost CS is more than five times the PS it delivers to domestic producers, the intended beneficiaries. Alternatively, it creates $250k in overall losses to deliver $150k of gain to producers.

Question 3

Initial equilbrium: P=$700, Q=300; efficient Q=340; efficient `P^d`=$580, `P^s`=$780; `\Delta CS`=+$38.4k, `\Delta PS`=+$25.6k, `\Delta Rev`=-$68k, `\Delta Ext`=+$7.2k. Overall: `\Delta SS`=+$3.2k.

Question 4

Policy 1: `Q_X`=8k; `\Delta Rev`=$160k; DWL=$20k. Policy 2: in each market `Q` will be 9k, `\Delta Rev` will be $90k, and DWL will be $5k; combining the two markets gives the overall impact: `\Delta Rev`=$180k and DWL=$10k. Policy 2 is better: the broader but lower tax raises more revenue and produces half the DWL. Alternatively, the DWL per dollar of revenue for Policy 1 is 12.5% while for Policy 2 it is only 5.5%.