Fall 2020 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

`Q_U`=90k; `Q_R`=4500; extra revenue in U=$900k; amount spent in R=$900k; budget is balanced and the policy breaks even; policy achieves the goals: it triples `Q_R` and the ISP breaks even. There are four subgroups. U buyers who remain in the market lose $900k; U buyers who leave the market lost $50k; R buyers who were already in the market gain $300k; and new R buyers gain $300k.

Question 2

Minimum wage=$15; new Q=90k; `\Delta CS`=-$475k; `\Delta PS`=+$430k; `\Delta SS`=-$45k; DWL= $45k (OK to give just `\Delta SS`). Job keepers gain $450k; job losers lose $20k; employers lose $475k.

Question 3

Step 1: insert the demand equations into the utility function to give:

`U=(50+{0.5(M-50P_x )}/P_x - 50 )^0.5 ({0.5(M-50P_x )}/P_y )^0.5`

Simplifying:

`U={0.5(M-50P_x )}/{P_x ^0.5 P_y^0.5}`

Solving for M:

`U P_x ^0.5 P_y^0.5 =0.5(M-50P_x )`

`M=2 U P_x ^0.5 P_y^0.5+50P_x`

Evaluating at `U`=100, `P_x`=$100, `P_y`=$25:

`M=2*100*(100)^0.5 (25)^0.5+50*100`

`M`=$15,000

Question 4

(a) Household C is CD and `a`=0.5; diagram omitted but should include the BC, the equilibrium with X and Y labeled, and at least one IC.

(b) `X_2=68`, `Y_2=136`; `\Delta Rev=40`; `CV=92` (the household is worse off); `\Delta Ext=72`, `\Delta SS=20`.

Question 5

`X_1=500`, `Y_1=300`; `X_2=425`; `\Delta Rev=4250`; `CV=4818`; `\Delta X_S=-35`, `\Delta X_I=-40`.