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Unformatted text preview: Answers to ECMC02 First Test, October 28, 2006 1. Demand is P = 50 - .015Q. Supply is P = 10 + .005Q. These intersect where 50 - .015Q = 10 + .005Q, or 40 = .020Q, so Q* = 2000. Substituting into the demand curve we have P* = 50 - .015(2000) = $20. The consumer surplus is given by the area under the demand curve but above the price line, which is (50 – 20) x 2000/2 = $30,000. The correct answer is (I). 2. Producer surplus is given by the area below the price line and above the MC or supply curve, which is (20 – 10) x 2000/2 = $10,000. The correct answer is (D). 3. If the number of taxi rides per day is restricted by quota to 1000 rides, the going price will be P = 50 - .015(1000) = $35. The cost to producers of providing this number of taxi rides is given by the original supply curve, or P = 10 + .005(1000) = $15. The new producer surplus is given by the area below the new price line and above the supply curve, so it is [(35 – 15) x 1000] + (15 – 10) x 1000/2 = $22,500. The correct answer is (H). 4. The quota restricts output to 1000 rides per day. The areas of consumer surplus and producer surplus that originally existed beyond 1000 rides per day are lost to society because of the quota. Therefore, the deadweight loss is (35 – 15) x (2000 – 1000)/2 = $10,000. The correct answer is (D). 5. The new purchasing policy will expand producer surplus, but it will cost a substantial amount of wasted government revenue. The net of these two provides the measure of deadweight loss. First, we must determine how much additional purchasing takes place. The question says that price will be kept up at the “quota” level from Question 3, which is $35. From the supply curve, we can see that this means that $35 = 10 + .005Q, so that Q = 25/.005 = 5000 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 4000 taxi rides to keep price at this level. The additional producers surplus will be 4000 x (35 – 20)/2 = $30,000. However, the wasted cost of these taxi rides will be 4000 x $35 = $140,000. The net amount of deadweight loss is therefore $110,000. The correct answer is (U). 6. If demand is P = A – bQ, then MR = A – 2bQ. MC = dTC/dQ = c. The monopoly firm will profit-maximize by setting A – 2bQ = c, so the equilibrium quantity traded will be Q* = (A- c)/2b. The profit-maximizing price will be given by substituting this into the demand curve, c)/2b....
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