Version A

I. Multiple choice [4 pt each: 24 pts total]

(1)b. (2)c. (3)b. (4)b. (5)e. (6)d.

II. Problems

(1) [Welfare effects of shifts in curves: 20 pts]

1. increase.
2. $140 thousand.
3. increase.
4. $70 thousand.
5. consumers.

(2) [Welfare effects of price controls: 27 pts]

1. excess supply.
2. 600.
3. 400.
4. decrease.
5. $1000.
6. increase.
7. $700.
8. decrease.
9. $300.

(3) [Welfare effects of quotas: 24 pts]

1. $6.
2. $8.
3. decrease.
4. $14 million.
5. increase.
6. $11 million.
7. decrease.
8. $3 million.

III. Challenge question

Producer surplus equals price minus marginal cost, over all units actually sold. In problem (3), the old producer surplus was 4 x 8 x (1/2) = $16 million. When permits to sell 6 million units were given only to lowest-cost producers, the new producer surplus was (3+6)/2 x 6 = $27 million, resulting in an increase in producer surplus of $11 million. However, if permits are distributed randomly among all existing producers, then the new producer surplus is (2+6)/2 x 6 = $24 million, resulting now in an increase in producer surplus of only $8 million. The deadweight social loss is the increase in producer surplus minus the decrease in consumer surplus, which was shown in problem (3) to be $14 milion. Therefore the deadweight loss caused by the quota is now $6 million.

Version B

I. Multiple choice [4 pt each: 24 pts total]

(1)c. (2)b. (3)c. (4)d. (5)d. (6)e.

II. Problems

(1) [Welfare effects of shifts in curves: 20 pts]

1. decrease.
2. $100 thousand.
3. decrease.
4. $50 thousand.
5. consumers.

(2) [Welfare effects of price controls: 27 pts]

1. excess demand.
2. 300.
3. 400.
4. decrease.
5. $500.
6. increase.
7. $200.
8. decrease.
9. $300.

(3) [Welfare effects of quotas: 24 pts]

1. $6.
2. $10.
3. decrease.
4. $24 million.
5. increase.
6. $12 million.
7. decrease.
8. $12 million.

III. Challenge question

Producer surplus equals price minus marginal cost, over all units actually sold. In problem (3), the old producer surplus was 4 x 8 x (1/2) = $16 million. When permits to sell 6 million units were given only to lowest-cost producers, the new producer surplus was (8+6)/2 x 4 = $28 million, resulting in an increase in producer surplus of $12 million. However, if permits are distributed randomly among all existing producers, then the new producer surplus is (8+4)/2 x 4 = $24 million, resulting now in an increase in producer surplus of only $8 million. The deadweight social loss is the increase in producer surplus minus the decrease in consumer surplus, which was shown in problem (3) to be $24 milion. Therefore the deadweight loss caused by the quota is now $16 million.

[end of answer key]