Practice Midterm Answers: 1. a) CS = 1600 b) PS = 400 c) DWL = 0.3125 2. e; None of the above 3. d; Shift of supply right 4. a; Demand increases 5. a; Vertical 6. d; Can occur due to price controls, taxes, subsidies, and results in an inefficient trade volume 7. a) and b) are correct 8. c; How a change in price of one good affects the quantity demanded of another good 9. e; None of the above 10. d; Price ceiling sets max, price floor sets min 11. e 12. d 13. d 14. d 15. c 16. a 17. c 18. d 19. b 20. a  

Short  answers  

1. a. 2016: 1*200+10*700+3*20=7260

2017: 1.5*120+12*500+1*50=6230 b. 2016

2. a. 1000;1000

b. USA oil 5/0.02 food 5/0.01

CAN food 5/0.02 oil 5/0.01

c. 0.5<= p <=2

d. Because each country can specialize in producing the product that they have competitive advantage in.

3. The quantity supplied in the real estate market in Tucson will decrease more than the quantity supplied NYC market, because supply in Tucson is more sensitive than the supply in NYC.

 

 

4. Please  work  on  this  solution  on  your  own.      

5.    

a)  Note  that  we  have  two  points  on  the  demand  curve.  (q,p)  =  (10,0)  and  (0,20).  Therefore,    

the  slope  Δp/  Δq  =  20/10=2  .    

Now,  (10,0)  -­‐>  (6,p^*)  and  given  that  Δp/  Δq=  2,  we  know  that  Δp  =  2  *  (10-­‐6)  =  8,  p^*-­‐0  =  8]  

 

TS  =  20  *  6  /  2  =  60  

 

b)  Foreign  supply  is  at  pf  =  4,  this  should  be  new  equilibrium  price.    

The  quantity  demand  is  calculated  by  the  equation  of  demand.  We  know  that  equation  of  demand  is    

Pd  =  20  –  2q.  Therefore,  at  p=4  we  get  q  =  (20-­‐4)/2  =  8.  With  this  number  we  can  compute  CS  =  (20-­‐4)*8/2.  

Now,  the  local  supply  is  given  by  equation  ps  =  8/6*q  or  ps  =  4/3  q.  why ?  because  now  you  have  two  points  for  the  supply  (0,0)  and  (6,8).  And  the  slope  of  this  curve  is  Δp/  Δq  =  8/6  =  4/3  

The  local  suppliers  at  the  price  of  4  are  producing  4  =  4/3q  or  q  =  3.  The  difference  between  qd  (8)  and  qs  (3)  is  imports  (5).    

The  PS  is  then  4*3/2.  Therefore  TS  =  CS  +  PS  =  64+6  =  70.  Note  that  now  the  total  surplus  (welfare)  is  higher  with  international  trade.    

 

c)  Now,  the  tariff  is  per  unit.  So  the  price  from  abroad  is  4*(1+50%)  =  6    

qd  =  (20-­‐6)/2  =  7    

qs  =  (6*3)/4    =  4.5  

imports  =  2.5  

CS  =  (20-­‐6)*7/2    

PS  =  (6-­‐0)*4.5/2  

Gov’  rev.  (tariffs)=  2.5  *  2    

We  have  a  DWL  compared  to  our  answer  in  b)  

 

d)  If  the  tariff  is  300%  new  price  is  (1+300%)*4  =  16.  This  is  above  the  equilibrium  without  trade.  Competitive  forces  will  lead  the  economy  to  compite  as  a  closed  economy  (no  imports).  Therefore,  the  local  price  is  determined  by  the  local  supply  and  demand,  which  is  equal  to  8.  

 

Good  luck  on  the  midterm !!