econ11_08_final_prac1_sol - Eco11, Fall 2008 Simon Board...

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Unformatted text preview: Eco11, Fall 2008 Simon Board Economics 11: Solutions to Practice Final December 4, 2008 Note: In order to give you extra practice on production and equilibrium, this practice final is skewed towards topics covered after the midterm. The actual final will test all the material. Part I: Short Questions Question 1 True or false? The allocation of tax burden between consumers and producers depends on whether the tax is imposed on consumers or producers. If true, explain why. If false, what does it depend on? Solution False. Who bears most of the tax burden, as well as the size of the social loss, depends on the elasticities of demand and supply. The analysis is independent of whether tax is levied on producers or consumers. Question 2 Using a graph, discuss the welfare effects of an import tariff. Who gains, who loses from the tariff, and what are the net welfare effects? Solution See lecture on Tuesday 2nd Dec. Question 3 What is the supply function for a perfectly competitive industry with constant returns to scale? What will be the equilibrium price and equilibrium profits for this industry? Solution 1 Eco11, Fall 2008 Simon Board With constant returns to scale, the marginal cost is constant, hence the firm, and industry, supply curve is given by a flat horizontal line at P = MC . The equilibrium price will equal the marginal cost of production, and firm and industry profits are zero. Question 4 State the First Welfare Theorem, and illustrate the result using a graph for a simple twoagent, twogood endowment economy. Solution The First Welfare Theorem states that every competitive equilibrium is Pareto Efficient. Graph- ically, this implies that in an Edgeworth box, the equilibrium allocation must be on the contract curve....
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This note was uploaded on 04/25/2009 for the course ECON 11 taught by Professor Cunningham during the Fall '08 term at UCLA.

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econ11_08_final_prac1_sol - Eco11, Fall 2008 Simon Board...

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