ECON2113 L4 & L5 & L6, 2018 Fall Midterm

Instructor : Philip Neary Date: October 20 (Saturday) 09:00am-11:00am

Declaration of Academic Integrity

I confirm that I have answered the questions using only materials specifically approved for use in this examination,
that all the answers are my own work, and that I have not received any assistance during the examination.

Name: Student ID: Signature:

1. (20pts) There is a world with 4 people: Alice, Brian and Charlie, and the benevolent dictator, Wooyoung.
Wooyoung must decide between three policies p1 , p2 , and p3 . The monetary payoffs to Alice, Brian and
Charlie from each policy are given in the table below.

p1 p2 p3
Alice 3 5 0
Brian 2 1 8
Charlie 4 2 2

a. (10pts) Suppose that Wooyoung is a utilitarian in that he wants to maximise the size of the economic
pie. Which policy does he adopt?
b. (10pts) Suppose that Wooyong is a Rawlsian in that he wants to maximise the wealth of the poorest
individual. Which policy does he adopt?

2. (20pts) On July 1, 2002, Mayor Bloomberg put a tax of $1.50 on a pack of cigarettes sold in New York City.
The tax was placed on sellers of cigarettes. Would the effect of the tax have been different if the tax had
been placed on buyers of cigarettes in stead? Use a supply and demand diagram to justify your answer.

3. (70pts) Suppose Kim can produce 50 pies an hour or 400 cookies an hour. Lim can produce 120 pies an hour
or 200 cookies an hour.

a. (10pts) Who has a comparative advantage in producing pies?

b. (10pts) Both Kim and Lim have preferences that mean they spend 30 minutes of each hour producing
pies and 30 minutes producing cookies. How many pies and cookies does each of them produce?
c. (10pts) Suppose that Kim and Lim specialise in producing only the good in which they have a compar-
ative advantage. How many pies and cookies does each of them produce?
d. (10pts) What is the highest price of a pie at which Kim and Lim would agree to trade pies and cookies?
e. (30pts) Suppose that both individuals will only ever trade to a point at which they have at least as much
of each good as they have in part (b). What is the set of points to which they could agree to trade?

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4. (90pts) Suppose that the market Demand for beer in Ireland, QD , is given by

P = 900 − QD . (1)

There are two identical suppliers of beer in the Irish market, each of which has the identical Supply schedule
of beer, QS , given by the following
P = 100 + 2QS . (2)

We note that the price of beer is expressed in dollars, and the quantities are expressed in kegs (“barrels”) of
beer per day.

a. (10pts) Calculate the market equilibrium price and quantity. No need to draw a graph.
b. (30pts) Suppose the Irish government decides to open the beer market for free international trade and
that the world price of beer is $300 per keg.
i. (10pts) What assumption must we make on the size of the Irish market for our analysis to be valid?
ii. (20pts) Draw a graph of the new “open” Irish beer market. Be sure to label the axes and the curves,
and mark in the new equilibrium price and quantity. Graphically demonstrate the benefit of trade
and compute the consumer surplus, producer surplus, and total surplus.
c. (50pts) The Irish producers of beer hire some lobbyists. After several days of lobbying activity, the
government decides to impose a tariff of τ = $100 on each keg of beer that is imported to Ireland
from a foreign country. Relative to your answer in (b) part (ii) and using a carefully labelled diagram,
comment on who benefits from this policy. Specifically, calculate the changes due to the tariff. That is,
the consumer surplus, the producer surplus, the government revenue from tariffs, and the dead weight
loss.

Please hand in this exam paper together with your exam book. Thanks!