1. a. Explain the social efficiency by taking into account consumer surplus and producer surplus. (20 point)

b. Consider a free market with demand equal to Q=1200 10P and supply equal to Q=20P. What is the value of consumer surplus? What is the value of producer surplus? (5 point)

c. Now the government imposes a $10 per unit subsidy on the production of the good. What is the consumer surplus now? The producer surplus? Why is there a deadweight loss associated with the subsidy, and what is the size of this loss? (5 point)

2. Consider an income guarantee program with an income guarantess of $6000 and a benefit reductions rate of %50. A person can work up to 2000 hours per year $8 per hour.

1. Draw the persons budget constraint with the income guarantee. (5 point)
2. Suppose that the income gurantee rises to $9000 but with a 75% reduction rate. Draw the new budget constraint. (5 point)
3. Which of these two income guarantee programs is more likely to discourage work? Explain. (5 point)

3. a. Explain graphically the incidence of taxation on producers and consumers in terms of the elasticities of supply and demand. (20 point)

b. The demand for rutabagas is Q = 2,000 100P and the supply of rutabagas is Q = 100 + 200P. Who bears the statutory incidence of a $2 per unit tax on the sale of rutabagas? Who bears the economic incidence of this tax? (10 point)

4. Consider a consumer who wants to consume only two commodities and has an income of $100. Assume the price of good 1 is $10 per unit and the price of good 2 is $20 per unit. Now, inflation causes the price of good 1 to increase to $20 per unit, while the price of good 2 increases to $25 per unit. On the other hand, the consumer also gets a raise of $100 (so her new income is $200). Is she better off or worse off? (10 point)

5. The market demand for super-sticky glue is Q = 240 6P and the market supply is Q = 60 + 4P.

a.Calculate the deadweight loss of a tax of $4 per unit levied on producers of super-sticky glue. (10 point)

b. How does deadweight loss change if the tax is levied on consumers of supersticky glue? (5 point)