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Economics 101 Student Name :
Answers to Second Midterm Section # :
June 13, 2011 TA Name :
Second Midterm
DO NOT BEGIN WORKING UNTIL THE INSTRUCTOR TELLS YOU TO DO SO. READ
THESE INSTRUCTIONS FIRST.
You have 75 minutes to complete the exam. The exam consists of 3 problems worth 20 points
each and 20 multiple choice questions worth 2 points each for a total of 100 points.
PLEASE WRITE NEATLY AND LEGIBLY AND PLEASE MAKE SURE IT IS EASY TO
SEE WHERE YOUR ANSWER IS FOR A QUESTION.
If there is an error on the exam or you do not understand something, make a note on your exam
booklet and the issue will be addressed AFTER the examination is complete. No questions
regarding the exam can be addressed while the exam is being administered.
When you are finished, please get up quietly and bring this exam booklet to the place indicated by
the instructors.
NO CALCULATORS OR FORMULA SHEETS ARE ALLOWED.
PICK THE BEST ANSWER FOR EACH QUESTION.
GOOD LUCK!
I, ______________________________, understand that giving answers to another student or
taking answers from another student on this exam constitutes academic misconduct and can
result in my receiving a zero on this exam. I also understand that the use of a calculator on this
exam is prohibited and that such use will result in my receiving a zero on this exam.
____________________________________ (signed)
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Problems (3 problems each worth 20 points for a total of 60 points)
1. You are given the following information about the market for motorcycles.
Market Demand: P = 400 – 4Q
Market Supply: P = 4Q
a. (2 points) Find the equilibrium price and quantity in this market.
400 – 4Q = 4Q
8Q = 400
Q = 50 motorcycles
P = 4(50) = $200 per motorcycle
b. (2 points) What is the value of consumer surplus in this market?
CS = (1/2)($400/motorcycle – $200/motorcycle)(50 motorcycles) = $5000
c. (2 points) What is the value of producer surplus in this market?
PS = (1/2)($200/motorcycle – $0/motorcycle)(50 motorcycles) = $5000
d. (2 points) Suppose that the government decides to impose an excise tax of $80 per motorcycle
on producers in this market. What will be the number of motorcycles sold in this market once
this tax is imposed?
The new supply curve with the excise tax will be P = 80 + 4Q. Using this equation and the
demand equation we can solve for the new quantity of motorcycles sold once the excise tax is
imposed. Thus, 80 + 4Q = 400 – 4Q or 8Q = 320 and Q = 40 motorcycles.
e. (3 points) Given the tax described in part (d), what will be the tax incidence on consumers?
To find the tax incidence we must first find the price consumers pay once the excise tax is
imposed. When Q = 40 motorcycles, the price consumers pay is P = 400 – 4Q or P = 400 – 4(40)
= $240/motorcycle. The excise tax raises the price to consumers from $200 to $240. Thus, the
consumer tax incidence can be calculated as the change in price times the number of motorcycles
sold once the tax is imposed. Thus, CTI = ($240/motorcycle -$200/motorcycle)(40 motorcycles)
= $1600.
f. (3 points) Given the tax described in part (d), what is the value of the deadweight loss from the
tax?
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DWL = (1/2)($240/motorcycles – $160/motorcycles)(10 motorcycles) = $400
g. (3 points) What is the loss in producer surplus from the imposition of the excise tax described
in part (d)?
The loss is producer surplus is equal to the area of a rectangle and the area of a triangle. The
producer loses some of their surplus when the government captures it as tax revenue. The
producer also loses some of their surplus due to the part of the deadweight loss from the tax that
falls on producers. Thus, the loss is producer surplus is equal to ($200/unit – $160/unit)(40 units)
+ (1/2)($200/unit – $160/unit)(50 units – 40 units) = $1600 + $200 = $1800.
h. (3 points) Suppose the government would like motorcycle consumption to fall to 20 units.
Relative to the initial situation before there was any excise tax, how big an excise tax would the
government need to place on motorcycles in order for consumption to fall to 20 units?
From the demand curve we know that if Q = 20 motorcycles, then the price demanders must pay
is equal to P = 400 – 4Q or P = 400 – 4(20) = $320/motorcycle. From the supply curve we know
that if Q = 20 motorcycles, then the price suppliers must receive in order to be willing to supply
20 units is P = 4Q or P = 4(20) = $80/motorcycle. The difference between the price demanders
are willing to pay for 20 units and the price suppliers must receive in order to produce 20 units is
$320 – $80 or $240. The excise tax would need to equal $240/motorcycle in order for
consumption to fall to 20 units.
2. Suppose there is a small, closed economy that produces bananas. The domestic demand and
domestic supply curves for bananas in this small, closed economy are given as:
Domestic demand: P = 20 – (1/2)Q
Domestic supply: P = 2 + (1/10)Q
a. (2 points) What is the equilibrium price and quantity of bananas in this small, closed
economy?
To find the equilibrium price and quantity simply use the demand and supply curves. Thus, 20 –
(1/2)Q = 2 + (1/10)Q and solving for Q, we get Q = 30 units. Using this quantity in either the
demand or the supply equations we can find the price: P = $5.
b. (2 points) Suppose that the world price of bananas is $8 per unit of bananas and this economy
opens to trade. Provide a numerical measure of this country’s imports or exports of bananas once
the market is open to trade.
If the world price is $8 per unit of bananas and this economy opens to trade, then at $8 domestic
demanders will demand 24 units of bananas. At $8, domestic suppliers will supply 60 units of
bananas. The excess supply of 36 units of bananas will be exported.
c. (2 points) If this closed economy opens its banana market to trade with the world price of
bananas equal to $8 per unit of bananas, what will be the change in consumer surplus due to this
decision?
CS when the banana market was closed to trade was equal to (1/2)($20/unit of bananas – $5/unit
of bananas)(30 units of bananas) = $225. CS when the banana market is open to trade is equal to
(1/2)($20/unit of bananas – $8/unit of bananas)(24 units of bananas) = $144. The loss is
consumer surplus when the banana market opens to trade is equal to $81.
d. (2 points) Suppose that the world price of bananas is $2.50 per unit of bananas. If this market
opens to trade, what will be the level of imports or exports of bananas?
When the world price is $2.50 per unit of bananas domestic demanders will demand 35 units of
bananas while domestic suppliers will supply 5 unit of bananas. The excess demand for bananas
of 30 units will be met by importing 30 units of bananas into this small economy.
e. (2 points) Given the scenario in part (d), what will be the change in consumer surplus when
