1. Consider the market for production and usage of steel. Steel is produced by steel producers both domestically and internationally. The domestic supply curve of steel can be expressed as:
P = 400 + 20Q
Steel is used domestically by manufacturers of automobiles and heavy equipment, the construction industry, and many other firms. Altogther, the domestic demand curve for steel can be expressed as:
P = 2000 10Q
In both cases P is the price per ton of steel and Q is the number of tons of steel supplied/demanded.
The world price of steel, under free trade, is $500 per ton.
With no trade restrictions in place, calculate:
- The quantity of steel purchased by consumers of steel domestically is: tons
- The quantity of steel produced by domestic producers of steel is: tons
- The quantity of steel imported is: tons
- Domestic consumer surplus in this market is: $
- Domestic producer surplus in this market is: $
(Enter numeric answers only, with no symbols, unnecessary decimals, etc. If necessary, you should round your answers to the nearest integer.)
2. Read the following scenario and use it to answer this question and the following question.
On Sept 18, 2015 Firstpost reported (Links to an external site.):
The Delhi governments directive to cap the cost of laboratory tests for dengue has upset owners of private hospitals and diagnostic clinics. According to the directive, private healthcare establishments can charge a maximum of Rs 600 for NS1 antigen and dengue antibody tests. Platelet count tests should cost no more than Rs 50.
Accusing the government of announcing the figure without taking them into confidence, the private players maintain that the cap is unrealistic since it does not cover even the cost of raw material used. They say they are not being provided with extraction kits and other agents used for laboratory examination on subsidized prices.
Meanwhile, dengue has assumed an epidemic proportion with 1,900 cases and 16 confirmed deaths reported till September 17. Private laboratories are currently charging anywhere between Rs 900 and Rs 2000 for the dengue test while checking platelet count costs about Rs 200.(Source: “As dengue assumes epidemic proportion, Delhi govt and private players bicker over test price cap”, Firstpost.com, 18 Sep 2015.)
Suppose that the (short-run) demand and supply of dengue tests in Delhi is as given below:
Demand: P = 2600 – 0.001Q
Supply: P = 200 + 0.001Q
where P is the price in Rupees/test, and Q is quantity measured in number of tests per month.
Then consider the imposition of a price ceiling of 600 Rupees/test. Which of the following statements is/are true?
(Check all of the answers that are correct–there MAY be more than one.)
a. The number of dengue tests sold/transacted per month goes down following the imposition of the price cap.
b. The price paid per dengue test by consumers goes up after the imposition of the price ceiling.
c. The deadweight loss due to the price ceiling is Rs 640 million per month
d. The deadweight loss due to the price ceiling is Rs 1280 million per month.
3. Following from the previous question, which of the following statements is true?
(There may be more than one correct answer.)
4. The rising costs of college education is a matter of ongoing debate in the US, both at the federal level and within some states. Some states have been considering capping tuition rates, to make it more affordable for students from lower income families.
Suppose that the demand for four-year college degrees in the state of Erehwon is given by:
P = 500 – 1.7Q
and suppose the supply of four-year college degrees by universities in the state is given by:
P = 70 + 0.4Q
In both equations, P is the total tuition in thousands of dollars for a four-year degree, and Q is the number of students enrolling for degrees in thousands as well.
Suppose the government caps tuition for the four-year period at $120,000. Then which of the following are true?
There may be more than one correct statement. Choose all that are correct.
a. Relative to what happens without the cap, college enrollment (i.e., number of degrees) will increase as many more students will be willing to attend college at the capped price.
b. Relative to what happens without the cap, college enrollment (i.e., number of degrees) will decline as colleges will cut back on the number of spots offered.
c. Because the cap is below the free market equilibrium price, the imposition of the cap will have no effect on college enrollment (i.e., number of degrees)
d. The deadweight loss from the cap would have been higher if the magnitude of the elasticity of supply (around the free market equilibrium price and quantity) was lower.
5. LoJack is an electronic anti-theft device that helps law enforcement track down stolen cars. Research suggests that LoJack helps reduce car thefts, by enabling the police to catch thieves as well as locate and shut down garages that specialize in stripping out parts from stolen cars.
Because the LoJack device is installed hidden from view, potential thieves don’t have a way of knowing that a car has the device or not. Thus, LoJack owners indirectly provide a benefit to the community, and this community benefit far exceeds their perceived private benefit from installing LoJack.
Another anti-theft device is “The Club”. This is a device that is used to lock the steering wheels of car, to prevent theft. The Club is very visible, and so potential thieves can see that the car is locked using a Club. Because of this, it is argued that car owners who use the Club impose a negative cost on other car owners, as thieves are more likely to try to steal cars that don’t have the Club.
Based on this information, which of the following statements are true.
There may be more than one correct statement. Choose all statements that are true
a. The number of LoJack devices sold in a (free) market would be lower than optimal for maximizing total welfare
b. the number of LoJack devices sold in a (free) market would be more than optimal for maximizing total welfare
c. a small tax or fee imposed on the purchase of Clubs is likely to increase total welfare in the market for Clubs.
d. a small tax or fee imposed on the purchase of Clubs is likely to decrease total welfare in the market for Clubs.
6. Suppose you work for the Trade Association for LCD screen manufacturers. These manufacturers produce screens and sell them to Original Equipment Manufacturers (OEMs) like Dell, HP, Sharp, Sony, etc. Currently, your associations policy is that all LCD screen manufacturers must bear the replacement cost of defective screens. That is, if an OEM purchases a screen and it is defective, the LCD screen manufacturer must replace it. Your estimate is that 5% of screens are defective, and when they are defective the replacement cost is $200. The president of the trade association proposes instituting a new policy that would state that LCD screen manufacturers are no longer responsible for replacing defective screens. I.e., if a screen is found to be defective, the OEM would need to pay for screen replacements themselves.
Initially, suppose that you believe that there are no moral hazard issues. (I.e., even with this new policy in place, the proportion of defective screens would remain at 5%.) Suppose also the OEMs are risk neutral, but the LCD screen manufacturers are risk averse. If the new policy is agreed to, the price OEMs pay for LCD screens will __________, the quantity of LCD screens sold will __________, and total surplus in the market will __________.
a. decrease // decrease // remain the same
b. decrease // increase // increase
c. increase // increase // increase
d. decrease // remain the same // remain the same
e. decrease // increase // remain the same
7. On many public train systems, tickets are not collected when riders get on the train. Instead, inspectors periodically go through the train and issue fines to riders who do not have valid tickets. According to an article in the Sydney Morning Herald (30 July 2007), at railway stations in Mumbai, India, there are now entrepreneurs who sell ticket insurance. For a payment of roughly half the price of a regular train ticket these entrepreneurs guarantee that in the event that you are caught without a ticket, your fine will be paid.
Assume that the regular fare for a trip is $10, the fine for riding without a ticket is $200, the probability of getting caught if traveling without a ticket is 0.02, and the going price for ticket insurance is $5. Assume also that sellers of ticket insurance always make good on their promise to pay fines. At these prices, we can predict that on any given riding occasion, when a passenger can choose between:
- Option 1: buying a ticket
- Option 2: buying insurance (and riding without a ticket)
- Option 3: taking their chances and riding without a ticket or insurance
Then:
a. All risk-averse persons will choose option 1 while all risk neutral persons will choose option 2
b. All risk-averse persons will choose option 1 while all risk-neutral persons will choose option 3
c. Some risk-averse persons will choose option 2 and some risk-neutral persons also will choose option 2
d. Some risk-averse persons will choose option 2 while all risk neutral persons will choose option 3
e. all risk-averse persons will choose option 1 while only some risk-neutral persons will choose option 1.
8. Justine has just submitted a first draft of her new book Frapponomics to two different publishers. Combridge University Press has offered to buy the rights to the final version for $225,000, while Axford University Press is offering only $150,000 for the book, but Axford has also promised to pay her an extra $100,000 if the book sells more than 20,000 copies. Which of the following is true?
a. If Justine is risk averse and if she estimates that there is an 80 percent chance of selling more than 20,000 copies, then she will definitely choose Axfords offer.
b. If Justine is risk neutral and if she estimates that there is an 80 percent chance of selling more than 20,000 copies, she will definitely choose Axfords offer.
c. If Justine is risk averse, she will always take Combridges offer, regardless of the probability of selling more than 20,000 copies.
d. If Justine is risk neutral, she will accept Combridges offer regardless of the probability of selling more than 20,000 copies.
e. Both a. and b. are true.
