Exam Instructions:

1. Answers in words should be typewritten or legibly handwritten.

2. Answers in graphs, figures, and numbers may be written through any medium or program as long as it
is readable. You may draw them in PowerPoint, Word, or any software, and then paste them in your
answer sheet. You may even draw them on a paper, scan or take a photo, and submit them along with
your answer sheet.
3. Upload your answers in Canvas as one file (preferably converted to PDF). If you are having trouble
doing so, e-mail them to me at tcanare@ateneo.edu, with the subject line “EC150 Final Exam”.
4. The time limit is 1.5 hours. This incorporates allowance for scanning, converting to PDF, and possible
connectivity issues.
5. Send me a message me in Canvas for any concern.

1. (10 points). There is one public good – an open highway, measured in number of kilometers – and
there are two persons, A and B. To finance the provision of the highway, Lindahl Pricing will be
used. The table below shows the number of kilometers demanded by each person for each
corresponding share in the cost of building the highway.

A.) What is the equilibrium number of kilometers of the highway to be built?

• The equilibrium number of quantity demanded is 4 kilometers.
B.) At this equilibrium, what is the share of each person in the cost of building the highway?
• At 4 kilometers, both Person 1 and Person 2, each has a share of a 60% in the cost of
building the highway.
C.) If each kilometer of highway costs PhP 100,000 to build, how much should person 1 and person
2 contribute under Lindahl Pricing?
• Person 1 shares Php 400,000
• Person 2 shares Php 400,000

Quantity Demanded Share of Person Share of Person

(in kilometers) 1 to Cost 2 to Cost
1 90% 95%
2 80% 85%
3 70% 75%
4 60% 60%
5 55% 45%
6 50% 40%
7 45% 35%
8 40% 30%
9 35% 25%
10 30% 25%

2. (10 points). An election will be held to determine the number of police cars that the city will
purchase. The five voters have the following preferences over the number of police cars:

Order of Preference
 Options
Voter A Voter B Voter C Voter D Voter E
(Number of Police Cars)
1 1st 2nd 3rd 4th 5th
2 2nd 1st 2nd 3rd 4th
4 3rd 3rd 1st 2nd 3rd
10 4th 4th 4th 1st 2nd
20 5th 5th 5th 5th 1st

Answers:

See Graph 1.
A.) Is there a median voter? If yes, who is it and why?
• Yes, there is a median voter. Voter C is the median voter because his most favored
preference (4 cars) lie in the middle of the set of all voters’ preference.
B.) Show that the preference of the median voter will win a in a majority voting.
• 4 cars vs 1 car
o 4 cars preferred by Voter C, D, E
o 1 car preferred by Voter A, B
• 4 cars vs 2 car
o 4 cars preferred by Voter C, D, E
o 2 cars preferred by Voter A, B
• 4 cars vs 10 car
o 4 cars preferred by Voter A, B, C
o 10 cars preferred by Voter D, E
• 4 cars vs 20 car
o 4 cars preferred by Voter A, B, C, D
o 20 car preferred by Voter E
Graph 1.
3. (20 points). There are two goods, coffee and tea, and the budget line of a representative consumer
over the two goods is drawn below as line XY. At this status quo, the consumer maximizes his/her
utility at point A, and utility level at this point is U1. The government then levies a commodity tax on
coffee, and the budget line of the consumer pivoted inwards to XZ. The new utility maximizing
point is B, and the after-tax utility level is U2.

Answers
See Graph 3
a.) What is the government’s revenue from this commodity tax?
• The government’s tax revenue from the commodity tax is the distance from Point G
to Point B.
b.) Suppose that instead of a commodity tax, the government just decided to levy a lump-sum
tax on the consumer’s fixed income. What level of lump-sum tax should the government impose
so that the consumer will be in the same utility level as he/she is with the commodity tax?
• The lump sum tax that should be imposed is the line HI at utility maximizing point C.
This is so that U3 which is in the same utility level when the commodity tax is
imposed lies along the lump sum tax curve HI.
b.) What is the government’s revenue from this lump-sum tax?
• The revenue of the from the lump sum tax is the distance from XH or GN.
c.) What is the excess burden of the commodity tax?
• The excess burden of the commodity tax is the distance from line BN.

Graph 3.
Tea
X

H
A

B U1

N
U2
U3
C H
H
Z Y
Coffee
I
4. (10 points). Consider the figure below. There are two demand curves – D1 is the demand curve of
person 1 and D2 is the demand curve of person 2. The supply curve is S. The government levied a
per unit tax of amount t on consumers.

Answers:
See Graph 4 and 5.
a.) Graphically show which demand curve will generate a larger price increase for the
consumer. Make sure to explain in words your illustrations.
• D2 curve will generate larger price for the consumer. As can be seen from Graph 5,
the price that the consumer has to pay is larger than D1. This can be observed by
looking at the gap between Pg and P1.
b.) Intuitively explain why consumers borne a relatively larger incidence of the tax if the demand
curve is relatively inelastic; and a relatively smaller incidence of the tax if the demand curve is
relatively elastic.
• It is because the tax incidence depends on the relative price of elasticity of demand.
The more inelastic the demand curve is, the larger the incidence of tax the consumer
bears. This is what we can see from Graph 5. The more vertical D2 curve is, the more
the consumer pays for the tax revenues. Tax revenue is larger the more inelastic the
demand and supply are.
 Graph 4.

Graph 5.