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^s`=`P^d`= $46 and `Q_m`= 41,600; `Q_a`= 370 and `Q_b`= 308; graph omitted.

(b) `P^d`= $70 and `P^s`= $40; buyer share of the tax burder = $24/$30 = 80%; `Q_m`= 32,000; `Q_a`= 250 and `Q_b`= 260; `R_a`= $6000 and `R_b`= $6240; `ETR_a`= 6% and `ETR_b`= 15.6% so the tax is strongly regressive.

Question 2

`P_2`= $600; `Q_(m2)`= 9000; `Q_(h2)`= 6000 and `Q_(f2)`= 3000; `\Delta CS`= -$950,000; `\Delta PS_h`= +$500,000; transfer to foreign workers= +$300,000. Consumers are hurt by $950,000 but domestic producers gain only $500,000. A large part of the difference, $300,000, goes to foreign workers.

Question 3

Initial equilibrium: `P`= $300 and `Q`= 100; efficient `Q`= 140; efficient prices are `P^d`= $140 and `P^s`= $420; efficient subsidy = $280; `\Delta Rev`= -$39,200; `Delta PS`= +$14,400; `\Delta Ext`= +$9,600.

Question 4

(a) Initial equilibrium: `P_1^d`=`P_1^s`= $100, `Q_(m1)`= 1000, `Q_(h1)`= 800 and `Q_(f1)`= 200. New equilibrium after crisis: `P_2^d`=`P_2^s`= $300, `Q_(m2)`= 900, `Q_(h2)`= 900, `Q_(f2)`= 0; `\Delta CS`= -$190,000.

(b) Target `P_3^d`=`P_1^d`= $100, which would cause `Q_(m3)^d`= 1000. For `Q_(h3)^s` to be 1000, `P_3^s` would have to be $500. Thus, the subsidy required would be $400. `\Delta Rev`= -$400,000; `\Delta PS_h`= +$360,000. The overall amount paid in subsidies is about twice the avoided harm to consumers and most of it goes straight to producers.