# Econ 100a Midterm

### Econ 100a Midterm

Econ 100A–Midterm 2 solutions. Thursday, March 22, 2012. True/False (2 questions, 10 points total) Answer true or false and explain your answer. Your answer must ? t in the space provided. T/F 1. (5 points) Suppose the government wants to place a tax on one of two goods, and suppose that supply is perfectly elastic for both goods. If the government wants to minimize the deadweight loss from a tax of a given size, it should put the tax on whichever good has worse substitutes. False: If the supply curves are identical, the only factor that determines the amount of deadweight loss is the elasticity of demand.

Placing the tax on the good that has the lower elasticity of demand will minimize the deadweight loss of the tax. It is true that, holding all else equal, a good without good substitutes will have more inelastic demand than a good with good substitutes. However, this is not the only factor that determines the elasticity of demand. The goods could also di? er in terms of the income e? ect. If the good with worse substitutes happened to be strongly normal while the good with better substitutes was strongly inferior, then the income e? ects might overwhelm the substitution e? cts, causing the good with better substitutes to be more inelastic. T/F 2. (5 points) In a perfectly competitive market with no taxes, if the price consumers are willing to pay for the marginal unit is the same as the price at which producers are willing to produce the marginal unit, then there will be no way to make anyone in the market better o? without making someone else worse o?. True. The price consumers are willing to pay for the marginal unit is the height of the inverse demand curve, and the price at which producers are willing to produce the marginal unit is the height of the inverse supply curve.

Thus, when these prices are equal, it must be the case that supply is equal to demand, which is to say, the market is in equilibrium. If the quantity ? rms produce, and consumers consume, is more than the equilibrium quantity, then the ? rms’ cost of production will be greater than the consumers’ willingness to pay, and either consumers will have to pay more than the units are worth to them, making them worse o? , or ? rms will have to receive less than the units cost them, making them worse o? , or both.