Exam #1, Prof. Hanson, Spring 2001. 20 points total.

1. (3pt) Describe the effect of these changes on the price and quantity of cars:

a. Gas prices go up.

b. China learns to make good cars for cheap.

c. More people move back to live in the inner cities.

2. (2pt) Five students share a house, and might buy cable TV, at a cost of $40 per month. Two of them clearly like cable TV, and would each benefit from it by $20 a month. Among the other three, two of them mildly like cable TV, and would each benefit by $5 a month, while the third one dislikes cable TV, and would suffer a loss of $5 a month. The trouble is, there is no way to tell by looking which of these three persons is the one who dislikes cable TV, since he will still watch TV along with the others just to be social.

a. If the proposal is put up to a house vote, will the outcome be efficient?

b. Is there a way to use transfers so that everyone gains from cable TV?

3. The demand for transplanted kidneys is given by P = 9-Q while the supply of kidneys for transplant is given by P = Q-1.

a. (4pt) If people could buy and sell kidneys freely, what would be the price, quantity, consumer surplus, and producer surplus?

b. (4pt) The law now forbids people from selling, rather than giving away, their kidneys. In this situation, what is the price, quantity, consumer surplus, and producer surplus?

c. (2pt) Who gains and who loses from this law, relative to a free market?

4. This table describes the supply and demand for cars in the U.S. and Japan.

	Japan		U.S.
Price	Q Demand	Q Supply	Q Demand	Q Supply
1	8	6	10	4
2	7	7	9	5
3	6	8	8	6
4	5	9	7	7
5	4	10	6	8
6	3	11	5	9
7	2	12	4	10

a. (2pt) What is the price and quantity of cars bought and sold in each nation, if people in each nation can only buy cars made in that nation?

b. (3pt) If people are allowed to buy cars made anywhere, what is the total price and quantity of cars sold, and how many cars are transported from one nation to the other?