Multiple Choice
| Question | Form A | Form B | Form C | Form D | Form E |
|---|---|---|---|---|---|
| 1 | B | C | A | B | A |
| 2 | C | A | B | A | C |
| 3 | D | A | B | B | B |
| 4 | C | C | A | C | D |
| 5 | B | D | D | A | B |
| 6 | D | D | D | D | A |
| 7 | D | D | D | D | B |
| 8 | D | B | C | A | B |
| 9 | B | D | A | D | D |
| 10 | D | A | D | D | D |
| 11 | A | B | B | B | B |
| 12 | A | B | C | A | A |
| 13 | A | B | C | D | B |
| 14 | D | A | B | C | C |
| 15 | B | D | B | D | C |
| 16 | A | B | A | C | D |
| 17 | C | D | D | B | D |
| 18 | B | B | D | B | A |
| 19 | B | C | B | B | D |
| 20 | B | B | B | B | B |
Problem 21
This problem is the same on all forms.
The subsidy is given on a per-hotel basis, it is not connected to the number of rooms rented. Thus it only affects fixed cost, not marginal or variable. Since marginal cost is the one that affects the firm's short-run decision, there is no change in the short run (AVC, which affects shutdown, is also unchanged). Both the rental price and quantity rented are unchanged in the short run.
The subsidy does increase profits. Firms enter the industry, shifting the supply curve to the right, lowering prices. This reduces profits, and entry continues until a new equilibrium is established. Because the subsidy reduces ATC, the long-run supply curve is to the right of the original supply curve (it is upward-sloping due because it is an increasing cost industry). The rightward shift in long-run supply means that the price of a hotel room is reduced in the long run, and the quantity rented increases, both in comparison to the original situation.
Problem 22
This problem is the same on all forms.
Without Subsidy
The intersection Supply and demand, corresponding to a price of $4 per lb. and quantity of 8 pounds. The consumer's surplus is the area under the demand curve and above the price. This measures $4 x 8/2 = $16, as does the producer's surplus, which is the area below the price and above the supply curve. Total surplus is $32.
With Subsidy
There are two ways to solve this. One is to incorporate the excise tax by shifting the supply curve up by the tax of $2. I don't recommend this as it makes the surplus calculations more complicated.
The second method is to use a price wedge—look for a quantity where the supply price is $2 higher than the demand price (because it is a subsidy, the supply price is higher; a higher demand price would indicate a tax). This happens at a quantity of 10 pounds, where the supply price is $5 and the demand price is $3. Once again, the consumer's surplus is the area between the demand price of $3 and the demand curve. This triangle has an area of $(5x10)/2 = $25. The producer's surplus is the triangle formed by the supply curve and the supply price of $5. This also has an area of $25, which is the producer's surplus. Finally, the government pays $2 per pound to subsidize 10 pounds, for a total of $20. Total surplus is then TS = $25 + $25 - $20 = $30, which is $2 lower than the surplus without the subsidy.