Download Unit 2B Review Answers

Unit 2B Practice Problem Answers
1.
a.
b.
c.
d.
e.
f.
g.
$10
$5
$2.50
$2.50
$12.50
$7.50
Market activity has fallen from 160 to 80
a.
b.
c.
d.
e.
f.
g.
h.
i.
40
$10
$80
40
$5
$200
$80$20
$120$30
Bottom line: maximizing point is efficiency at equilibrium
2.
3. The more inelastic the demand for a good, the more the incidence of an excise tax can be
shifted to the consumer. The more elastic the curves, the more deadweight loss.
4.
a.
b.
c.
d.
e.
f.
g.
h.
i.
$10
$3600
$2400
$6000
$900
$600
$3000
$4500
Lost quantity of 300
Remember you will not be able to use a calculator on the exam, so the math will be much
simpler than this, but it is good to understand how to figure out the answers. If you are
struggling with the math, then anything else make sure you understand the different areas
of the graph before and after the tax!!!
5.
a. The imposition of a binding price floor in the cheese market is shown in Figure 3.
In the absence of the price floor, the price would be P1 and the quantity would be
Q1. With the floor set at Pf, which is greater than P1, the quantity demanded is
Q2, while the quantity supplied is Q3, so there is a surplus of cheese in the
amount Q3-Q2.
b. The farmers’ complaint that their total revenue has declined is correct if demand
is elastic. With elastic demand, the percentage decline in quantity would exceed
the percentage rise in price, so total revenue would decline.
c. If the government purchases all the surplus cheese at the price floor, producers
benefit and taxpayers lose. Producers would produce quantity Q3 of cheese, and
their total revenue would increase substantially. However, consumers would buy
only quantity Q2 of cheese, so they are in the same position as before. Taxpayers
lose because they would be financing the purchase of the surplus cheese through
higher taxes.
6. The table below shows the demand and supply schedule for on-campus housing.
Rent (dollars per month)
500
550
600
650
700
750
Quantity Demanded (rooms)
2,500
2,250
2,000
1,750
1,500
1,250
Quantity Supplied (rooms)
2,000
2,000
2,000
2,000
2,000
2,000
a. What are the equilibrium rent and number of rooms?
 Equilibrium Price is 600, Equilibrium Quantity is 2,000
b. If the college puts a rent ceiling on rooms of $650 a month, what is the rent and
how many rooms are rented?
 Price of $650 would be non-binding, Equilibrium Price is 600,
Quantity Demanded is 2,000
c. If the college puts a rent ceiling on rooms of $550 a month, what is the rent and
how many rooms are rented?
 Equilibrium Price is 550, Quantity Supplied is 2,000
d. If the college strictly enforces the rent ceiling of $550 a month, is the on-campus
housing market efficient? Explain why or why not.
 It is not efficient and is in disequilibrium. Quantity Demanded is
greater than Quantity Supplied leading to a shortage situation.
e. If a black market develops, how high could the black market rent be? Explain.
 The black market rent could be as high as the willingness of the
consumer. (i.e. 750)
f. If a black market develops, is the housing market fair? Explain your answer.
 Answers will vary