Exam 1 Fall 2020

If you'd prefer to have the exam in the usual format, a PDF is available at the link below:

• Paper-format exam

1. The exam is closed-notes, closed-book and no collaboration is allowed.
2. It will end at 9:15 to allow everyone 5 minutes for scanning and submitting answers.
3. There are 60 points possible on the exam and you'll have about 75 minutes to complete it.
4. Show all your work. Answers without supporting work will receive little or no credit.
5. Write your answer on paper and then scan it and submit it at the end of the exam.
6. Please number the pages as you go so you can scan them in the right order.
7. If you have a tablet, you can use that instead of paper as long as you can produce a PDF.

• Area of a triangle: `1/2 b h`

• Area of a trapezoid: `((b_1+b_2)/2)h`

A good is purchased by households of types A and B and produced by sellers of type C. Key information about each group is shown below.

Part A (15 points):

Please compute: [] the market equilibrium price and quantity; [] the quantity purchased by an individual A household; [] the quantity sold by an individual C seller; and [] illustrate the market equilibrium with an appropriate graph.

Part B (15 points):

Now suppose the government is considering a $20 subsidy on the good and would like to know how it would impact the market, and whether it would be progressive or regressive. A subsidy is regressive if high income households receive a larger amount of the subsidy as a percent of their income than low income households.

Please compute the following when the subsidy is in place: [] the new buyer and seller prices; [] the new market quantity; [] the new quantity purchased by an individual household of each buyer type (A and B); [] the amount of spending on the subsidy received by an individual household of each buyer type (A and B); [] indicate whether the subsidy is progressive or regressive, including any necessary calculations; and finally [] calculate the fraction of subsidy spending that goes to sellers and the fraction that goes to buyers (analogous to the tax burden percentages).

Although pollution and other negative externalities can be managed by taxes, governments sometimes prefer a more direct approach and require firms to purchase equipment to eliminate the externalities (e.g., requiring pollution controls on smokestacks). Such an approach is a bit like a tax except that the firm has to buy equipment instead of sending cash to the government.

Suppose an area is served by two electricity sources: W, a wind farm, and C, a coal power plant. The price of electricity is currently $40. W is producing 1000 units and has a supply elasticity `eta_W=2`. C is producing 2000 units and has a perfectly elastic supply curve with a `WTA_C=$40`. Total consumption is initially 3000 units and the demand elasticity is `\eta=-0.2`.

Production from C contributes to climate change and the government is considering requiring it to use an emissions-control technology. The technology would cost C an additional $20 on each unit it produces; that is, it would be similar to a $20 tax on C except that the money would be spent on equipment rather than being given to the government. Since W does not produce emissions it would not need to purchase the equipment.

Suppose the technology requirement is put in place. Please compute the following: [] the new market price; [] the new total quantity consumed; [] the new quantity produced by W; [] the new quantity produced by C; [] the change in CS; [] the change in PS for each producer; and [] the total amount spent by C on new equipment.

The government would like to intervene in the market for a good that creates a positive externality. The market WTP and WTA curves for the good are given below, as is the MB curve for the externality. Initially there is no tax or subsidy.

Please determine: [] the initial market equilibrium price and quantity in the absence of a policy; [] the efficient quantity; [] the efficient buyer and seller prices; [] the subsidy rate that would move the market to the efficient equilibrium; [] the resulting change in CS; [] the change in PS; [] the change in government revenue; [] the change in the benefits created by the externality; and [] the change in SS resulting from the policy.