Fall 2021 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^d=P^s=30`; `Q_M=24,000`; `Q_{Ai}^d=250`; `Q_{Ci}^s=300`; graph omitted.

(b) `P^s=25`; `P^d=35`; buyer share of the tax burden is `\Delta P^d`/`T=`5`/`10`=50%`; `Q_M=20,000`; `Q_{Ai}^d=225`; `Q_{Bi}^d=130`; `Rev_A=1125`; `Rev_B=650`; `ETR_A=0.94%`, `ETR_B=1.86%`; policy is regressive.

Question 2

`P_2=140`; `Q_M=6900`; `Q_H=3200`; `Q_F=3700`; `\Delta CS=$387k`; `\Delta PS_H=-$246k`; `Delta PS_F=-$60k`; `\Delta SS=$81k`.

Question 3

`Q_1=100`; `P_1^d=P_1^s=300`; `Q_2=130`; `P_2^d=240`; `P_2^s=390`; `S=150`; `Delta Ext=$4950`.

Question 4

`Q_1=80`; `P_1^d=P_1^s=160`; `Q_2=60`; `P_2^d=170`; `P_2^s=120`; `\Delta CS=-$700`; `\Delta PS=-$2800`; `\Delta Rev=$3000`; `\Delta Ext=$1000`; `\Delta SS=$500` (a gain, so `DWL=-$500`); DWL per dollar of revenue `=-$500`/`$3000=-16.7%`; cost per dollar of revenue = `(700+2800-1000)`/`3000=$0.83`. The key difference from an ordinary tax is that the `\Delta SS` is positive (DWL is negative) so the tax raises revenue and increases SS. Alternatively, the welfare cost of $1 of revenue (in terms of CS, PS and the externality) is less than $1 while for an ordinary tax it would be greater than $1.