BUAD 351  Economic Analysis for Business Decisions
Midterm
answer key
question
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
answer
c
d
c
b
b
e
b
d
d
x
b
b
d
c
a
(for 5, I gave 0.25 points for d, even if the question does state that for any
positive
sales quantity)
On q3, a lot of people calculated the expected value, not the expected utility and the match
ing certainty equivalent.
Recall that for uncertain outcomes, the expected value equals certainty
equivalent plus risk premium.
On q6, a lot of people got it also wrong. note that the two goods are complements (an increase
in price of T reduces demand for R), an increase in price increases expenditure (elasticity of 0.9
means that the demand goes down less than the price goes up, so the total goes up), and because
the income elasticity is positive, we are dealing with a normal good.
(b) Longer questions:
1. Suppose the lemonade market is competitive, with demand for lemonade given by
Q
d
= 20
°
P
and the supply of lemonade given by
Q
S
=
1
2
P
°
5
:
(i) Calculate the equilibrium price and quantity in the market.
Q
d
=
Q
s
20
°
P
=
1
2
P
°
5
25 =
3
2
P
P
=
50
3
= 16
2
3
so
Q
= 20
°
16
2
3
= 3
1
3
(ii) Suppose the government imposes a speci°c tax
T
= 2
on lemonade.
Calculate the tax rev
enue raised and the deadweight loss associated with the tax
New equilibrium:
20
°
(
P
s
+ 2) =
1
2
P
s
°
5
23 =
3
2
P
s
P
s
= 15
1
3
; P
b
= 17
1
3
and
Q
= 20
°
17
1
3
= 2
2
3
Tax revenue:
2
±
2
2
3
= 5
1
3
deadweight loss:
1
2
±
(2)
±
°
3
1
3
°
2
2
3
±
=
2
3
2. A coalburning power plant owns its own coal mines that it uses to supply its coal. The power
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 Spring '07
 Eastin
 Microeconomics, Government, Supply And Demand, Sales, Economics terminology, minimum wage law

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