1) The answer to the first question is A. This is the solution guide for Form A. The following graph will be referenced for the next set of questions: 2) This question asks you to identify a consumption bundle that is on the same indifference curve as (10 tacos, 10 nachos). 10 tacos and 10 nachos is a point on indifference curve IC2 in the above chart (the red dot). The only consumption bundle among the options that is on the same indifference curve is (4 tacos, 24 nachos), the yellow dot, which is answer E. The answer is E. 3) If Wildcat has an income of $48, and PNacho=$3, and Ptacos=$6, then we have enough information to draw the budget constraint. If Wildcat spends all his income on Nachos, he can afford 16 (Income/ PNacho=48/3=16). Similarly if Wildcat spends all his income on Tacos, he can afford 8. By connecting those two points, we get the budget constraint, BC1. The opportunity cost of one more taco in terms of nachos is equal to the slope of the budget constraint, which is 2. The answer is C. 4) Using the budget constraint from the previous question (BC1), we can see that at this income and prices of tacos and nachos, the optimal consumption bundle for Wildcat is (4 tacos, 8 nachos). This is the green dot in the above chart. At this point, Wildcat is consuming on his budget constraint and at the point where the opportunity cost equals the marginal rate of substitution. The answer is A. 5) If Wildcat’s income rises to $96, we need to construct the new budget constraint. Here income has doubled, but prices have stayed the same. Now if Wildcat spends all his income on Nachos, he can afford 32 (Income/ PNacho=96/3=32). Similarly if Wildcat spends all his income on Tacos, he can afford 16. By connecting those two points, we get the new budget constraint, BC2. We can see that the new optimal consumption bundle for Wildcat is (8 tacos, 16 nachos). This is the purple dot in the above chart. Wildcat’s consumption of nachos has increased from 8 to 16, therefore the change in Wildcat’s demand for nachos from the change in income equals 8. The answer is E. IC4 IC3 IC2 IC1 BC1 BC26) Wildcat’s budget constraint with an income of $48 and the initial prices PNacho=$3 and that Ptacos=$6, is shown as the blue line above. Equilibrium is at the blue point with 4 tacos and 8 nachos. When the price of tacos decreases from $6 to $2 Wildcat’s budget constraint shifts up to the right from blue line to red line. In order to calculate the substitution effect of the price change, draw a parallel line to the new constraint in red. Notice that the intersection of the parallel line and utility curve is at the green point with 7 tacos and 5 nachos. See that the substitution effect of the price change increases the demand for tacos by 7-4=3 units. Thus the answer is C. 7) In the graph above, income effect is the difference between red point and green point. Since the question is asking for the income effect for nachos, it is 8-5=3. So the answer is C. 8) Substitution effect for nachos is the difference between green point and blue point, which is 5-8=-3 and income effect is the difference between red point and green point, which is 8-5=3. So they are in opposite direction. Thus the answer is B.9) Since PMC=SMC, there is no external cost, thus no negative externalities. SMB curve is above PMB curve, so there is a per unit external benefit equals the vertical distance between the two curves. The answer is C. 10) Free market quantity is at R, where PMB crosses PMC. Social efficient quantity is S, where SMB crosses SMC. The policy that would increase quantity from R to S would be a subsidy of IK. The answer is A. 11) Under free market, CS is BDH, while under subsidy of IK, CS is BUK. The change in CS is thus +DHKU. Similarly, under free market, PS is DHV, while under subsidy, PS is CIV. The change in PS is thus +CIHD. Under free market, external benefit is AFHB (which is a per unit external benefit of AB times quantity R). Under subsidy, external benefit is AIKB (which is a per unit external benefit of AB times quantity S). The change in external benefit is thus +FIKH. Here government pays a per unit subsidy of IK for quantity S, thus government pays CIKU. The change in government surplus is –CIKU. Add them up, change in total surplus = +DHKU+CIHD+FIKH-CIKU = FHI. The answer is D. 12) Let’s consider each statement individually: (i) TRUE. This is to ensure that all firms have the same cost curves. (I.e., a firm is more costly when it has worse technology.) This is necessary because all firms will then have the same profit-maximizing price (the minimum ATC), which gives the price of the LR supply curve. (ii) TRUE. There cannot be barriers to entry because in the LR, the industry’s supply adjusts to changing demand by changing the number of firms, not changing the amount of production within each firm. (iii) FALSE. The ATC does not need to be constant over the entire range of Q. An easy counterexample of this will be the U-shaped ATC curves that we use to represent average total cost. The U-shape curves U Vhave a portion that is increasing returns to scale, a point that is constant return to scale, and a portion that is decreasing returns to scale. Therefore, it is not necessary that ATC be constant over the entire range of Q. (iv) TRUE. This is similar to (i). This ensures that cost curves of firms do not change as the number of firms in the industry increases. (v) FALSE. The shape of the demand curve has no effect on the shape of the supply curve. Thus the answer is C. 13) To find fixed cost, we first choose a quantity where we can read the ATC and AVC. Remember that because Total Cost = Fixed Cost + Variable Cost, we also have Average Total Cost = Average Fixed Cost + Average Variable Cost. Since our goal is to find fixed cost, as long as we can get average fixed cost, we can use the fact that AFC=FC/Q. We can find average fixed cost by picking a quantity and finding the ATC and AVC at that quantity. As an example, let’s pick Q=4. At Q=4, AVC=4 and ATC=8. This means that AFC=ATC-AVC=8-4=4. Knowing that AFC=4, we can plug that back into our formula: AFC=FC/Q. We get: 4=FC/4, or 4x4=FC=16. Therefore, fixed cost is equal to 16, and the answer is D. 14) We can find the firm’s profit by looking at the graph for the individual firm. Given that the price is $16, we use the fact that P=MR for a competitive firm to plot the marginal revenue onto the graph.