Consider (again!) a 2 period model (assumptions: P=8- 0.4Q, MEC=2, r=10%, reserves = 20 units, similar to the example discussed in the lectures) where the government sets a price ceiling of Pc=4. We found that the efficient price in period 2 is 4.095. This means that the price control will be binding/constraining in the second time period, that is you know that P2 * =4. a. Derive the quantity allocation across time periods (Q1

*, Q2*) given the price control

b. Derive the resource price in period 1 that yields this allocation (P1*)

c. What is the Marginal User Cost in both time periods (MUC1*, MUC2*)

d. Compute the present total surplus with price control and compare to the surplus

without it

e. Explain the intuition behind this result.

1   all nations face the problem of scarcity because there are limited resources and unlimited wants. nations do not have enough factors of production to produce everything that their population wants. entrepreneurial resources initiate businesses to make new goods and services; labor resources produce goods and services.

2 there are four factors of production: natural resources, labor resources, capital resources, and entrepreneurial resources. natural resources are raw materials from nature that are used to produce goods. trees, water, and grains are natural resources. some natural resources, such as wheat and cattle, are renewable

3 wants

things that you do not need to have in order to survive, but would like to have

needs

things that you must have in order to survive

goods

physical products

services

tasks that a business perform for customers

resources

items that people can use to make or obtain what they need or want

determine

to settle or decide by choice of alternatives or possiblities

4 i really dont know

where is the graph?

the third answer is correct.

answer; charters;