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CONCORDIA UNIVERSITY

Department of Economics
ECON 201 Section B
Fall 2012
Instructor: Ivan Tchinkov
Exam duration: 60 min.
MIDTERM EXAMINATION WITH ANSWERS
Version 2
Last Name: ______________________

First Name: ______________________

ID #: ___________________________
Multiple Choice Questions (3 marks each).
1. If the government wishes to discourage smoking by tax increases the policy will be more effective if:
A)
demand is price inelastic.
B)
supply is price elastic.

C)
demand is income elastic.
D)
demand is price elastic.
2. If a per unit tax is imposed, the more elastic demand is,
A)
less likely the deadweight loss will be affected.
B)
smaller the deadweight loss.
C)
larger the loss in consumer surplus.
D)
larger the deadweight loss.
3. All of the following statements are incorrect except:
A)
demand is more elastic in the short run than in the long run.
B)
the time period available for adjustment to changes in a good's price does not affect the
elasticity of demand for the good.
C)
the longer the time period consumers have to adjust to price changes, the more elastic
will be demand.
D)
the long-run demand curve for a good is steeper than the good's short-run demand curve.
4. Suppose that an increase in consumer income of 5% causes the consumption of a good to fall from 10
to 7 units, then using the initial quantity as the reference quantity, the income elasticity is:
A)
-10.
B)
-7.
C)
-5.
D)
-6.
5. Which of the following statements is false?
A)
When a market is in equilibrium, excess demand is zero.
B)
When a market is in equilibrium, quantity demanded equals quantity supplied.
C)
When a market is in equilibrium, a price is established that clears the market.

D)

When a market is in equilibrium, shortages may still exist.

6. All of the following statements are false except:


A)
Normative economic statements are statements of fact.
B)
In positive economics, we are detached scientists and personal values do not enter our
description of economic events.
C)
"The unemployment rate for September, 1987 was 5.9 percent" is a normative statement.
D)
"The government should provide a minimum income to every citizen" is a positive
statement.
7. A basket of goods in 1987 cost $783, while the value of the same basket in 1997 was $1133. The value
of this price index in 1997, based on 1987 = 100, was:
A)
144.7.
B)
242.
C)
69.1.
D)
117.4.
8. It does not make economic sense to strive for a completely pollution- free environment because:
A)
the cost incurred would be greater than the benefit received.
B)
the marginal social benefit would be greater than the marginal social cost.
C)
society does not want a pollution-free environment.
D)
the total benefit received by society would be greater than the total cost incurred.
9. All the following are complementary goods except:
A)
beer and peanuts.
B)
ipods and CD players.
C)
gasoline and motor oil.
D)
tennis balls and tennis rackets.
10. Mad cow disease led to lower price of Alberta beef, because:
A)
The leftward shift of the demand curve of Alberta beef was greater than the leftward
shift of the supply curve of Alberta beef.
B)
The leftward shift of the demand curve of Alberta beef was smaller than the leftward shift
of the supply curve of Alberta beef.
C)
The leftward shift of the demand curve of Alberta beef was greater than the
rightward shift of the supply curve of Alberta beef.
D) The rightward shift of the demand curve of Alberta beef was greater than the leftward shift
of the supply curve of Alberta beef.

Part II: Answer all questions (total of 70 marks)


1. (20 marks) Suppose that the demand for dehumidifiers in Vancouver is given by P=1000-Qd while
supply is given by P=4Qs.
(i)
Find the equilibrium quantity and price.
The equilibrium price is $800 and equilibrium quantity is 200.
(ii)

Draw the demand and supply equilibrium graph and label the consumer and producer surplus areas.
Also find the value of consumer surplus, producer surplus and total surplus.

The consumer surplus is height times base divided by 2. The height of the triangle is the
vertical intercept 1000 less equilibrium price $800. So the height is 200. The base of the
triangle is 200. The value of consumer surplus is then $20,000. The value of producer surplus
is also height times base divided by 2. The height is 800, the base is 200, so the value of
producer surplus is $80,000. Total surplus is $100,000
Now suppose that the mayor of Vancouver creates an energy saving program. Therefore, it imposes a tax
of $100/machine on the consumers.
(iii) Find the equilibrium quantity and price after the tax and depict these new results graphically.
Equilibrium quantity is solve by setting 1000-100 (=t)-Qd=4Qs, Q=180, Consumers pay
P=$720 before tax, but P=$820 after tax.

(iv)

Find the tax revenue collected by a city of Vancouver, the new consumer and producer surpluses
and the deadweight loss of this tax program.
Tax revenue is $100 each machine, multiplied by 180 machines, so tax revenue is $18,000.
New consumer surplus is 1000-820=180 multiplied by 180 divided by 2. So consumer surplus
is $16,200 and producer surplus is 720 multiplied by 180 divided by 2, which is equal to
$64,800.
Deadweight loss is $100 multiplied by 20 units divided by 2, which is $1,000.

2. (20 marks) Developed countries often intervene in their agricultural industries, using price
floors, production subsidies or quotas (supply management). As an economist in the Department
of Agriculture you have estimated the demand to be P = 250 Qd and supply to be P = 100 + 2Qs
for the wheat industry. You have been asked to evaluate three policy choices. Quantities are in
tons.
(i)

Find the initial equilibrium P and Q. What is the total revenue (TR) of the suppliers.
Q=50, P= 200, TR=10000.

(ii)

Option 1: Price floor = $220, the government buys up any surplus (excess supply). Find Qd,
Qs, surplus (Excess Supply), TR of the suppliers, and the cost to the government.
Qd=30, Qs=60, ES=30, TR=13200, Cost to government=6600.

(iii) Option 2 : Production subsidy.


Find how much the consumers pay per unit if the TR of firms is the same as under the price
floor. Also find the amount of the production subsidy per unit and the total cost to the
government.
Pc=190, Subsidy per unit=30, total cost to government=1800.
(iv) Option 3: Quota = 40.
Find the corresponding consumer price and the total revenue of the suppliers at this
quantity supplied. As an economist, what option would you recommend to both
government and farmers for their own benefit?
Pc=250-40=210, suppliers revenue= 210*40=8400
The recommendation should minimize the cost to the government and maximize the
farmers revenue. The lowest cost for the government is under a quota. The highest
revenue for farmers is under subsidy and price floor.
3. (30 marks) Suppose that in the market for paper, demand is P = 150 - Q. The private cost of producing
paper, or supply, is P = 10 + Q. However, pollution generated by the production process creates a per unit
external harm (negative externality) equal to 0.5Q. The socially responsible supply is simply P = 10 +
1.5Q.
(i)

What is the private market equilibrium price and quantity if the externality is not corrected for in
this market?
5

The unregulated market equilibrium is characterized by the intersection of the private cost
curve and the demand curve. Thus, 150 Q = 10 + Q. The market equilibrium quantity is Q =
70. The market equilibrium price is P = $80
(ii)

What is the socially optimal quantity of paper that should be produced?


Socially optimal equilibrium is characterized by the intersection of the social cost curve and
the demand curve. The social cost is given by 10 + 1.5Q. Thus the socially optimal quantity is
given by 150 Q = 10 + 1.5Q. The socially optimal quantity is Q = 56. The price is P = $94

(iii) Suppose that the government wants to achieve the socially optimal quantity by imposing a tax on
the producers. What would be the size of the tax in dollars on per unit of paper?
We know that we want the output to be 56 units. To sell 56 units, we know that the consumers
are willing to pay $94. To produce 56 units, we know that the firms only need to receive a
price equal to P = 10 + Q (=56) or P = $66. This means that if the government charges a tax of
$94 - $66 = $28 per unit, the firms will produce only 56 units. We can always check, using our
knowledge from Chapter 3. Let demand be unaffected at P = 150 - Q, while supply is P = (10 +
28) + Q. We will find Q = 56 and P = $94 for consumers, and P = $94 - $28 = $66 for the firms
after they have paid the tax.
(iv)

Calculate the changes in CS, PS, Social Cost (SC), government tax revenue (TR) and Total Surplus
(changes in CS, PS, SC and TR taken together) as a result of the tax (assume the supply curve with
the tax from (iii) is the socially responsible one with equation P=10+1.5Q).
Change in CS= (70+56)*14/2= 882 (loss)
Change in PS= (70+56)*14/2= 882 (loss)
Change in GR= 28*56= 1568 (gain)
Change in SC= 35*14/2+28*14/2= 441 (gain)
Change in TS= -882-882+1568+441= 245 (gain)

(v)

Which TS (before or after the tax) is bigger, by how much and why?
TS after the tax is bigger by $245, because the tax has moved the economy from an inefficient
allocation to an efficient one, by internalizing the cost of negative externality