Key to Test 2 Study Problems

Here is the answer key to the practice problems (see I-drive):

1-D, 2-D, 3-A, 4-C, 5-D, 6-C, 7-D, 8-B,
9-A, 10-D, 11-D, 12-B, 13-D, 14-A,
15-A, 16-B, 17-C, 18-C, 19-D, 20-A,

Note: problems 21-24 relate to the nearest diagram (the one used for 18 & 19). Problem 20 is not relevant to that diagram. I apologize for any confusion.

21. $125
22. $12.50
23. $137.50 (= $125 + $12.50)
24. 10 units of the good are gone unproduced and unsold.

Let me know if you think there are any errors on the answer key.

Some comments for problem set #2

Here some comments on a few of the problems.

Problem 1, c. Two things to make sure you notice: First, the government is having to buy 50 million pints more than they were in part b. Still, the price floor is $1 per pint. Second, they are selling the entire surplus for 60 cents a pint, so they're recovering some of the cost.

Problem 2. Taxes and quotas have very similar effects. The main difference is that with the tax scheme, the quota rent becomes tax revenue. Krugman and Wells point out how similar the outcomes are.

Problem 4. Concepts you need to employ are supply and demand. One of those shift, thereby changing the price. The revenue changes. So when the price changes a certain direction and the revenue changes in a certain direction, you should be able to figure out if the good is elastic or inelastic.

Good luck.

BTW, due to another engagement, I will not be able to hold office hours tomorrow. So get your questions in tonight!

JJ