Econ 101, Final, Fall 2007.Prof. Guse, W & L UniversityLONGER PROBLEMS. Answer 3 out of 4. Skip exactly one of your choice.1. A Regulation Problem. ( 20 Points )The diagram below depicts the cost structure over two years (MC and AC) for a monopolistand the market demand it faces. Note well, that on the one hand, demand does not changefrom year 1 to year 2, but that the firm’s cost structure does change.(a) (5 Points) What is the economic term for a market like this? Explain. What sort ofgood or service might be depicted here?(b) (5 Points) Suppose the pricing power of this firm is regulated by a government authoritywho sets a long term price ceiling ofˆP .• I dentify an area on each graph representing the firm’s profit for that year.• I dentify the quantity of this good supplied to consumers in each diagram for thatyear.(c) (10 Points) In the second year, critics charge that the regulatory authority is letting thefirm earn excessive profits and that the price-ceiling should be lowered. Address thiscriticism.ˆPDemandMCMCACACQuantity (units /yr)$/unitDemandQuantity (units /yr)$/unitMCMCACACYEAR 1YEAR 2$15000 5000$1Figure 1.1Extra Space For Your Answer.22. Potato and Nuts. (20 Points )Paul has income of $2000 per month. Walnuts are $10 per lb and cable TV is $10 per monthper channel. (There are at least 200 channels available). At these prices Paul would choose50 channels and spend the remainder of his income on walnuts.(a) (5 Points) draw Paul’s budget line, label it B(a)and identify his chosen consumptionbundle, C(a).(b) (5 Points) The price of walnuts falls to $5 per pound. Redraw Paul’s budget li ne in thesame diagram, labeling it B(b)and identify what his new choice, C(c)might be. (Sketchin some indifference curves, if you like.)(c) (5 Points) Sketch Paul’s own-price demand curve for walnuts for the given income leveland price of cable. Be sure that your demand curve accurately depicts Paul’s demandat $10/lb and $5/lb.(d) (5 Points) When the price of walnuts is $5/lb, and just after Paul signed his cablecontract for the month and purchased his walnuts for the month, Sara from the cablecompany approaches Paul with a deal. She’ll give Paul 10 more channels if he’ll send her20 p ounds of walnuts. Does Paul take the deal? Explain using the notion of marginalrate of substitution.33. Rent Control. (20 Points )Matt ( our intrepid dishwasher from the midterm ) had been living with his parents, becauserent in his city’s competitive market for studio apartments was $400 per month - more thanMatt was willing to pay for independence. Recently, however, the city where he lives passeda simple rent-control law that set an unsupported ceiling on studio apartment rent of $300per month. This is less than Matt is willing to pay. It was rather difficult finding a place, buthe now enjoys his independence at the controlled price of $300 per month. You may assumethat nobody signs a lease who is not willing and able to pay the legal price. Also assume thatfor landlords, all tenants are equally desirable.(a) (12 Points) Using a diagram, if you like, describe the effect of the rent-control law onthe city’s studio apartment market. What happens to the overall number of apartmentsfor rent? How does the law affect landlords? Does every landlord experience the samechange in welfare? How does it affect tenants? Does every tenant experience the samechange in welfare?(b) (8 Points) What does Matt’s experience tell you about the efficiency of rent-controlledunit allocation? (i.e. rationing)44. A Gas Tax. (20 Points )The production and consumption of gasoline has many negative side effects whose costs arepaid neither by producers or consumers of gasoline. Assume that every gallon has a marginalexternal cost of $2 and that it does not matter how the gasoline is produced or consumed.(a) (5 Points) Draw a diagram showing an efficient gasoline tax.(b) (5 Points) Label an area in your diagram indicating the loss in consumer surplus resultingfrom the tax.(c) (5 Points) Label the net social welfare change. Is it a net gain or loss?(d) (5 Points) Explain the importance of the assumption that i t does not matter how thegasoline is produced or consumed.5Extra Space For Your