Exam #1 2/22/17. Problem Number Points

Transcription

1 Exam #1 2/22/17 Economics 108 Landsburg NAME: There are 9 problems, with the following point values: Total Points: 125 Problem Number Points

2 1. Label each situation below with the appropriate letter to describe what happens to the price and quantity of butter. Z. Price goes up, quantity goes up W. Price goes up, quantity is unchanged C. Price goes up, quantity goes down F. Price is unchanged, quantity goes up L. Price is unchanged, quantity is unchanged P. Price is unchanged, quantity goes down T. Price goes down, quantity goes up Q. Price goes down, quantity is unchanged M. Price goes down, quantity goes down a) The government imposes an excise tax on butter. b) The government imposes an excise tax on bread. c) The government imposes an excise tax on margarine. Note: Bread is often eaten with either butter or margarine, but usually not with both.

3 2. Label each of the following according to whether it describes the effect of: Z. An increase in the demand for cars. W. A decrease in the demand for cars. C. An increase in the supply of cars. F. A decrease in the supply of cars. L. A violation of the laws of supply and demand. a) The price of cars has gone up, and people are buying a lot more of them. b) The price of cars has gone down, and people are buying a lot more of them. c) Because the price of cars has gone down, the demand curve for cars has shifted to the right.

4 3. Donuts are currently subject to an sales tax of 10 cents apiece. With the sales tax in place, the price of a donut is 25 cents (so to get a donut, you must pay 25 cents to the seller, plus 10 cents tax). a) Suppose the sales tax on donuts is eliminated. Which of the following is true? Z. The price of a donut will fall to 15 cents. W. The price of a donut will fall to somewhere between 15 and 25 cents. C. The price of a donut will fall, but we can t say anything about how much. F. The price of a donut will remain exactly 25 cents. L. The price of a donut will rise to 35 cents. I. The price of a donut will rise to somewhere between 25 cents and 35 cents. T. The price of a donut will rise, but we can t say anything about how much. Q. The price of a donut could either rise or fall. M. No donuts will be sold. Enter the LETTER of the correct answer: b) Suppose the sales tax on donuts is eliminated and replaced with an excise tax of 10 cents per donut. Which of the following is true? Z. The price of a donut will fall to 15 cents. W. The price of a donut will fall to somewhere between 15 and 25 cents. C. The price of a donut will fall, but we can t say anything about how much. F. The price of a donut will remain exactly 25 cents. L. The price of a donut will rise to 35 cents. I. The price of a donut will rise to somewhere between 25 cents and 35 cents. T. The price of a donut will rise, but we can t say anything about how much. Q. The price of a donut could either rise or fall. M. No donuts will be sold. Enter the LETTER of the correct answer:

5 4. A competitive producer has fixed costs of $1 and variable costs as shown in the chart below. The going price of the product is $10. Fill in the rest of the chart with numbers. Total Marginal Variable Total Marginal Producer Quantity Revenue Revenue Cost Cost Cost Profit Surplus 1 $

6 5. In the widget industry, there are ten firms, all with this marginal cost curve: Quantity MC 1 $4 2 $5 3 $6 4 $7 5 $8 6 $9 a) On the market supply curve, what quantity goes with a price of $6? b) Suppose that for some reason, five of the ten firms are allowed to sell at a price of $9, and the remaining five firms are not allowed to sell any at all. How many widgets are produced, and what is the social variable cost of producing them? NUMBER OF WIDGETS: SOCIAL VARIABLE COST: $ c) What is the smallest possible social variable cost for producing the same number of widgets you found in part b)? All of your answers should be NUMBERS. Please don t overlook the fact that there are ten firms!

7 6. The following diagram shows the market for widgets: Price $7 C Supply D E $5 F G $4 H K Demand J For parts a) through f), assume there are no taxes. Quantity a) What area represents the total value to consumers of the widgets that they buy? b) What area represents the amount that consumers spend to acquire those widgets? c) What area represents the consumer surplus created by those widgets? d) What area represents the social variable cost of creating those widgets? e) What area represents the producer surplus created by those widgets? f) What area represents the social gain created by those widgets? For the remaining questions, assume that widgets are subject to an excise tax (not a sales tax!) of $3 per widget. g) With the tax in place, what is the new price of a widget? h) What area represents the amount that consumers lose as a result of the tax? i) What area represents the amount that producers lose as a result of the tax? j) What area represents the tax revenue collected by the government? k) What area represents the deadweight loss due to the tax?

8 7. In the market for widgets, there are 10 demanders and 20 suppliers. All demanders have the same marginal value curve, and all suppliers have the same marginal cost curve, as shown: Every demander has this MV curve: Q MV 1 $ Every supplier has this MC curve: Q MC 1 $ a) What is the equilibrium price of a widget? b) In equilibrium, what is the total number of widgets sold? ANSWER: c) How much consumer surplus does a single consumer earn? d) How much producer surplus does a single firm earn? e) What is the social gain? per widget widgets All of your answers should be NUMBERS.

9 8. Here are the market demand and supply curves for widgets: Demand Price Quantity $ Supply Price Quantity $ Widgets are subject to a sales tax of $7 per widget. a) Before the tax is implemented, what is the price of a widget? b) After the tax is implemented, what is the price of a widget? c) Fill in the entries in the following chart: per widget per widget Consumer Surplus Producer Surplus Tax Recipients Social Gain Deadweight Loss Without Sales Tax With Sales Tax For the remainder of this problem, suppose you are able to take money directly from consumers and producers, without their noticing it s gone until after you ve taken it. You re hoping to exactly mimic all the good and bad effects of the tax, but then also to do some additional good. d) How much money should you take from the consumers? e) How much money should you take from the producers? f) How much money should you give to the tax recipients? g) How much money do you have left over to do additional good? All of your answers, including all of your chart entries, should be NUMBERS. Please take a minute to double check your arithmetic!

10 9. Every day, Tom buys 3 bananas from Jerry, and then throws his banana peels on the ground, where Alice slips on them and falls down. She slips on every single banana peel, so she slips three times a day. Here are Tom s marginal value curve and Jerry s marginal cost curve for providing bananas: Tom s MV Quantity MV Jerry s MC Quantity MC Alice would be willing to pay $10 to prevent one slip on a banana peel (and $20 to prevent two slips, and so forth). Alice has demanded that bananas be outlawed. The town is holding an election to decide the matter. Answer the following questions, assuming that Tom is the only buyer, Jerry is the only seller, and Alice is the only other person who cares whether bananas are sold. a) According to the efficiency criterion, how many votes should Tom get? b) According to the efficiency criterion, how many votes should Jerry get? c) According to the efficiency criterion, how many votes should Alice get? d) According to the efficiency criterion, should bananas be outlawed? And what is the margin of victory for the winning side? { should Bananas (CIRCLE ONE) be outlawed, and the margin of victory is should not votes. As always, please double-check your arithmetic!

11 THIS PAGE IS FOR THE GRADERS. PLEASE DO NOT WRITE ON IT. Problem Number Score 1 /9 2 /9 3 /6 4 /12 5 /12 6 /22 7 /15 8 /28 9 /12 Total /125