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Practice Midterm Answers: 1. a) CS = 1600 b) PS = 400 c) DWL = 0.3125 2. e; None of the above 3. d; Shift of supply right 4. a; Demand increases 5. a; Vertical 6. d; Can occur due to price controls, taxes, subsidies, and results in an inefficient trade volume 7. a) and b) are correct 8. c; How a change in price of one good affects the quantity demanded of another good 9. e; None of the above 10. d; Price ceiling sets max, price floor sets min 11. e 12. d 13. d 14. d 15. c 16. a 17. c 18. d 19. b 20. a
Short answers
1. a. 2016: 1*200+10*700+3*20=7260
2017: 1.5*120+12*500+1*50=6230 b. 2016
2. a. 1000;1000
b. USA oil 5/0.02 food 5/0.01
CAN food 5/0.02 oil 5/0.01
c. 0.5<= p <=2
d. Because each country can specialize in producing the product that they have competitive advantage in.
3. The quantity supplied in the real estate market in Tucson will decrease more than the quantity supplied NYC market, because supply in Tucson is more sensitive than the supply in NYC.
4. Please work on this solution on your own.
5.
a) Note that we have two points on the demand curve. (q,p) = (10,0) and (0,20). Therefore,
the slope Δp/ Δq = 20/10=2 .
Now, (10,0) -‐> (6,p^*) and given that Δp/ Δq= 2, we know that Δp = 2 * (10-‐6) = 8, p^*-‐0 = 8]
TS = 20 * 6 / 2 = 60
b) Foreign supply is at pf = 4, this should be new equilibrium price.
The quantity demand is calculated by the equation of demand. We know that equation of demand is
Pd = 20 – 2q. Therefore, at p=4 we get q = (20-‐4)/2 = 8. With this number we can compute CS = (20-‐4)*8/2.
Now, the local supply is given by equation ps = 8/6*q or ps = 4/3 q. why ? because now you have two points for the supply (0,0) and (6,8). And the slope of this curve is Δp/ Δq = 8/6 = 4/3
The local suppliers at the price of 4 are producing 4 = 4/3q or q = 3. The difference between qd (8) and qs (3) is imports (5).
The PS is then 4*3/2. Therefore TS = CS + PS = 64+6 = 70. Note that now the total surplus (welfare) is higher with international trade.
c) Now, the tariff is per unit. So the price from abroad is 4*(1+50%) = 6
qd = (20-‐6)/2 = 7
qs = (6*3)/4 = 4.5
imports = 2.5
CS = (20-‐6)*7/2
PS = (6-‐0)*4.5/2
Gov’ rev. (tariffs)= 2.5 * 2
We have a DWL compared to our answer in b)
d) If the tariff is 300% new price is (1+300%)*4 = 16. This is above the equilibrium without trade. Competitive forces will lead the economy to compite as a closed economy (no imports). Therefore, the local price is determined by the local supply and demand, which is equal to 8.
Good luck on the midterm !!
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