1. Neoclassical Economics Review 1

a. A prominent senator has calculated the total social benefit of the current amount of space exploration at $3 billion per year. The total social cost of space exploration is currently only $2 billion. The senator argues that a net gain to society would result by increasing the amount of space exploration until total social costs rise enough to equal total benefits. Is the senator's logic correct? Provide a brief explanation AND graph supporting your response. (3)

2. Neoclassical Economics Review 2 on subsidies

The MPB for natural gas is 4-.125Q where Q is the amount of gas consumed. The MPC for natural gas is 1.

a) Draw this graph, labelling axes, curves and equilibrium points.

b) Calculate the consumer surplus, the producer surplus and total social welfare. (5)

CS = $36

PS  = $0

TSW = $36

c) Assume now that a $0.50 subsidy is paid to the suppliers of natural gas. (6)

i. How much is the total dollar amount of the subsidy and where does the money for this subsidy come from? Show the area representing the deadweight loss on the graph.

Subsidy=$14

ii. Show the area representing the deadweight loss on the graph and calculate the dollar amount of the deadweight loss associated with this subsidy? DWL=$1