ECMC38 Midterm Answer Key – Winter 2013
Question 1 (25 points)
Part (a) (8 points)
The support price = $52.
Quantity sold Q* = 50 + 40(52) = 2130 (1 pt)
Price paid by consumers: PC= (2400 – 2130)/10 = $27 (1 pt)
Change in CS: (2 pts – 1 pt for correct answer, 1 pt for showing work)
in CS = 0.5($47 – $27)(2130 + 1930) = $40600
Change in PS: (2 pts – 1 pt for correct answer, 1 pt for showing work)
in PS = 0.5($52 – $47)(2130 + 1930) = $10150
Change in TS: (2 pts – 1 pt for correct answer, 1 pt for showing work)
in TS = in CS + in PS – Cost of deficiency payment
in TS = $40600 + $10150 – $(52 – $27)(2130) = – $2500 (= DWL)
or, in TS = 0.5($52 – $27)(2130 – 1930) = – $2500
* Note: Price is in terms of per kg and quantity measures thousand kg.
Part (b) (6 points)
Winners of this change in policy include:
Coffee bean farmers (1 pt): They receive higher price per kg sold & their income increases
Coffee bean consumers (1 pt): The actual price paid per kg falls (2 pts).
Part (c) (5 points)
New competitive equilibrium:
2400 – 10P = –200 + 40P
P* = 52 (1 pt)
Q* = 2400 – 10(52) = 1880
Since the new competitive equilibrium price is the same as the support price; therefore, the
deficiency-payment price-support system IS NOT in effect (2 pts) the system DOES
NOT lead to inefficiency. (2 pts)
Part (d) (6 points)
Those who lose: (any 2 with proper explanation, 3 pts each)
Consumers: The price they paid had gone up.
The economy as a whole: total surplus falls (must show calculation for full credit).
Farmers who lost their crop: They may have nothing to sell.
ECMC38 Midterm Answer Key – Winter 2013 1 Question 2 (30 points)
Part (a) (6 points)
The seemingly contradicting observations can coexist:
In the first decade after the airline deregulation, more carriers provided services to the same
routes number of flight & competition. (3 pts)
During the first decade of airline deregulation, the demand for flights (or the number of
passengers) increased at a slower pace than the increase in the number of seats available
the market became saturated load factor :
Load factor = #of passengers (3 pts)
Part (b) (6 points)
By cutting capacity the airlines attempt to reduce its operating cost by increasing its load
factor (i.e., attempt to avoid flying their planes half empty) and this would lead to a better use
of resources. (2 pts)
Charging services that used to be free this would raise the revenue of the airlines. (2 pts)
All these measures aim at increasing the profits: (2 pts)
Profit = Total revenue – Total cost
Part (c) (8 points)
Potential benefits: (4 pts – any 2 with explanation would be sufficient)
Having granted Canada the ADS, more Chinese tourists will visit Canada # of travelers
demand for air travel .
New routes/markets would be developed tourists from different Chinese cities would visit
different Canadian cities, in response to the new demand for services new routes may be
developed Canadian airlines may have access to new routes and/market.
Load factor holding all else constant, when more Chinese tourists visit Canada, the
number of passengers per plane (the routes between Canada and China) Load factor
= #of seatsavailable .
Potential challenges: (4 pts – any 2 with explanation would be sufficient)
More Chinese airline are now able to provide more services in the Canadian market (such as
more routes serviced, higher frequency) competition .
Load factor if the number of seats available increases faster than the number of
passengers (i.e., the demand), then the load factor would fall.
Lower profit of the Canadian airlines in attempt to gain larger market share, airlines may
engage themselves into price competition revenues .
* Note: The above are just some possible answers; you may still receive full credit by
mentioning other possible impacts. However, the impacts should focus on the airlines in Canada
not the government nor the consumers.
ECMC38 Midterm Answer Key – Winter 2013 2 Part (d) (10 points)
Annual Quota Rent
Maximum willingness to pay for the quota (per thousand hogs) = .
The maximum willingness to pay for the quota (per thousand hogs) by different bidders:
Sophia Celia Hayley
$90000 (1 pt) $72000(1 pt) $120000 (1 pt)
Who gets the quota and why?
Winning bidders: Sophia and Hayley (2 pts)
Hayley has the highest willingness to pay; she will definitely get the quota.
However, her production capacity falls short of the quota (i.e., she could not capture the
2 pts whole quota), so Sophia with the second highest willingness to pay will also get the
The combination of Sophia’s and Hayley’s production capacity equals to the quota limit,
Celia will not get the quota.
How much would they pay?
Since both Sophia and Hayley know the borrowing costs of all bidders and their
1 pt production capacity would be sufficient to fill the quota, they would submit a bid just
slightly higher than Celia’s and they both will be awarded the quota.
Both will submit a bid of $72001 per million thousand hogs.
Total payment made by Sophia = $72001 3= $216003. (1 pt)
Total payment made by Hayley = $72001 4 = $2