... Answer all the questions correctly
GO ON TO THE NEXT PAGE. -5- Question I is reprinted for your convenience. 1. Steverail, the only provider of train service operating between two cities, is currently incurring economic losses. (a) Using a correctly labeled graph, show each of the following. (i) Steverail's loss-minimizing price and quantity, labeled Pm and Om, respectively (ii) The area of economic losses, shaded completely (iii) The allocatingly efficient quantity, labeled Q (b) If Steverail raised the price above Pm identified in part (a)(i), would total revenue increase, decrease, or not change? Explain. (c) Assume a per-unit subsidy is provided to Steverail. (i) Will Steverail's quantity increase, decrease, or not change? Explain. (ii) Will consumer surplus increase, decrease, or not change? (d) Assume instead that a lump-sum subsidy is provided to Steverail. For the short run, answer the following. (i) Will the deadweight loss increase, decrease, or not change? Explain. (ii) Will Steverail's economic losses increase, decrease, or not change? Unauthorized copying or reuse of any part of this page is illegal. GO ON TO THE NEXT PAGE. -6- Additional answer page for Question 1.2. Theresa consumes both bagels and toy cars. Quantity of Marginal Utility Quantity of Marginal Utility from Bagels from Bagels (utils) Toy Cars Toy Cars (utils) 1 8 10 2 7 2 8 w 6 6 4 5 4 4 5 4 5 3 6 3 6 2 (a) The table above shows Theresa's marginal utility from bagels and toy cars. (i) What is her total utility from purchasing three toy cars? (ii) Theresa's weekly income is $11, the price of a bagel is $2, and the price of a toy car is $1. What quantity of bagels and toy cars will maximize Theresa's utility if she spends her entire weekly income on bagels and toy cars? Explain your answer using marginal analysis. (b) Assume that the price of wheat, an input for the production of bagels, increases. Will Theresa's demand for bagels increase, decrease, or not change? Explain. (c) Suppose that Theresa's income elasticity for bagels is -0.2. Does the value of Theresa's income elasticity indicate that bagels are normal goods, inferior goods, substitutes, or complements? (d) Suppose that when the price of toy cars increases by 10 percent, Theresa buys 5 percent fewer toy cars and 4 percent less of a different toy, blocks. Calculate the cross-price elasticity for toy cars and blocks and indicate if it is positive or negative. Unauthorized copying or reuse of any part of this page is illeg GO ON TO THE NEXT PAGE. -10- Additional answer page for Question 2.GO ON TO THE NEXT PAGE. -11- 3. Sugar is freely traded in the world market. Assume that a country, Loriland, is a price taker in the world market for sugar. Some of the sugar consumed in Loriland is produced domestically while the rest is imported. The world price of sugar is $2 per pound. The graph below shows Loriland's sugar market, and Pw represents the world price. PRICE Domestic Supply $6 $5 $2 PW Domestic Demand 10 14 MILLIONS OF POUNDS (a) At the world price of $2 per pound, how much sugar is Loriland importing? (b) Suppose that Loriland imposes a per-unit tariff on sugar imports and the new domestic price including the tariff is $4. (i) Identify the new level of domestic production. (ii) Calculate the domestic consumer surplus for Loriland. You must show your work. (iii) Calculate the total tariff revenue collected by the government. You must show your work. (c) Given the world price of $2, what per-unit tariff maximizes the sum of Loriland's domestic consumer surplus and producer surplus? Unauthorized copying or reuse of any part of this page is illegal. GO ON TO THE NEXT PAGE. -12- Additional answer page for Question 3
