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