midterm2sol - better off Since there is no distribution of...

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1 Multiple Choice 1. A 2. E 3. C 4. C 5. E 6. C 7. B 8. E 9. C 10. D 11. D 12. B 13. D 14. D 15. D 16. C 17. C 18. C 19. D 20. B 2 Short Answer 1. a. Draw the standard graph, shade in area between demand curve and price line = consumer surplus, area between supply curve and price line = producer surplus. b. Draw a new demand curve D 0 such that D(Q) - D(Q 0 ) = t for all Q (i.e., a parallel shift in of demand). The intersection of D 0 and S represents (Q 0 ,P 0 ). c. The triangle of area between D and P’+t is consumer surplus. between S and P’ is producer surplus. rectangle of length Q’ and height t is gov’t revenue. d. The triangle remaining (with base t and height Q* - Q’) represents deadweight loss from the introduction of the tax. (Answer should contain something similar to or that hints at the following ideas) In lay terms, there are some trades that without a tax, make both sides better off, but the margin is relatively small. Once there is a tax in place, the amount of the tax is greater than the amount by which the trade would make both sides
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Unformatted text preview: better off. Since there is no distribution of the tax between the two parties that would make them both better off by executing the trade and paying the tax, the exchange is no longer made. This represents a loss of social welfare, because these are trades that would be beneficial, in the sense that the item is worth more to the buyer than it costs the seller to produce it. The deadweight loss represents these trades that would have benefited both sides, and would have taken place without the tax, but do not take place once the tax is in place. 2. a. Draw a horizontal line at p = 20. Find where this line intersects MC curve. Trace down from this point to the x-axis - this represents the optimal quantity q * . b. Shade in the rectangle with length q * and height 20-ATC . c. Since P=MC at a point where P is less than AVC, the firm should shut down in the short run and produce q*=0. Remember Profit = P * Q-TV C-TFC . When Q = 0, P * Q = TV C = 0, so profit is equal to-TFC . 1...
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