answers.test1.fall2007 - Answers to ECMC02 First Test...

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Answers to ECMC02 First Test, October 20, 2007 Multiple Choice Questions 1. Demand is P = 50 - .015Q.  Supply is P = .005Q.  These intersect where 50 - .015Q = .005Q,  or 50 = .020Q, so Q* = 2500.  Substituting into the demand curve we have P* = 50 - . 015(2500) = $12.50.  The consumer surplus is given by the area under the demand curve but  above the price line, which is (50 – 12.50) x 2500/2 = $46,875.  The correct answer is (M). 2. Producer surplus is given by the area below the price line and above the MC or supply curve,  which is (12.50 – 0) x 2500/2 = $15,625.  The correct answer is (F). 3. At the regulated price of $35, consumers will purchase fewer rides: 35 = 50 - .015Q, so that Q  = 1000 taxi rides per day (even though producers supply more).  The cost to producers of  providing this number of taxi rides is given by the original supply curve, or P = .005(1000) =  $5.  The new producer surplus is given by the area below the new price line and above the  supply curve, so it is [(35 – 5) x 1000] + (5 – 0) x 1000/2 = $32,500.  The correct answer is  (J).   4. There are two parts to the deadweight loss calculation.  First, the areas of consumer surplus  and producer surplus that originally existed beyond 1000 rides per day are lost to society  because of the regulated price.  This amounts to (35 – 5) x (2500 – 1000)/2 = $22,500.  Second, the producers will be wasting resources because they do not restrict their provision of  taxi services to the 1000 rides a day that can be sold.  The value of these wasted resources is  given by the area under the supply curve from 1000 units out to the number of units actually  supplied.  The number of units supplied is given by $35 = .005Q, so Q = 7000.  This area is  the sum of 5 x (7000-1000) and (35 – 5) x (7000 – 1000)/2, which is $120,000.  The sum of  these two parts of deadweight loss is therefore $142,500. The correct answer is (X).   5. First, we must determine how much additional purchasing takes place.  The question says  that price will be kept up at $35.  From the supply curve, we can see that this means that $35  =.005Q, so that Q = 35/.005 = 7000 units.  Private demand for taxi rides at this price will be  1000 units, as we know from the answers above.  Therefore, the government will have to  purchase 6000 taxi rides to keep price at this level.  The additional producers surplus will be  6000 x (35 – 5)/2 = $90,000.  The previous level of producer surplus, from Question #3, was  $32,500, so the new total is $122,500.  The correct answer is (W).
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6. If demand is P = b – aQ, then MR = b – 2aQ.  MC = dTC/dQ = c.  The monopoly firm will 
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