Regulation and Antitrust Policy (Econ 180) Drake University, Spring 2011 William M. Boal Course page: www.drake.edu/cbpa/econ/boal/180 Blackboard: bb.drake.edu Email: william.boal@drake.edu

QUIZ 3 ANSWER KEY
Welfare Analysis

### 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]