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ARE120Homework2_Spring08_KEY

# ARE120Homework2_Spring08_KEY - University of California...

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1 University of California, Davis Agricultural and Resource Economics 120, Spring 2008 Homework #2 Solutions PART A 1. See attached table 1 for parts a, b, and c. Policy Δ PS DWL DWL/ Δ PS Quota (B-H) F F/(B-H) Target Price (B+C+E) F F/(B+C+E) Support Price Sales at P N (B+C+E) (C+F+H+I+J+M+N) (C+F+H+I+J+M+N) (B+C+E) Sales at P 0 (B+C+E) F F/(B+C+E) d. 1=highest DWL Support price 3=lowest DWL tie between Quota and Target price e. The numerators of the ratios for the quota and target price are the same. However, the denominator of the ratio for the quota is clearly smaller than the denominator of the ratio for the target price. So, the deadweight costs per dollar of producer benefits are larger for the quota than for the target price. The denominators of the ratios for the target price and the support price are the same. However, the numerator for the support price is clearly larger, so that the deadweight costs per dollar of producer benefits is larger for the support price than for the target price. The DWL/ Δ PS ratios for the quota and the support price cannot be compared, because both the numerator and the denominator of the support price ratio are larger than those of the quota ratio. Thus, we know that the target price scheme will have the lowest deadweight costs per dollar of producer benefits, but we don’t know which of the other two policies will be the most costly. 1=highest DWL/ Δ PS ? Quota or Support Price 3=lowest DWL/ Δ PS Target Price f. Now, all three of the policies can be ranked. 1=highest DWL/ Δ PS Quota 3=lowest DWL/ Δ PS tie between Target Price and Support Price

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2. Consider a tariff of T dollars per unit. 2 R Tariff Demand S SR Q 0 F L N S IR C 0 A B C E H I G D Q 1 Q 2 M 2 M 3 C 1 K J M S LR P W + T 0 P P W Quantity M 1 M 0