Unformatted text preview: University of California, Davis
Department of Economics
ECONOMICS 1A
Winter 2011 Hilary Hoynes
First Midterm Exam
Total points=100 points, ANSWER ALL QUESTIONS
(45 points for Multiple Choice and 55 points for short answer) Last Name: First Name:
– Your Student ID Number: – Please check your registered section number:
B01 ChiaWen Chen M 67 B02 ChiaWen Chen M 56 B03 ChiaWen Chen W 56 B04 ChiaWen Chen W 67 B05 Li (Paris) Ba T 67 B06 Li (Paris) Ba T 78 B07 Li (Paris) Ba R 67 B08 Li (Paris) Ba R 78 B09 Oscar Mendez Medina T 56 B10 Oscar Mendez Medina T 67 B11 Oscar Mendez Medina R 56 B12 Oscar Mendez Medina R 67 Write your name (last name first), subject, date, and your registered section number in the boxes
on the Scantron form as illustrated below:
NAME Last name, First name SUBJECT ECN 1A TEST
NO. Blank DATE 1/27/11 HOUR Your section
(e.g., B06) Enter your student ID number in the “ID Number” section on your Scantron, but leave the “Test
Form ” and “Subj Score” sections of the Scantron blank.
1 Part A: Multiple Choice Questions
(15 questions, each 3 points = 45 points)
Identify the letter of the choice that best completes the statement or answers the question.
1. We can measure total consumer surplus for Good X as:
A) the area bounded by the demand curve for X and the two axes.
B) the sum of the individual consumer surpluses for all buyers of X.
C) the area above the supply curve for X.
D) the area above the demand curve for X and below the price of X.
2. In the market for local Starbucks coffee, the price will ________ and the quantity will ________ if Déjà
Vu Coffeehouse opens nearby and consumers' incomes decrease due to a recession.
A) be indeterminate; increase
B) increase; be indeterminate
C) be indeterminate; decrease
D) decrease; be indeterminate
Use the following to answer question 3:
Figure: Demand for Notebook Computers 3. (Figure: Demand for Notebook Computers) The change in the firm's total revenue resulting from a change
in price from P to T suggests that demand is:
A) priceinelastic.
B) price unitelastic.
C) priceelastic.
D) nonelastic.
4. When the government removes a binding price floor:
A) an excess supply would develop.
B) quantity demanded would decrease and quantity supplied would increase.
C) quantity demanded would increase and quantity supplied would decrease.
D) an excess demand would develop.
5. In one hour, the United States can produce 25 tons of steel or 250 automobiles. In one hour, Japan can
produce 30 tons of steel or 275 automobiles. This information implies that:
A) Japan has a comparative advantage in the production of both goods.
B) Japan has a comparative advantage in the production of automobiles.
C) the United States has a comparative advantage in the production of automobiles.
D) the United States has an absolute advantage in the production of steel. 3 Use the following to answer question 6:
Figure: Market I 6. (Figure: Market I) If the government decides to restrict the quantity that is sold to 100, which of the
following is not a true statement?
A) Consumer surplus is maximized.
B) Total surplus will fall by areas C and E.
C) Mutually beneficial transactions have been missed.
D) The market is not at equilibrium.
Use the following to answer question 7:
Figure: Shifts in Demand and Supply III 7. (Figure: Shifts in Demand and Supply III) The figure shows how supply and demand might shift in
response to specific events. Suppose a spring frost destroys onethird of the nation's artichoke crop.
Which panel best describes how this will affect the market for mayonnaise, which is a complement to
artichokes?
A) Panel C
B) Panel D
C) Panel B
D) Panel A 4 8. The publisher of an economics textbook finds that when the book's price is lowered from $70 to $60, sales
rise from 10,000 to 15,000. Using the midpoint method, you can calculate that the price elasticity of
demand is:
A) 3.5.
B) 2.6.
C) 50%.
D) 500.
9. If an economy has to sacrifice only one unit of good X for each unit of good Y produced throughout the
relevant range, then its production possibility frontier has a(n):
A) increasing, negative slope.
B) zero slope.
C) decreasing, negative slope.
D) constant, negative slope.
10. What is the difference between a shortage and scarcity?
A) A shortage will exist when a good is scarce.
B) Scarcity will always exist because choices must be made, but a shortage will only exist if the price
is kept below the equilibrium level.
C) There is no distinction between the two. They are the same thing.
D) Scarcity is a result of two or more alternative uses and will always exist, and quantities of supply
and demand adjusting to flexible prices will create shortages.
11. Suppose you manage a convenience mart and are in charge of ordering products but do not set the price.
The home office provides the prices. In your area, the income elasticity of demand for peanut butter is
–0.5. Due to local factory closings, you expect local incomes to decrease by 20%, on average, in the next
month. As a result, you should stock:
A) 5% more peanut butter on the shelves.
B) 10% more peanut butter on the shelves.
C) 10% less peanut butter on the shelves.
D) 20% more peanut butter on the shelves.
Use the following to answer question 12:
Figure: Bicycles and Radishes I 12. (Figure: Bicycles and Radishes I) The figure shows production possibility frontier for two countries that
produce only radishes and bicycles. The axes of both graphs are measured in equivalent units. Country A
is now operating at point M, and Country B is now operating at point N. The opportunity cost of
producing an additional ton of radishes would be greater in:
A) neither; the opportunity cost would be the same in both countries.
B) There is not enough information given to answer the question.
C) Country B.
D) Country A. 5 13. Which of the following always results in an increase in price and quantity?
A) an increase in supply with no change in demand
B) a decrease in demand and supply
C) an increase in demand with no change in supply
D) an increase in supply and a decrease in demand Use the following to answer question 14: 14. (Table: Tradeoff of Study Time and Leisure Time) A student sleeps 8 hours per day and divides the
remaining time between study time and leisure time. The table shows the combinations of study and
leisure time that can be produced in the 16 waking hours of each day. Suppose the student completes a
speedreading course that allows him to do the same amount of studying in half as many hours. Which of
the following is now true of his opportunity costs?
A) There is no change in the opportunity costs.
B) The opportunity cost of leisure has decreased.
C) The opportunity cost of leisure has increased.
D) The opportunity cost of studying has increased. 15. Assume that corn is an input in the production of beef but not in the production of pork. Further, beef and
pork are substitutes. A decrease in the price of corn will:
A) increase the supply of beef and decrease the demand for pork.
B) increase the supply of beef and increase the demand for pork.
C) decrease the supply of beef and increase the demand for pork.
D) decrease the supply of beef and decrease the demand for pork. 6 Part B: Short answer questions (55 points total)
Instructions: Write your answers in the area provided. DO NOT use a separate blue book. All parts are required. The
points are indicated on each question
1) Market Efficiency (18 points)
Consider the market for stuffed animals. We have two consumers: Romeo and Juliet. We have two suppliers:
Plushtoys.com and Pillowpets.com. The following table gives the willingness to pay for the two consumers and the costs
for the two producers:
Number of
stuffed animals
1
2
3
4 Romeo’s
willingness to
pay
$8
$7
$6
$3 Juliet’s
willingness
to pay
$8
$5
$4
$3 Plushtoys.com Pillowpets.com
Costs
Costs
$1
$1
$4
$6 $3
$5
$7
$9 a) (13 points) Derive the demand and supply curve below (for full credit you need to label axes and lines) What is the equilibrium? ___________________________________ At the market equilibrium:
How many stuffed animals does Romeo buy? ______________________ How many stuffed animals does Juliet buy? ______________________ How many stuffed animals does Plushtoys.com sell? _____________________ How many stuffed animals does Pillowpets.com sell? _____________________ Suppose we force Romeo to buy one fewer stuffed animal and we force Plushtoys.com to sell one less stuffed animal.
b) (5 points) By how much does this reduce the consumer surplus, the producer surplus, and the total surplus? (Must
show work for full credit) 7 2) Market for Econ 1A Textbooks (37 points)
The table on the left expresses the amount students are willing to pay for a new Econ 1A textbook. The table on the right
expresses the amount that publishers (suppliers) are willing to accept their Econ 1A textbook.
Name of student
Britney
Bono
Julia
John
Alex Price willing to
pay
$100
$200
$150
$50
$300 Name of
publisher
Joe’s Books
Prentice Hall
Book Biz
Online books
Econbook.com Price willing to
accept
$50
$100
$150
$300
$350 a) (7 points) Derive the D curve and the S curve (for full credit you need to label axes and lines). b) (2 points) What is the market willingness to pay for the 4th textbook? c) (2 points) What is the equilibrium price and quantity in the market? Write below and indicate on graph. d) (2 points) If only one unit is sold, which seller is most likely to make this sale? Explain. e) (6 points) Calculate consumer surplus, producer surplus and total surplus at the market equilibrium. 8 Suppose the university implemented a price ceiling of $50.
f) (4 points) Reproduce your demand and supply curves from part (a) here. Illustrate the free market equilibrium outcome
and the market outcome with the price control. What is the impact on prices? ___________________________________________ What is the impact on quantities? ___________________________________________ g) (4 points) Calculate the deadweight loss from the price control, and show the area on the graph above. h) (4 points) Among the students, who gains and who loses from the price control? By how much? Explain. i) (4 points) Among the producers, who gains and who loses from the price control? By how much? Explain. j) (2 points) How do your answers to (h) and (i) relate to your answer in (g)? 9 Midterm 1 Answer Key ECN 001A, Professor Hoynes Winter 2011 Version A: First question starts with “We can measure total consumer surplus for Good X as…” Version B: First question starts with “In one hour, the United States can produce 25 tons of steel or 250 automobiles…” Multiple Choice
Question
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15 Version A
B
D
C
C
C
A
B
B
D
B
B
C
C
C
A 1 Version B
B
D
B
C
B
D
A
A
C
D
B
A
A
A
A VERSION A Part B: Short answer questions (55 points total)
Instructions: Write your answers in the area provided. DO NOT use a separate blue book. All parts are
required. The points are indicated on each question
1) Market Efficiency (18 points)
Consider the market for stuffed animals. We have two consumers: Romeo and Juliet. We have two
suppliers: Plushtoys.com and Pillowpets.com. The following table gives the willingness to pay for the two
consumers and the costs for the two producers:
Number of
stuffed animals
1
2
3
4 Romeo’s
willingness to
pay
$8
$7
$6
$3 Juliet’s
willingness
to pay
$8
$5
$4
$3 Plushtoys.com Pillowpets.com
Costs
Costs
$1
$1
$4
$6 $3
$5
$7
$9 a) (13 points) Derive the demand and supply curve below (for full credit you need to label axes and lines) In this exercise both step and linear graphs were considered correct if they were drawn properly. The
maximum score for the graph is 7. Points were deducted if you didn’t label the axes (1 point) or if you
didn’t label the curves (1 point). If you labeled at least one of the axes you would be given half of the
credit. Similarly for the curves.
Partial credit was given if the graph, although not perfectly drawn, had helped to answer correctly some
of the questions below. 2 What is the equilibrium? ____P* = 5 , Q* = 5 or 4 _______________________________ There are two correct answers for this question. If we assume that, under indifference, the agents (buyer
or seller) decide not to participate in the market, then our solution would be P*=5, Q*=4. On the other
hand, if we assume that they decide to participate in the market even if the Marginal Benefit of doing it
equals the Marginal Cost (and, hence, the surplus obtained from that transaction is zero), then the solution
is P*=5, Q*=5.
At the market equilibrium:
How many stuffed animals does Romeo buy? _____3_________________ How many stuffed animals does Juliet buy? ___2 (or 1, if Q*=4)___________________ How many stuffed animals does Plushtoys.com sell? ____3_________________ How many stuffed animals does Pillowpets.com sell? ____2 (or 1, if Q*=4)_________________ Suppose we force Romeo to buy one fewer stuffed animal and we force Plushtoys.com to sell one less
stuffed animal.
b) (5 points) By how much does this reduce the consumer surplus, the producer surplus, and the total
surplus? (Must show work for full credit)
Step function:
If Romeo buys one fewer stuffed animal, then his Consumer Surplus would decrease by 1 unit, since his
Marginal Willingness to Pay for the stuffed animal is 6, while the price of the good is 5.
If Plushtoys.com sells one less stuffed animal, then its Producer Surplus would decrease by 1 unit, since
its Marginal Willingness to Sell is 4, while the price of the good is 5.
Total Surplus = Consumer Surplus + Producer Surplus = decreases by 2
Graphically, we can see the reduction in CS and PS by considering that the transaction that would have
taken place when the market WTP is 6 and the market WTS is 4 did not occur. This removes two units
from the Total Surplus (two squares of 1x1), one from CS, and one from PS.
Or
Linear Curve:
If we consider the set of linear curves described by the information provided instead of the step function,
then we can obtain an alternative answer by analyzing the graph.
If Romeo buys one fewer stuffed animal, and Plushtoys.com sells one less stuffed animal, then the
transaction that would have taken place when the market WTP is 6 and the market WTS is 4 did not
occur. This removes the whole area (3) above the supply curve and below the demand curve that is
between Q=3 and Q=4 from the Total Surplus. The area above the price line and below the demand curve
between Q=3 and Q=4 is the loss in Consumer Surplus (1.5), and the area below the price line and above
the supply curve between Q=3 and Q=4 is the loss in Producer Surplus (1.5). 3 2) Market for Econ 1A Textbooks (37 points)
The table on the left expresses the amount students are willing to pay for a new Econ 1A textbook. The
table on the right expresses the amount that publishers (suppliers) are willing to accept their Econ 1A
textbook.
Name of student
Britney
Bono
Julia
John
Alex Price willing to
pay
$100
$200
$150
$50
$300 Name of
publisher
Joe’s Books
Prentice Hall
Book Biz
Online books
Econbook.com Price willing to
accept
$50
$100
$150
$300
$350 a) (7 points) Derive the D curve and the S curve (for full credit you need to label axes and lines). Similar grading criteria as in 1.a.
b) (2 points) What is the market willingness to pay for the 4th textbook?
The market willingness to pay for the 4th book is $100.
c) (2 points) What is the equilibrium price and quantity in the market? Write below and indicate on graph.
P* = 150, Q* = 2 or 3 (Similar reasoning as in 1.a) 4 d) (2 points) If only one unit is sold, which seller is most likely to make this sale? Explain.
Joe’s books, since this producer has the lowest Willingness To Sell. (Answers close to this were given full
credit)
e) (6 points) Calculate consumer surplus, producer surplus and total surplus.
Step function
CS = 200, PS = 150, TS = 350
Linear curve
CS = 275 or 300, PS = 200 or 225, TS = 475 or 525
There are two correct answers if we draw a linear curve. If we start graphing the demand curve from the
coordinate (0,350), and the supply curve from the coordinate (0,0) then the answer is CS=300, PS=225,
and TS=525. If, instead, we start graphing the demand curve from the coordinate (0,300), and the supply
curve from the coordinate (0,50) then the answer is CS=275, PS=200, and TS=475.
Suppose the university implemented a price ceiling of $50.
f) (4 points) Reproduce your demand and supply curves from part (a) here. Illustrate the free market
equilibrium outcome and the market outcome with the price control. 5 Or What is the impact on prices? __The price will fall from 150 to 50 (the price ceiling will be binding).
What is the impact on quantities? __Quantity demanded will increase from 2 (or 3) to five, while the Quantity supplied will decrease from 2 (or 3) to 1. There will be a shortage.
(You will receive full credit if you say that quantity sold decreases to 1) g) (4 points) Calculate the deadweight loss from the price control, and show the area on the graph above.
Step function:
DWL = 100
Linear curve:
DWL = 225 6 h) (4 points) Among the students, who gains and who loses from the price control? By how much?
Explain.
Gains and losses relative to the equilibrium outcome: Britney Bono Julia John Alex At Q* Consume? No Yes Yes No Yes CS 0 50 0 0 150 At Q = 1 Consume? No No No No Yes CS 0 0 0 0 250 Net Gain 0 ‐50 0 0 100 50 (you do not have to create the table to get full credit.)
i) (4 points) Among the producers, who gains and who loses from the price control? By how much?
Explain.
Gains and losses are relative to the equilibrium outcome: Joe's Books Prentice Hall Book Biz Online Books Econbook.com At Q* Sell? Yes Yes Yes No No At Q = 1 Sell? Yes No No No No PS 100 50 0 0 0 PS 0 0 0 0 0 Net Gain ‐100 ‐50 0 0 0 ‐150 j) (2 points) How do your answers to (h) and (i) relate to your answer in (g)?
Adding up the increase in CS found in (h) and the decrease in PS found in (i) we obtain the total effect of
the price ceiling on the welfare of the society. In this case, the effect is a loss of welfare, which we refer
to as Deadweight Loss, and is equal to the value we found in (g). 7 University of California, Davis
Department of Economics
ECONOMICS 1A
Winter 2011 Prof Hilary Hoynes
Second Midterm Exam
Total points=100 points, ANSWER ALL QUESTIONS
(45 points for Multiple Choice and 55 points for short answer) Last Name: First Name:
– Your Student ID Number: – Please check your registered section number:
B01 ChiaWen Chen M 67 B02 ChiaWen Chen M 56 B03 ChiaWen Chen W 56 B04 ChiaWen Chen W 67 B05 Li (Paris) Ba T 67 B06 Li (Paris) Ba T 78 B07 Li (Paris) Ba R 67 B08 Li (Paris) Ba R 78 B09 Oscar Mendez Medina T 56 B10 Oscar Mendez Medina T 67 B11 Oscar Mendez Medina R 56 B12 Oscar Mendez Medina R 67 Write your name (last name first), subject, date, and your registered section number in the boxes
on the Scantron form as illustrated below:
NAME Last name, First name SUBJECT ECN 1A TEST
NO. Blank DATE 2/24/11 HOUR Your section
(e.g., B06) Enter your student ID number in the “ID Number” section on your Scantron, but leave the “Test
Form ” and “Subj Score” sections of the Scantron blank.
1 Part A: Multiple Choice Questions
(15 questions, each 3 points = 45 points)
Identify the letter of the choice that best completes the statement or answers the question.
1. Suppose the Alaskan king crab harvest is unregulated and any person with a boat can go offshore, lower a
crab pot, and harvest king crab. This common resource will likely be ________ because the marginal
social cost of harvesting crabs ________.
A) overharvested; exceeds the market price of crab
B) overharvested; is equal to the market price of crab
C) overharvested; is less than the market price of crab
D) efficiently harvested; is equal to the market price of crab 2. Sid is thinking of mowing lawns over the summer. His friend Jason currently mows laws, and he says the
marginal cost of the fourth lawn mown in a day is $40. Sid then realizes that the total cost of mowing four
lawns is:
A) not possible to determine from the information provided.
B) 160.
C) 40.
D) 80. 3. In Westlandia, personal income up to and including $30,000 is not taxed, income greater than $30,000
and less than or equal to $60,000 is taxed at a rate of 10%, and income over $60,000 is taxed at a rate of
25%. A family earning income equal to $100,000 in Westlandia will pay an average tax rate of:
A) 10%.
B) 25%.
C) 5%.
D) 13%. Use the following to answer question 4: 4. (Table: Three Tax Structure Proposals) If one wished to use a proportional or flat tax structure, one should
use Proposal ________, in which the percentage of income taxed is ________.
A) 2; 10%
B) 2; 20%
C) 1; 20%
D) 3; 20% 5. Paying a tax of $15 on an income of $200, a tax of $10 on an income of $300, and a tax of $8 on an
income of $400 is an example of a:
A) progressive tax.
B) regressive tax.
C) proportional tax.
D) constantrate tax. 3 6. Welfare state programs are believed to create deadweight loss since they:
A) are based on the abilitytopay principle.
B) are supported by many political parties.
C) impact government's budgets.
D) affect incentives to work and to save in a society. Use the following to answer question 7: 7. (Figure: Tax Incidence) Based on the figure, the deadweight loss of an excise tax is likely to be:
A) greater in Panel B than in Panel A.
B) greater in Panel D than in Panel A.
C) greater in Panel C than in Panel D.
D) greater in Panel C than in Panel A. Use the following to answer question 8: 8. (Table: Street Cleanings) Peter and Wendy both benefit from having cleaner streets. The table shows the
relationship between the number of street cleanings per month and the total benefit they get. What is the
marginal social benefit for Peter and Wendy together when the number of street cleanings per month
increases from 4 to 5?
A) $15
B) $6
C) $30
D) $60 4 9. Considering demand only, a tax on which of the following goods would result in a larger deadweight
loss?
A) medicine
B) restaurant meals
C) tobacco
D) gasoline
10. Suppose the government imposes a $4 excise tax on Good X. If the demand for Good X is perfectly
elastic and the supply curve is elastic, then the price of Good X will:
A) increase by exactly $4.
B) remain constant.
C) increase by more than $4.
D) increase, but by less than $4.
Use the following to answer question 11: 11. (Table: Present Value of Projects A, B, C, and D) Given the information in the accompanying table, if the
interest rate were 10%, which project would you choose?
A) B
B) C
C) D
D) A
12. When an activity like education generates a positive externality, the:
A) market demand curve is above the marginal social benefit curve.
B) market will produce more than the efficient level of output.
C) market demand curve is below the marginal social benefit curve.
D) marginal cost of production is below the market demand curve. Use the following to answer question 13: 13. (Figure: Market for Blue Jeans) The government recently levied a $10 tax on the producers of blue jeans.
Using the graph, identify the area(s) that represent consumer and producer surplus after the tax was
levied.
A) a + b + c + d + e + f
B) a + f
C) a + b + c
D) d + e + f 5 14. According to the Coase theorem, when negative externalities are present a market will:
A) reach an efficient solution only if the negative externalities are offset by positive externalities.
B) reach an efficient solution only if the government intervenes in the market.
C) always reach an efficient solution.
D) reach an efficient solution if transaction costs are low. 15. If the government imposes an excise tax in a market in which the supply curve is perfectly inelastic, the
burden of the tax will fall completely on the ________ and the deadweight loss will equal ________.
A) consumers; the government's tax revenue
B) producers; the government's tax revenue
C) producers; zero
D) consumers; zero 6 Part B: Short answer questions (55 points total)
Instructions: Write your answers in the area provided. DO NOT use a separate blue book. All parts are required. The
points are indicated on each question
1) Pesticide production (21 points)
ABC Corporation produces pesticides in Smallville, and their marginal private costs and marginal benefits are given in the
graph below. When ABC Corp produces the pesticide they also create waste, which they dump into a lake on the outskirts
of Smallville. 150 Price (dollars per ton) 125 MPC 100
75
50
MB
25
0
0 10 20 30 40 50 60 Quantity (tons per week)
The town residents are harmed by the waste, and the marginal external cost is $50 per ton. a) (4 points) Graph the marginal social cost of production on the above figure. Identify the marginal external cost.
b) (3 points) What is the quantity of pesticide produced if ABC corporation owns the lake (the private market outcome)? c) (3 points) What is the socially efficient quantity of pesticide? d) Suppose the government imposes a pollution tax on ABC corporation.
(3 points) What is the tax that achieves the efficient outcome (show this on the graph)? (3 points) Calculate how the wellbeing of the town residents (those harmed by the pollution) is changed with the
imposition of the tax. (3 points) Calculate the loss in producer surplus for the firm with the imposition of the tax. 7 e) (2 points) How would you have to change the problem such that the socially efficient level was NO production? 8 2) Taxing Cigarettes (18 points)
On July 1, 2002 Mayor Michael Bloomberg put a tax of $1.50 per pack on cigarettes sold in New York City. The graph
below shows the market for cigarettes prior to the tax.
6.00
5.50 Price (dollars per pack) 5.00
4.50
4.00 S 3.50
3.00
2.50
2.00
1.50 D 1.00
0.50
0.00
0 25 50 75 100 125 150 175 200 225 250 Quantity (millions of packs per year) a) Suppose that the tax is imposed on sellers.
(4 points) Show the shift in the curve including the tax.
(2 points) How many cigarettes are sold after the tax? (2 points) What is the incidence of the tax on buyers? (2 points) What is the incidence of the tax on sellers? b) (2 points) What does the incidence tell you about the relative elasticities of supply and demand? c) (4 points) Identify the area on the graph that corresponds to the revenue raised with the tax. Identify the area
corresponding to the dead weight loss of the tax. 9 d) (2 points) Draw an alternative supply and demand curve below that yields the same pretax equilibrium price and
quantity where the deadweight loss will be zero. Explain.
6.00
5.50 Price (dollars per pack) 5.00
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
0 25 50 75 100 125 150 175 200 225 250 Quantity (millions of packs per year) 10 3) Police officers on campus (16 points)
The table below sets out the marginal benefits that Terri and Sue receive from police officers on duty on their college
campus:
Police officers on
duty (number per
night)
1
2
3
4
5 Marginal Benefit (dollars per policy
officer)
Terri
Sue
18
22
14
18
10
14
6
10
2
6 a) (4 points) Using the two properties of goods, discuss whether campus police officers satisfy the characteristics of a
private or public good? b) (5 points) Assuming that this is a public good and that Terri and Sue are the only students on campus at night, draw a
graph to show the marginal social benefit from on campus policy officers on duty at night.
For full credit, you need to label the x and y axis and all curves. c) (3 points) If the marginal cost of a police officer is constant at MC=32, what is the socially efficient number of police
officers? 11 d) (2 points) Will the private market get us to the socially efficient number of police officers? e) (2 points) Why or why not? 12 Midterm 2 Answer Key ECN 001A Winter 2011 Version A: First question starts with “Suppose the Alaskan king crab harvest is unregulated and any person with a boat can go offshore…” Version B: First question starts with “Suppose the government imposes a $4 excise tax on Good X…” Multiple Choice
Question
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15 Version A
A
A
D
C
B
D
C
B
B
B
A
C
B
D
C 1 Version B
D
B
D
D
B
B
C
D
B
C
B
B
D
C
A VERSION A
Part B: Short answer questions (55 points total)
Instructions: Write your answers in the area provided. DO NOT use a separate blue book. All parts are
required. The points are indicated on each question
1) Pesticide production (21 points)
ABC Corporation produces pesticides in Smallville, and their marginal private costs and marginal
benefits are given in the graph below. When ABC Corp produces the pesticide they also create waste,
which they dump into a lake on the outskirts of Smallville.
150
MSC Socially efficient outcome 125
MPC Tax=MEC= 50 100
Private market outcome 75 50 MB Loss in producer surplus 25 0 0 10 20 30 40 50 60 Quantity (tons per week) The town residents are harmed by the waste, and the marginal external cost is $50 per ton. a) (4 points) Graph the marginal social cost of production on the above figure. Identify the marginal
external cost.
MSC (3 points), MEC (1 points)
b) (3 points) What is the quantity of pesticide produced if ABC corporation owns the lake (the private
market outcome)?
30 tons
c) (3 points) What is the socially efficient quantity of pesticide?
20 tons
d) Suppose the government imposes a pollution tax on ABC corporation.
(3 points) What is the tax that achieves the efficient outcome (show this on the graph)?
Tax=$50 per ton (2 points)
Graph (1 point) 2 (3 points) Calculate how the wellbeing of the town residents (those harmed by the pollution) is changed
with the imposition of the tax.
Before the tax: the damage =$50*30=$1500
After the tax: the damage=$50*20=$1000, so the wellbeing of the town increased by $500 with
the tax.
(3 points) Calculate the loss in producer surplus for the firm with the imposition of the tax.
Before the tax producer surplus=1/2*75*30=$1125
After the tax producer surplus=1/2*50*20=$500
Loss in producer surplus=$1125$500=$625
e) (2 points) How would you have to change the problem such that the socially efficient level was NO
production?
Let marginal external cost = $150 per ton (or larger)
2) Taxing Cigarettes (18 points)
On July 1, 2002 Mayor Michael Bloomberg put a tax of $1.50 per pack on cigarettes sold in New York
City. The graph below shows the market for cigarettes prior to the tax.
6.00 5.50 S1
5.00 Tax=1.5
Tax revenue 4.50 4.00 S
3.50 3.00 2.50 2.00 DWL 1.50 D
1.00 0.50 0.00 0 25 50 75 100 125 150 175 200 225 250
Price (dollars per pack) Quantity (millions of packs per year) a) Suppose that the tax is imposed on sellers.
(4 points) Show the shift in the curve including the tax.
See the graph
(2 points) How many cigarettes are sold after the tax?
125 million packs
(2 points) What is the incidence of the tax on buyers?
New price paid by consumers=4, incidence of the tax on buyers=43=$1
(2 points) What is the incidence of the tax on sellers?
New price paid by producers=2.5, incidence of the tax on sellers=32.5=$0.5
b) (2 points) What does the incidence tell you about the relative elasticities of supply and demand?
Consumers bear a larger share of tax burden. Therefore, supply is relatively more elastic than
demand.
3 c) (4 points) Identify the area on the graph that corresponds to the revenue raised with the tax. Identify the
area corresponding to the dead weight loss of the tax.
See the graph (2 points each)
d) (2 points) Draw an alternative supply and demand curve below that yields the same pretax equilibrium
price and quantity where the deadweight loss will be zero. Explain.
6.00 S1
5.50 5.00 S
4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 D
0.50 0.00 0 25 50 75 100 125 150 175 200 225 250
Price (dollars per pack) Quantity (millions of packs per year) If demand is inelastic, deadweight loss will be zero.
3) Police officers on campus (16 points)
The table below sets out the marginal benefits that Terri and Sue receive from police officers on duty on
their college campus:
Police officers on
duty (number per
night)
1
2
3
4
5 Marginal Benefit (dollars per policy
officer)
Terri
Sue
18
22
14
18
10
14
6
10
2
6 a) (4 points) Using the two properties of goods, discuss whether campus police officers satisfy the
characteristics of a private or public good?
Campus police officers satisfy the characteristics of a public good:
Nonexcludable: cannot prevent people who do not pay from consuming a safe campus
Nonrival: all people can enjoy a safe campus at the same time 4 b) (5 points) Assuming that this is a public good and that Terri and Sue are the only students on campus at
night, draw a graph to show the marginal social benefit from on campus police officers on duty at night.
For full credit, you need to label the x and y axis and all curves.
Marginal Social Benefit/Cost (dollars per police officer)
48
44
40
36
32 MC 28
24
20
16
12
8 4 0 MSB
0 1 2 3 4 5 6 7 8 9 10 Police officers on duty (number per night)
c) (3 points) If the marginal cost of a police officer is constant at MC=32, what is the socially efficient
number of police officers?
Socially efficient number of police officers =2, where MC = MSB
d) (2 points) Will the private market get us to the socially efficient number of police officers?
No
e) (2 points) Why or why not?
Terri’s marginal benefit for the first officer is only 18, which is less than the marginal cost. So
Terri will not pay for the first police officer. Similarly, Sue will not pay for the first police officer in a
private market (Furthermore, because it is nonexcludable, even if Terri’s MB for the first unit was above
the MC she still would not pay because of the free rider problem.) 5 University of California, Davis
Department of Economics
ECONOMICS 1A
Winter 2011 Prof Hilary Hoynes
Final Exam
Total points=140 points, ANSWER ALL QUESTIONS
(60 points for Multiple Choice and 80 points for short answer) Last Name: First Name:
– Your Student ID Number: – Please check your registered section number:
B01 ChiaWen Chen M 67 B02 ChiaWen Chen M 56 B03 ChiaWen Chen W 56 B04 ChiaWen Chen W 67 B05 Li (Paris) Ba T 67 B06 Li (Paris) Ba T 78 B07 Li (Paris) Ba R 67 B08 Li (Paris) Ba R 78 B09 Oscar Mendez Medina T 56 B10 Oscar Mendez Medina T 67 B11 Oscar Mendez Medina R 56 B12 Oscar Mendez Medina R 67 Write your name (last name first), subject, date, and your registered section number in the boxes
on the Scantron form as illustrated below:
NAME Last name, First name SUBJECT ECN 1A TEST
NO. Blank DATE 4/18/11 HOUR Your section
(e.g., B06) Enter your student ID number in the “ID Number” section on your Scantron, but leave the “Test
Form ” and “Subj Score” sections of the Scantron blank.
1 Part A: Multiple Choice Questions
(20 questions, each 3 points = 60 points)
Identify the letter of the choice that best completes the statement or answers the question.
1. The problem with common resources is similar to the problem with negative externalities because:
A) the marginal cost of producing another unit exceeds the individual's marginal benefit.
B) both issues deal with natural resources.
C) the marginal social benefit from producing another unit exceeds the individual's marginal benefit.
D) the marginal social cost from producing another unit exceeds the individual's marginal cost.
2. Suppose the crossprice elasticity of demand for butter and margarine is equal to 0.96 while the answer
for water and lemon is –0.13. This means that butter and margarine are ________ while water and lemon
are ________.
A) inelastic goods; elastic goods
B) complements; substitutes
C) elastic goods; complements
D) substitutes; complements
3. Lilly is the pricetaking owner of an apple orchard. Currently the price of apples is high enough that Lilly
is earning positive economic profits. In the long run, Lilly should expect:
A) lower apple prices due to exit of existing firms.
B) lower apple prices due to entry of new firms.
C) higher apple prices due to entry of new firms.
D) higher apple prices due to exit of existing firms.
Use the following to answer question 4:
Figure: Production Possibility Frontier Curve for Tealand 4. (Figure: Production Possibility Frontier for Tealand) In the figure, Tealand is currently producing at point
C on its production possibility frontier. What is the opportunity cost in Tealand of increasing the
production of tea from 20 million cups to 30 million cups?
A) 10 million scones
B) The answer is impossible to determine from the information given.
C) 5 million scones
D) 10 million cups of tea
5. For a firm producing at any level of output less than the most profitable one, an increase in output adds:
A) more to total revenue than to total cost.
B) to total revenue but not to total cost.
C) more to total cost than to total revenue.
D) the same amount to total revenue as to total cost.
6. A perfectly competitive industry is currently in a state of longrun equilibrium. Which of the following
must be true?
A) P = MR = MC = ATC
B) P > MR = MC = AVC
C) P = MR = MC = AVC
D) P = MR = MC > ATC
3 Use the following to answer question 7: 7. (Table: Marginal Benefit from Additional Streetlights) Dave and Art live in a new housing development
and would like to have streetlights installed to illuminate the streets and sidewalks at night. The table
shows Dave and Art's individual marginal benefits of different quantities of streetlights that could be
installed in the neighborhood. Suppose that the marginal cost of installing a streetlight is $6. What is the
optimal number of streetlights in the neighborhood?
A) 4
B) 3
C) 1
D) 2
8. Suppose an income tax taxes 0% of the first $1,000, 10% of the next $9,000, and 20% of the remainder of
earnings. How much tax would Miranda have to pay if she earned $20,000?
A) $4,900
B) $2,900
C) $3,000
D) $5,000
9. Compared to a perfectly competitive market, a monopolist will produce ________ and charge a ________
price.
A) more; lower
B) more; higher
C) less; higher
D) less; lower
10. If economic profits exist in perfect competition, in the long run firms will enter because of easy entry, the
________ curve will shift to the right, and ________ in the market will ________.
A) demand; price; increase
B) supply; output; increase
C) demand; supply; fall
D) supply; demand; also shift to the right
Use the following to answer question 11:
Figure: Revenues, Costs, and Profits III 11. (Figure: Revenues, Costs, and Profits III) In the figure, if the market price is $18, this firm will:
A) minimize its losses by continuing to produce.
B) earn an economic profit.
C) minimize its losses by shutting down.
D) break even. 4 Use the following to answer question 12:
Figure: A ProfitMaximizing Monopoly Firm 12. (Figure: A ProfitMaximizing Monopoly Firm) The profitmaximizing firm in this figure will produce
________ units of output per week.
A) 300
B) 250
C) 160
D) 220
13. In perfectly competitive markets, if the price is ________, the firm will ________.
A) greater than the minimum AVC; shut down
B) greater than the minimum AVC but less than ATC; make an economic profit
C) less than ATC; make an economic profit
D) greater than ATC; make an economic profit
14. If your farm has the only known source of a rare cocoa bean needed to make chocolatecovered peanuts,
your monopoly would result from:
A) technological superiority.
B) governmentcreated barriers.
C) control of a scarce resource or input.
D) increasing returns to scale.
15. Paying a tax of $20 on an income of $100, a tax of $15 on an income of $200, and a tax of $12 on an
income of $300 is an example of a:
A) regressive tax.
B) progressive tax.
C) flat tax.
D) proportional tax.
16. If the price of chocolatecovered peanuts decreases from $1.10 to $0.90 and the quantity demanded
increases from 190 bags to 210 bags, this indicates that, if other things are unchanged, the price elasticity
of demand using the midpoint method is:
A) 1.
B) 2.
C) 0.5.
D) 0.
17. Suppose the price elasticity of demand is relatively elastic, and the price elasticity of supply is relatively
inelastic in a specific market. If an excise tax is imposed on this good, who will bear the greater burden of
the tax?
A) government
B) consumers
C) producers
D) both consumers and producers equally 5 18. Kaile Cakes is currently producing 10 cakes per day. The marginal cost of the tenth cake is $24, and
average total cost of 10 cakes is $6. The average total cost of 9 cakes is:
A) $5.
B) $6.
C) $8.
D) $4. 19. In perfect competition, the profitmaximizing level of output occurs where:
A) P = MR above MC.
B) MR > MC above minimum AVC.
C) MR = MC above minimum AVC.
D) price > marginal cost above minimum AVC. 20. There are several close substitutes for Bayer aspirin but fewer substitutes for a complete medical
examination. Therefore, you would expect the demand for:
A) Bayer aspirin to be more priceelastic.
B) Bayer aspirin to be more priceinelastic.
C) both to be equally priceelastic.
D) medical exams to be more priceelastic. 6 Part B: Short answer questions (80 points total)
Instructions: Write your answers in the area provided. DO NOT use a separate blue book. All parts are required. The
points are indicated on each question
1) (20 points) The firm’s output decision. Pat’s Pizza Kitchen is a price taker. Its costs are given by the following table:
Output
(pizzas per hour)
0 FC VC 20 TC
20 1 40 2 50 3 60 4 80 5 120 6 180 a) (6 points) Fill out the columns for FC, VC, and TC in the above table. Use the remaining empty columns of the table to answer parts b, c, and d.
b) (4 points) Calculate Pat’s profitmaximizing output if the market price is $40 a pizza. c) (2 points) What profit does Pat earn at $40 a pizza? d) (4 points) What is Pat’s shutdown price (short run shut down)? What is Pat’s profit if it shuts down in the short
run? e) (4 points) Derive and graph Pat’s short run supply curve. 7 2) (12 points) Diminishing marginal productivity of labor.
The following table sets out Sue’s Surfboards total product schedule (=the relationship between labor input and output)
Labor
(workers per
week)
1 Output
(surfboards per
week)
30 2 70 3 120 4 160 5 190 6 210 7 220 Marginal Product
of Labor a) (8 points) Calculate the marginal product of labor (fill in the table) and graph the MP of labor below. b) (2 points) Over what range does Sue’s Surfboard experience diminishing marginal product of labor? c) (2 points) Why do we think that all marginal product curves eventually reach the point of diminishing marginal
product? 8 3) (16 points) Market for Housepainters in Davis
a) (4 points) Suppose that the market for Housepainters in Davis is represented the diagram below. Label the supply
and demand curves and what is on each axis. Find and label the equilibrium price and quantity in the market and
provide it in space provided at right.
1000
900
800
700
600
500
400
300
200
100
0
0 25 50 75 100 125 150 175 200 225 250 b) (2 points) Suppose the price is initially set at $300. Discuss how the forces of supply and demand will move the
market towards the equilibrium c) (2 points) Suppose that the population of the town of Davis increases. After the increase in population, the
equilibrium price is $700. Using the graph above in part (a), shift the appropriate curve to show how we end up at
this new equilibrium price. 9 d) (4 points) Returning to the original market conditions presented in part a, suppose that Davis imposes a price
ceiling of $200. Use the figure below to illustrate the impact of imposing this price ceiling. What is the impact on
equilibrium prices and quantities in the market? Is there a shortage or surplus? How much? Show this on the
graph and list in space provided below at right.
1000
900
800
700
600
500
400
300
200
100
0
0 25 50 75 100 125 150 175 200 225 250 e) (4 points) Calculate the change in consumer surplus due to the price ceiling. Are all consumers better or worse off?
Explain. 10 4) (16 points) Negative Externalities. Facing rising prices for paper, UC Davis is contemplating building a paper plant
on the stream that goes through the UC Davis arboretum. The following table presents the total (private) costs and
total (private) benefits for the paper plant:
Quantity
(tons of paper) Total Benefit Total Cost 0 0 0 5 11 2 10 21 6 15 30 12 20 38 20 25 45 30 30 51 42 35 56 56 a) (4 points) Given the cost and benefits above, use the below figure to graph and label the MB and MC of
production of electricity at the power plant. NOTE: Graph MC & MB at the unit, NOT halfway between units.
18 16
14 Price 12
10
8
6
4
2
0
0 5 10 15 20 25 30 35 Quantity b) (4 points) From the University’s perspective, how much paper should they produce? Call this amount Qmkt .
Show Qmkt on the graph above. 11 c) (2 points) Using the information in the figure explain why the university—as a rational decision maker—would
not find it better to produce 30 units. Use reasoning to answer this question, not specific numbers. d) (4 points) After the University’s plan is announced, The California Aggie runs a front page story indicating that
the new production will lead to a marginal external cost (MEC) of $6 per unit. What is the optimal production of
paper from society’s standpoint? Call this Q* and show it on your graph above. e) (2 points) Choose one of the approaches we talked about in class to correct the externality and get us to the
socially efficient outcome of Q*. Full credit requires specifics about the policy to correct the market failure. 12 5) (16 points) Taxes. The table below gives the demand and supply schedules for chocolatechip cookies:
Price
(cents per cookie)
20
30
40
50
60
70
80
90
100 Quantity demanded Quantity supplied 8
7
6
5
4
3
2
1
0 0
1
2
3
4
5
6
7
8 a) (4 points) Graph the S and D for cookies below. If cookies are not taxed, what is the price of the cookie and how
many are bought?
100
90
80 Price (cents) 70
60
50
40
30
20
10
0
0 1 2 3 4 5 6 7 Quantity b) (4 points) If a tax of 20 cents per cookie is imposed on buyers, how do prices change? How many cookies are
bought? c) (6 points) Fill in the table to show how (numerically) social welfare changes with the tax.
Before tax
After tax
Change
Consumer surplus Producer surplus Government revenue Total
d) (2 points) What is the deadweight loss of the tax?
13 Final Answer Key ECN 001A Winter 2011 Version A: First question starts with “The problem with common resources is similar to the problem with negative externalities because:” Version B: First question starts with “(Figure: Production Possibility Frontier for Tealand)” Multiple Choice
Question
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20 Version A
D
B
B
C
A
A
B
B
C
B
B
D
D
C
A
C
C
D
C
A Version B
B
A
B
B
D
D
D
B
B
B
B
D
A
A
B
D
B
D
C
A 1 VERSION A
Part B: Short answer questions (80 points total)
Instructions: Write your answers in the area provided. DO NOT use a separate blue book. All parts are required. The
points are indicated on each question
1) (20 points) The firm’s output decision. Pat’s Pizza Kitchen is a price taker. It costs are given by the following table:
Output
(pizzas per hour)
0
1
2
3
4
5
6 FC VC TC ATC AVC MC 20
20
20
20
20
20
20 0
20
30
40
60
100
160 20
40
50
60
80
120
180 40
25
20
20
24
30 20
15
13.33
15
20
26.67 20
10
10
20
40
60 a) (6 points) Fill out the columns for FC, VC, and TC in the above table. Use the remaining empty columns of the table to answer parts b, c, and d.
b) (4 points) Calculate Pat’s profitmaximizing output if the market price is $40 a pizza. c) (2 points) What profit does Pat earn at $40 a pizza?
OR d) (4 points) What is Pat’s shutdown price (short run shut down)? What is Pat’s profit if it shuts down in the short
run? e) (4 points) Derive and graph Pat’s short run supply curve. S curve goes positive at P=13.33 P
S Q 2 2) (12 points) Diminishing marginal productivity of labor.
The following table sets out Sue’s Surfboards total product schedule (=the relationship between labor input and output)
Labor
(workers per
week)
1 Output
(surfboards per
week)
30 2 70 40 3 120 50 4 160 40 5 190 30 6 210 20 7 220 10 Marginal Product
of Labor
30 a) (8 points) Calculate the marginal product of labor (fill in the table) and graph the MP of labor below. MPL Labor b) (2 points) Over what range does Sue’s Surfboard experience diminishing marginal product of labor?
After the 3rd labor c) (2 points) Why do we think that all marginal product curves eventually reach the point of diminishing marginal
product?
By only changing the variable input, while holding all other factors of production constant, diminishing
marginal product is inevitable (i.e. production of one input becomes limited by the supply of other factors).
One example would be congestion. 3 3) (16 points) Market for Housepainters in Davis
a) (4 points) Suppose that the market for Housepainters in Davis is represented the diagram below. Label the supply
and demand curves and what is on each axis. Find and label the equilibrium price and quantity in the market and
provide it in space provided at right. P 1000
900
800 P = 500
Q = 125 S 700 (125, 500) 600
500
400 D’ 300
200 D 100
0
0 25 50 75 Q (Housepainters) 100 125 150 175 200 225 250 b) (2 points) Suppose the price is initially set at $300. Discuss how the forces of supply and demand will move the
market towards the equilibrium
At a price of $300 there will be excess demand (which puts upward pressure on the price), so producers will
start to raise prices until the quantity supplied and the quantity demanded reach an equilibrium.
c) (2 points) Suppose that the population of the town of Davis increases. After the increase in population, the
equilibrium price is $700. Using the graph above in part (a), shift the appropriate curve to show how we end up at
this new equilibrium price.
See D’ in the graph above.
d) (4 points) Returning to the original market conditions presented in part a, suppose that Davis imposes a price
ceiling of $200. Use the figure below to illustrate the impact of imposing this price ceiling. What is the impact on
equilibrium prices and quantities in the market? Is there a shortage or surplus? How much? Show this on the
graph and list in space provided below at right. S 1000
900 The equilibrium price is now the price ceiling of
$200. The equilibrium quantity is 50 housepainters.
There is a shortage of 150 (20050) housepainters. 800
700
600 P = 200
Q = 50
shortage: 150 housepainters 500
400
300
200
100 D 0
0 25 50 75 100 125 150 175 200 225 250 4 e) (4 points) Calculate the change in consumer surplus due to the price ceiling. Are all consumers better or worse
off? Explain. This net increase in consumer surplus comes at a cost of 75 consumers who can no longer hire a housepainter
due to the drop in supply from the price ceiling. 5 4) (16 points) Negative Externalities. Facing rising prices for paper, UC Davis is contemplating building a paper plant
on the stream that goes through the UC Davis arboretum. The following table presents the total (private) costs and
total (private) benefits for the paper plant:
Quantity
(tons of paper) Total Benefit Total Cost MB (MSB) MPC 0 0 0   5 11 2 11 2 10 21 6 10 4 15 30 12 9 6 20 38 20 8 8 25 45 30 7 10 30 51 42 6 12 35 56 56 5 14 a) (4 points) Given the cost and benefits above, use the below figure to graph and label the MB and MC of
production of electricity at the power plant. NOTE: Graph MC & MB at the unit, NOT halfway between units.
18 MSC = MPC + MEC
16 MPC 14 Price 12 Q* 10
8
6 Qmkt 4 MB (MSB) 2
0
0 5 10 15 20 25 30 35 Quantity b) (4 points) From the University’s perspective, how much paper should they produce? Call this amount Qmkt .
Show Qmkt on the graph above.
Qmkt = 20 6 c) (2 points) Using the information in the figure explain why the university—as a rational decision maker—would
not find it better to produce 30 units. Use reasoning to answer this question, not specific numbers.
If they were to produce 30 units, the marginal cost on the 30th unit would exceed the marginal benefit. As a
rational decision maker, you should only produce an additional unit if the marginal benefit of that unit
exceeds (or equals) its marginal cost. d) (4 points) After the University’s plan is announced, The California Aggie runs a front page story indicating that
the new production will lead to a marginal external cost (MEC) of $6 per unit. What is the optimal production of
paper from society’s standpoint? Call this Q* and show it on your graph above.
When MSB = MSC, Q* = 10 e) (2 points) Choose one of the approaches we talked about in class to correct the externality and get us to the
socially efficient outcome of Q*. Full credit requires specifics about the policy to correct the market failure.
(1) A tax of $6 per unit could be applied on the sale of paper, to be paid by the seller. This would increase
the seller’s marginal cost by $6 per unit, and thus they will choose to produce at a lower quantity (Q*).
Revenue collected from the tax would be used to offset the external costs to society.
OR
(2) The government could sell permits for paper production at a price of $6 per unit and only sell 10 units
worth of permits. This would force the seller to only produce 10 units, and the revenue from the
permits would offset the external costs to society.
OR
(3) The government can also regulate by direction regulation, i.e. setting specific pollution standards such
that the optimal quantity would be the socially optimal quantity.
OR
(4) Coasian solution. If both sides are able to bargain at zero cost, then they can negotiate and reach a
socially efficient level of quantity without government intervention. 7 5) (16 points) Taxes. The table below gives the demand and supply schedules for chocolatechip cookies:
Price
(cents per cookie)
20
30
40
50
60
70
80
90
100 Quantity demanded Quantity supplied 8
7
6
5
4
3
2
1
0 0
1
2
3
4
5
6
7
8 a) (4 points) Graph the S and D for cookies below. If cookies are not taxed, what is the price of the cookie and how
many are bought?
100 S 90
80 Price (cents) 70 P = 60
Q=4 60
50
40 D 30
20
10
0
0 1 2 3 4 5 6 7 Quantity 100
90 S 80 Price (cents) 70 P = 60
Q=4 60
50
40 D 30
20
10
0
0 1 2 3 4 5 6 7 Quantity b) (4 points) If a tax of 20 cents per cookie is imposed on buyers, how do prices change? How many cookies are
bought?
The price paid by consumers increases to 70 cents, the price received by producers falls to 50 cents, and only 3
cookies are sold. 8 c) (6 points) Fill in the table to show how (numerically) social welfare changes with the tax.
Before tax
After tax
Change
Consumer surplus 80 45 35 Producer surplus 80 45 35 Government revenue 0 60 +60 Total 160 150 10 d) (2 points) What is the deadweight loss of the tax?
DWL = 10 OR you can do a step function (second graph above) b) (4 points) If a tax of 40 cents per cookie is imposed on buyers, how do prices change? How many cookies are
bought?
The price paid by consumers increases to 70 cents, the price received by producers falls to 50 cents, and only 3
cookies are sold.
c) (6 points) Fill in the table to show how (numerically) social welfare changes with the tax
Before tax
Consumer surplus After tax Change 100 60 40 Producer surplus 100 60 40 Government revenue 0 60 +60 Total 200 180 20 d) (2 points) What is the deadweight loss of the tax?
DWL = 20 9 ...
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 Economics, Producer Surplus, Supply And Demand, producer, Oscar Mendez Medina

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