PS3_Solutions

# PS3_Solutions - Econ306 – Intermediate Microeconomics...

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Unformatted text preview: Econ306 – Intermediate Microeconomics Solutions to Problem Set 3 Question 1 ( 2 points ) When the price is \$1 per pound, the quantity demanded is Q = 10- 2 · 1 = 8 pounds. The intercept of the demand curve with the horizontal axis corresponds to a price of \$0: Q = 10; the intercept with the vertical axis corresponds to zero demand: 0 = 10- 2 p ⇒ p = 10 2 = 5. The consumer surplus is the shaded area in the graph below, and it is equal to 1 2 · (5- 1) · 8 = \$16. After the price increase, the quantity demanded falls to Q = 10- 2 · 2 = 6 pounds and consumer surplus falls to 1 2 · (5- 2) · 6 = \$9. Hence, consumers experience a loss of 16- 9 = \$7, meaning that they would be willing to pay up to \$7 to bribe legislators in order to avoid the quantity restrictions imposed. Question 2 ( 2 points ) (i) ( 1 point ) The present value of the five-installment plan is PV = 1 + 1 1 + 0 . 05 + 1 (1 + 0 . 05) 2 + 1 (1 + 0 . 05) 3 + 1 (1 + 0 . 05) 4 = \$4 . 55 million ....
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## This note was uploaded on 05/18/2008 for the course ECON 306 taught by Professor Cramton during the Fall '06 term at Maryland.

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PS3_Solutions - Econ306 – Intermediate Microeconomics...

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