ANSWER KEY: WELFARE ANALYSIS
Quiz 3 Version A
(1)b. (2)b. (3)c. (4)b. (5)c. (6)c. (7)b. (8)b. (9)f. (10)e.
Quiz 3 Version B
(1)b. (2)b. (3)a. (4)c. (5)a. (6)b. (7)a. (8)a. (9)e. (10)f.
Test 3 Version A
(1) [Consumer surplus, producer surplus: 24 pts]
- $12 = height of demand curve.
- $4 = height of demand curve - price.
- $5 = height of supply curve.
- $3 = price - height of supply curve.
- $50 million = area of triangle bounded by demand curve, vertical axis, and price.
- $25 million = area of triangle bounded by supply curve, vertical axis, and price.
(2) [Pareto and potential Pareto improvements: 12 pts]
- NO, NO.
- NO, YES.
- YES, YES.
(3) [Perfect competition: 20 pts]
- inelastic, because less than one in absolute value.
- 1.6 percent.
- -16.0 = market elasticity / market share.
- elastic, because greater than one in absolute value.
- 32.0 percent.
(4) [Welfare analysis of price controls: 36 pts]
- $6.
- 40 thousand bushels.
- excess demand.
- 90 thousand bushels.
- decrease.
- $210 thousand.
- decrease.
- $60 thousand.
- $270 thousand.
Critical thinking [10 pts]
- Loss of consumer surplus = $2.5 million.
- Average cost of production = $3. The quota will raise the price to $5. At this price, all sellers on the supply curve up to 4 million pounds will want quota permits. The average height of the supply curve in this range is $3.
- Loss of producer surplus = $0.5 million. Old producer surplus was $4.5 million. New producer surplus = (new price - new avg cost of production) × quota quantity = ($5-$3) × 3 million.
- Producers who actually receive the quota permits gain from the quota because they can sell at a higher price. All other producers and all consumers lose from the quota.
Test 3 Version B
(1) [Consumer surplus, producer surplus: 24 pts]
- $10 = height of demand curve.
- $1 = height of demand curve - price.
- $3 = height of supply curve.
- $6 = price - height of supply curve.
- $16 million = area of triangle bounded by demand curve, vertical axis, and price.
- $32 million = area of triangle bounded by supply curve, vertical axis, and price.
(2) [Pareto and potential Pareto improvements: 12 pts]
- YES, YES.
- NO, YES.
- NO, NO.
(3) [Perfect competition: 20 pts]
- inelastic, because less than one in absolute value.
- 1.2 percent.
- -6.0 = market elasticity / market share.
- elastic, because greater than one in absolute value.
- 12.0 percent.
(4) [Welfare analysis of price controls: 36 pts]
- $6.
- 80 thousand bushels.
- excess supply.
- 60 thousand bushels.
- increase.
- $150 thousand.
- decrease.
- $180 thousand.
- $30 thousand.
Critical thinking [10 pts]
[end of answer key]