Department of Economics
Midterm Exam #2, March 11, 2013
Time Allowed: 80 Minutes
The total marks in this test are 60. The test is divided into two parts:
Part I - problem format - is worth 52 marks (52 of the total mark of 60)
Part II – Explanation questions are worth 8 marks (8 of the total mark of 60)
Place your answers (and work where necessary) in the space provided
Show your work where applicable.
Please use pen instead of pencil.
Print your name and student number clearly on the front of the exam and on any loose pages.
(FamilyName) (Given Name)
Student #: .
There are 6 pages to the exam.
- 1/7 - ECON2350): Midterm Exam #2, March 11, 2013
1. Tax and Subsidies: Diagram and Calculations (14 marks)
A. Suppose that the Supply of Coffee is relativelyelastic and that the Demand for Coffee is
relatively inelastic Draw a Demand/Supply diagram in the space below for Coffee with the
equilibrium price of Coffee = Po ($2/cup, for example) at Qo.
a) Show the new equilibrium (Q , P ) th1t r1sults from a tax /unit collected (paid) by sellers
($0.20/litre, for example). (2 marks)
b) Identify the Buyers’ Share (BS), Sellers Price (P Selleri.e., after payment of tax), and Sellers’
Share (SS) of the tax in your diagram. (3 marks)
c) Clearly identifythe total revenue from the tax for the government (1 mark)
Q Qo Q
a) 1 mark: Supply obviously relatively flatter than Demand
1 mark: shift up Supply
b) 1 mark: BS = P [from intersection of new Supply (whatever) and original D] – Po
1 mark: P Sellerrom P –1tax = point on original supply curve at Q 1
1 mark: SS = Po - P Seller
d) 1 mark: correct vertical dimension of the tax (P – P , i.1., beSelen the two supply curves
at Q 1 and correct horizontal dimension of the tax (Q ), accordi1g to their diagram
B. Suppose that the Demand and Supply functions for a commodity are
P = 1,255 – 0.24Q P = 415 + 0.36Q
a) What is the competitive Price and Quantity from a tax of $30/unit on sellers? (2 marks)
1 mark: Q = 1,350 from either 1,255 – 0.24Q = 415 + 30 + 0.36Q or some other method
1 mark: P = $931 from either 1,255 – 0.24*1, 350= 415 + 30 + 0.36*1,350
b)What is the Sellers’ Price after payment of the tax? (1 mark)
1 mark: = $901 from $931 - 30
c)What is the Sellers’ Share of the per unit tax of $30? (1 mark)
1 mark: = $18 from either $30*0.36/(0.24 + 0.36) or 30 – 30*0.24/(0.24 + 0.36)
d) What is the total revenue for the government from the tax of $30/unit on sellers? (1 mark)
1 mark: = $40,500 from $30 * 1,350
e)What is the loss of Consumer Surplus due to the tax of $30/unit? (1 mark)
1 mark: correct answer = $16,500 from work such as (12)*(1,400 + 1,350)/2 or CS1 – CSo =
(1,255 – 919)*1,400/2 – (1,255 – 931)*1,350/2 or 12(1350) + 12(1400 – 1350)/2
f) What is the Buyer’s Share of the Tax in the Long-run (1 mark)
1 mark: = $30
g) What is the equilibrium Price in the Long-run?
1 mark: $949 from $919 + $30
- 2/6 - ECON2350): Midterm Exam #2, March 11, 2013
2. Monopoly Diagram and Mark-up Pricing (12 marks)
A. Monopoly Diagram (6 marks)
Suppose that Rogers Cable is a natural monopoly with the average cost and demand
functions represented in the diagram below.
a) Identify price MP ) and output MQ ) at monopoly equilibrium (short-run). (4 marks)
b) Identify the economic profit or loss of the monopoly at monopoly equilibrium. (1 mark)
c) Identify price (Po) and output (Qo) at competitive equilibrium (short-run). (1 mark)
Q M Q Comp
1 mark: draw constant MC though min AC (probably constant for most of way))
1 mark: draw MR below D roughly bisecting space between D and the vertical axis
1 mark: Q Mrom intersection of MC and MR (give this even if MC and MR are wrong)
1 mark: PMfrom Demand at their Q (Mut not if the Q Ms not from their MC intersect MR)
1 mark: Economic Profit ( Mono Profit) between PMand AC aM output Q M
1 mark: Po and Qo at MC intersect Demand
B. Mark-up Pricing (6 marks)
Suppose that the demand function for an industry is P = 180 – 0.25Q (180 = $180)
a) What is elasticity at Q = 320? (2 marks)
1 mark: P = $100 from P = 180 – 0.25(320)
1 mark: elasticity = -1.25 (or 1.25) from 1/-0.25 *100/320
b)What is Marginal Revenue at Q = 320 calculated from the formula using Price and elasticity?
1 mark: formula: MR = 100(