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Unformatted text preview: 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). 6.6....
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This note was uploaded on 04/21/2011 for the course ECMC 02 taught by Professor Cleveland during the Fall '08 term at University of Toronto- Toronto.
- Fall '08