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1. Suppose that the demand curve for apartments near the university is given by P =1000 −Q and the supply curve is given by P = 400+ 2Q 

a. (4) Plot a diagram of the market for apartments. 

b. (4) Find the equilibrium in the market. 

c. (4) Find the consumer surplus, the producer surplus and the total surplus from 

the market. 

d. (4) Suppose that the local government, in an attempt to help the students 

financially, imposes a price ceiling of $500 on rental apartments. Find the 

number of apartments that students will be able to rent at that price. 

e. (4) Find the excess demand for rental apartments that will arise from the price 

ceiling. 

f. (4) Find the consumer surplus, the producer surplus, the total surplus and the 

deadweight loss in the presence of the price ceiling. 

g. (4) Illustrate with a diagram the market for apartments after the price ceiling is 

imposed and show on your diagram the excess demand in the market, the 

consumer surplus, the producer surplus, and the deadweight loss resulting 

from the price ceiling.

2. (10 Points) Suppose that Micronesia is a small country that imports milk (thus, it 

takes the world price of milk as given). Illustrate with the help of a diagram the 

effects of a price subsidy of $x for milk. On your diagram show the consumer 

surplus before and after the price subsidy as well as the deadweight loss resulting 

from the price subsidy. 

3. (16 Points) The following claim is often made with respect to per unit taxes 

imposed on some good or service: “the producers will pass the tax to the 

consumers”. 

a. (4) Show a diagram of a market after a tax of $T is imposed on a good and 

illustrate that the tax burden is shared between the consumers and the 

producers. In your graph label the burden on the consumer and the burden on 

the producer as a result of the tax. 

b. (4) What determines who pays larger fraction of the tax, the sellers or the 

buyers? Explain with the use of a diagram. 

c. (4) Show on the same diagram in part b the deadweight loss that results from 

the tax.  3

d. (4) The deadweight loss due to a tax is smaller, the more elastic the demand 

curve for that good is. True/false, explain with the help of a diagram. 

4. (16 Points) Illustrate with the help of a diagram the effects of a tariff imposed on 

an imported good. On your diagram, illustrate the deadweight loss resulting from 

the tariff. 

5. (30 Points) Suppose that the capital (machines) in a particular plant is fixed in 

the short run and is equal to K = 2. Thus the only way to change the output level 

is by changing the number of workers (L). The technology of the firm (in the 

short run) is described in the following table. 

K L Q MPL 

2 0 0 

2 1 100 

2 2 220 

2 3 340 

2 4 450 

2 5 550 

2 6 640 

2 7 720 

2 8 790 

2 9 850 

2 10 900 

a. Calculate the Marginal Product of Labor (MPL) in the above table and 

plot the graphs of output (Q) and MPL as functions of labor (L) on the 

same diagram. 

b. Does the law of diminishing marginal product hold for this technology? 

Explain. 

c. Complete the costs in the following table, assuming that 

= 30, =100 PK PL . 

d. (Excel required). Plot the graphs of ATC, AVC, and MC on the same 

diagram. 

e. Calculate the profit of the firm for the following market prices: 

= $1, = $1.25, = $2 PX PX PX . 

f. Show the firm’s profit when the price is $1.25 on the diagram in section d. 

g. For each of the given above market prices, state whether the firm will 

operate in the short run? In the long run?