midterm1_2011_guide

505thuschangeinconsumersurplusis0512512theanswerisd 17

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Unformatted text preview: 4 P D 5 9 +4 P S 5 1 ‐4 CS 12.5 0.5 ‐12 PS 12.5 0.5 ‐12 Gov't Surplus 0 8 +8 TS Free Market 25 9 ‐16 CS GS DWL PS 13. A wedge of height $8 is placed on the left of the free‐market equilibrium, between the demand and supply curves, at Q=1. The price paid by the consumer (Pd) is where this wedge meets the demand curve, i.e. at $9. The answer is D. 14. The equilibrium quantity under a $8 tax is the quantity where the wedge is placed, i.e. Q=1. The answer is E. 15. The producer surplus is always defined as the area between the supply curve and the price received by suppliers, across all quantities transacted. The price received by suppliers is found where the supply curve meets the wedge, i.e. at at $1. The area of producer surplus is thus the triangle bounded by the supply curve, the horizontal line at P=$1, and runs across quantity up to Q=1. Thus the area is 1*1*0.5=0.5. The answer is A. 16. Consumer surplus before tax is given as 12.5. Let's first calculate the consumer surplus after tax. Consumer surplus is always defined as the area between the demand curve and the price paid by consumers, across all quantities transacted. The price paid by consumers is $9, as explained in Question 13. Quantity transacted is Q=1. Thus after‐tax consumer surplus is the area of the triangle, 1*1*0.5=0.5. Thus, change in consumer surplus is 0.5‐12.5=‐12. The answer is D. 17. The change in total surplus is given by the area of the dead weight loss (DWL), which is the triangle bounded by the demand curve, the supply curve, and the lost quantity transacted (i.e. from Q=1 to Q=5). (The intuition is that DWL comes from these unrealized transactions which were mutually beneficial otherwise.) The area of this triangle is 8*4*0.5=16. This is a loss in surplus, thus the change in total surplus is ‐16. This can also be found by summing the change in (CS+PS+GS), as in table above. The answer is E. 18. Only rule 3) is violated. Tax puts wedge between price for marginal consumers (MRP) and price for marginal producers (MC), thus they are not equalized with taxes. However, allocations for consumption and production are still efficient, therefore, still the consumers with highest values get to buy and most efficient producers get to produce, so both 1) and 2) are satisfied. The answer is D. 19. At Q=4 units of widget, the difference between marginal price for consumer($6) and marginal cost of producer($4) is $2, thus the price for quotas, which will make the marginal producer indifferent to produce or not. The answer is B. 20. If quotas are given to producers...
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