Version A

I. Multiple choice [2 pt each: 18 pts total]

(1)b. (2)c. (3)a. (4)d. (5)d. (6)b. (7)f. (8)a. (9)a.

II. Problems

(1) [Welfare effects of shifts in curves: 27 pts]

1. $8.
2. $3.
3. $4.
4. $1.
5. decrease.
6. $140 thousand.
7. decrease.
8. $20 thousand.
9. consumers.

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

1. excess supply.
2. 600.
3. 800.
4. decrease.
5. $1800.
6. increase.
7. $1500.
8. decrease.
9. $300.

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

1. $5.
2. $7.
3. decrease.
4. $20 million.
5. increase.
6. $14 million.
7. decrease.
8. $6 million.

III. Critical thinking [6 pts]

Graph should show a demand curve passing through (P,Q) = ($4, 70 million) and ($2.50, 90 million). Estimate the benefit to consumers as the increase in consumer surplus from the price decrease. This increase is approximately the area of a trapezoid bounded by the price axis, the demand curve, and two horizontal lines at P=$2.50 and P=$4. The benefit to consumers is thus approximately $120 million. (This approximation is exact if demand is a straight line.)

Version B

I. Multiple choice [2 pt each: 18 pts total]

(1)d. (2)b. (3)c. (4)d. (5)b. (6)d. (7)e. (8)b. (9)b.

II. Problems

(1) [Welfare effects of shifts in curves: 27 pts]

1. $7.
2. $2.
3. $4.
4. $1.
5. increase.
6. $285 thousand.
7. decrease.
8. $25 thousand.
9. consumers. (Producers did not benefit at all!)

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

1. excess supply.
2. 400.
3. 800.
4. decrease.
5. $900.
6. increase.
7. $700.
8. decrease.
9. $200.

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

1. $5.
2. $9.
3. decrease.
4. $32 million.
5. increase.
6. $8 million.
7. decrease.
8. $24 million.

III. Critical thinking [6 pts]

Graph should show a demand curve passing through (P,Q) = ($4, 40 million) and ($2, 50 million). Estimate the harm to consumers as the decrease in consumer surplus from the price increase. This increase is approximately the area of a trapezoid bounded by the price axis, the demand curve, and two horizontal lines at P=$2 and P=$4. The harm to consumers is thus approximately $90 million. (This approximation is exact if demand is a straight line.)

[end of answer key]