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Unformatted text preview: 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 power2....
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This note was uploaded on 04/21/2009 for the course BUAD 351 taught by Professor Eastin during the Spring '07 term at USC.
 Spring '07
 Eastin
 Microeconomics, Sales

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