ECON 180 - Regulation and Antitrust Policy
Drake University, Spring 2015
William M. Boal

Course page: www.cbpa.drake.edu/econ/boal/180
Blackboard: bb.drake.edu
Email: william.boal@drake.edu

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]

  1. $12 = height of demand curve.
  2. $4 = height of demand curve - price.
  3. $5 = height of supply curve.
  4. $3 = price - height of supply curve.
  5. $50 million = area of triangle bounded by demand curve, vertical axis, and price.
  6. $25 million = area of triangle bounded by supply curve, vertical axis, and price.

(2) [Pareto and potential Pareto improvements: 12 pts]

  1. NO, NO.
  2. NO, YES.
  3. YES, YES.

(3) [Perfect competition: 20 pts]

  1. inelastic, because less than one in absolute value.
  2. 1.6 percent.
  3. -16.0 = market elasticity / market share.
  4. elastic, because greater than one in absolute value.
  5. 32.0 percent.

(4) [Welfare analysis of price controls: 36 pts]

  1. $6.
  2. 40 thousand bushels.
  3. excess demand.
  4. 90 thousand bushels.
  5. decrease.
  6. $210 thousand.
  7. decrease.
  8. $60 thousand.
  9. $270 thousand.

Critical thinking [10 pts]

  1. Loss of consumer surplus = $2.5 million.
  2. 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.
  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.
  4. 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]

  1. $10 = height of demand curve.
  2. $1 = height of demand curve - price.
  3. $3 = height of supply curve.
  4. $6 = price - height of supply curve.
  5. $16 million = area of triangle bounded by demand curve, vertical axis, and price.
  6. $32 million = area of triangle bounded by supply curve, vertical axis, and price.

(2) [Pareto and potential Pareto improvements: 12 pts]

  1. YES, YES.
  2. NO, YES.
  3. NO, NO.

(3) [Perfect competition: 20 pts]

  1. inelastic, because less than one in absolute value.
  2. 1.2 percent.
  3. -6.0 = market elasticity / market share.
  4. elastic, because greater than one in absolute value.
  5. 12.0 percent.

(4) [Welfare analysis of price controls: 36 pts]

  1. $6.
  2. 80 thousand bushels.
  3. excess supply.
  4. 60 thousand bushels.
  5. increase.
  6. $150 thousand.
  7. decrease.
  8. $180 thousand.
  9. $30 thousand.

Critical thinking [10 pts]

[end of answer key]