midterm1_2011_guide

Theanswerisb 23

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Unformatted text preview: for free at the beginning, and traded for $2 as Q19 suggests, the profits from trading the 4 quotas will be $2*4=$8, and the surplus from making the widget is still the triangle area framed by $4 price line faced by producers, supply curve and y axis, which is 0.5*$4*4=$8, thus the total surplus is $16. The answer is A. 21. Just compare the total surplus for producers using the methods in Q20. If Q=0, the surplus is 0 since no one buys or sells. If Q=1, quota price will be $8, and producer’s total surplus being $8*1+0.5*$1*1=$8.5. If Q=3, quota price will be $7‐3=$4, and total surplus for producers being $4*3+0.5*3*$3=$16.5. If Q=4, it is $16 from Q20. If Q=6, quota price will be 0, and nobody is going to trade any quotas, free market back at work, PS=0.5*$5*5=$12.5. So the highest is Q=3. The answer is C. 22. This question is simply asking for the assumptions necessary for the First Welfare Theorem to hold. (1) is not necessary – the First Welfare Theorem talks about the size of the social pie and has nothing to say about the equitable distribution of the social pie. (2) is necessary because we must assume firms take the market price as given and are not capable of influencing the market price. We’ll discuss situations where perfect competition doesn’t hold later in the semester. (3) is not necessary. Perfect elasticity is a possibility for the supply curve in some markets, but any supply curve will work with the First Welfare Theorem. (4) is necessary because externalities drive a wedge between the social cost (or benefit) of the good and the private cost (or benefit) of the good. If externalities are present, the First Welfare Theorem fails because the unregulated market cannot take into account the wedge of the externality and therefore produces a socially inefficient quantity. The answer is B. 23. This supply curve is vertical. This means there is a limited quantity of goods available, no matter how much consumers are willing to pay for them. A good example of this sort of supply curve is the market for Picasso originals. Since a change in price leads to no change in quantity, this is a perfectly inelastic supply curve. The answer is D. 24. The easiest way to calculate this is to figure out the producer surplus before and after the change. Before the subsidy, the intersection of supply and demand gives us the market equilibrium. This means the quantity is 5 and the price is 5. T...
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