exam2-prac1soln - Economics 420K Professor Matt Clements...

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Economics 420K University of Texas Professor Matt Clements Fall 2006 Practice exam #2 (I): solutions 1. Bill and Ted are both correct. The statements are different ways of saying MRTS = price ratio (specifically, Bill’s statement corresponds to MPL/w = MPK/r, and Ted’s corresponds to MPL/MPK = w/r). 2. The deadweight loss associated with the reduction in quantity assumes that those consumers with the highest willingness to pay are the ones who actually buy the widgets. Since there will be excess demand (a shortage) with the price ceiling, it may be that some consumers with lower willingness to pay buy widgets. Another reason is that, in the presence of a shortage, there has to be some mechanism to allocate widgets among consumers, and these mechanisms may be costly (e.g., consumers have to stand in line to buy widgets, so they incur a time cost). There may also be various long-term effects: the artificially low price changes the incentives of suppliers in ways that may adversely affect surplus. 3. The division of the tax does not make sure that the reduction in surplus is the same for
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This note was uploaded on 04/07/2008 for the course ECON 420k taught by Professor Clements during the Spring '07 term at University of Texas.

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exam2-prac1soln - Economics 420K Professor Matt Clements...

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