EC201 Microeconomic Principles 1
Section A 微观经济学原理考试助考
(Answer all SIX questions. Each question carries 25 marks.)
Question 1
(a) Define the total cost function. What happens to the total cost function if the prices of all inputs decrease by 20%? Use a diagram to explain your answer. [10 marks]
(b) Define an entry-and-exit equilibrium for a perfectly competitive industry. Suppose that an industry is perfectly competitive and that all firms in the industry, including potential entrants, have the same total cost function. What profits do the firms make if the industry is in entry-and-exit equilibrium? [8 marks]
(c) Suppose that the industry starts in an entry-and-exit equilibrium, and then input prices decrease by 20%. The industry adjusts until it is again in entry-and-exit equilibrium. What happens to the industry price? What happens to the output of an individual firm? Does the number of firms in the industry change? [7 marks]
Question 2 微观经济学原理考试助考
This question asks you to work with a greatly simplified model of the state of the UK debate on leaving the European Union in February 2019.
- There are two groups of politicians, leavers and remainers.
- Each group has to make a proposal, either leave with a deal, or delay leaving.
- If they make the same proposal this determines the outcome.
- If they make different proposals the UK leaves the European Union with no deal.
- For leavers leaving with no deal is the best result. For remainers leaving with no deal is the worst result.
The payoffs are described by the following matrix which you should analyse as a game. In each cell the number on the left is the payoff of the leavers and the number on the right is the payoff of the remainers.
| Remainer | |||
| Leave with deal | Delay | ||
| Leaver | Leave with deal | 2, 1 | 3, -1 |
| Delay | 3, -1 | 1, 2 |
(a) Explain the distinction between an equilibrium in pure strategies and an equilibrium in mixed strategies. Does the game have an equilibrium in pure strategies? [10 marks]
(b) Does the game have an equilibrium in mixed strategies? [10 marks]
(c) Recall that the outcome is leave with no deal if the remainers and leavers make different proposals. What is the probability of leaving with no deal? [5 marks]
Question 3 微观经济学原理考试助考
There are 100 people in an economy and their incomes are as follows: 25 have income of £2, 50 have income of £4 and 25 have income of £8.
(a) What is the average income in the economy? [3 marks]
(b) Draw the Lorenz curve for this economy. [10 marks]
(c) Suppose that the incomes of some people fall and some increase so that the income distribution is: 75 have income of £2 and 25 have income of £8. Draw the new Lorenz curve. Can you say whether inequality has increased or decreased from part b) by looking at the Lorenz curve? [12 marks]
Question 4 微观经济学原理考试助考
Suppose that the Bean Counter cafe is deciding what kind of wage structure to use for employing its baristas who work in their coffee shop making coffee and serving customers. The Bean Counter owners aims to sell as many cups of coffee as possible each day, but if the baristas are slow some customers may leave before getting their cup of coffee because they are put off by long queues.
(a) Under what assumptions does this kind of employment relationship constitute a moral hazard problem? [10 marks]
(b) What kind of incentive compatible contract might the Bean Counter offer to baristas to limit moral hazard? [10 marks]
(c) Are there alternatives to using monetary incentives which might also improve the rate of customer service? [5 marks]
Question 5 微观经济学原理考试助考
Consider a two-good economy with 20 consumers all of whom have an income of £10. Both goods have a price of £1. Suppose that 10 consumers have experience utility of x1 + 2x2 and decision utility of 2x1 + x2. The the other 10 consumers have experience utility of 2x1 + x2 and decision utility of x1 + 2x2.
(a) Explain what is meant by “decision utility” and “experience utility”. [5 marks]
(b) What consumption decisions do we expect each group of consumers to make according to their decision utility? [7 marks]
(c) Show that these decisions are sub-optimal according to experience utility. [7 marks]
(d) Could a tax on consumption of one of the goods correct the sub-optimal outcome? Explain. [6 marks]
Question 6
(a) Draw an Edgeworth box for this economy. [5 marks]
(b) Draw the indifference curve that each individual is on if they consume their endowment. [8 marks]
(c) Draw the allocation with x1 = x2 = 2. [2 marks]
(d) Is the allocation with x1 = x2 = 2 Pareto optimal? Explain. [5 marks]
(e) Is the allocation with x1 = x2 = 2 a competitive equilibrium? Explain. [5 marks]
Section B 微观经济学原理考试助考
(Answer all THREE questions. Each question carries 50 marks.)
Question 7
(a) Define economies of scale. Under what conditions do firms have economies of scale? If a firm has a total cost function c (q) = 20 + 6q does it have economies of scale? [6 marks]
(b) Is perfect competition possible if all the firms in an industry have economies of scale? [12 marks]
(c) What is a cartel? There are two firms in an industry. The inverse demand curve is given by p = 24 − 3Q where p is price and Q is industry output. Firm 1 produces output q1 with a total cost of c (q1) = 20 + 6q1. Firm 2 produces output q2 with a total cost of c (q2) = 20 + 6q2. Can a two firm cartel operate profitably in the industry? [12 marks]
(d) What is a Cournot-Nash equilibrium? Can the two firms operate profitably in a Cournot-Nash equilibrium? [12 marks]
(e) How many firms will there be in the industry? [8 marks]
Question 8
(a) Derive the demand functions for goods 1 and 2. What is the equilibrium price ratio? [10 marks]
(b) From now on suppose that a new technology is discovered which dramatically increases the productivity of good 2 producers who can now produce 10 units of good 2 for the same fixed labour supply. Give a real world example of a dramatic technological improvement like this. [2 marks]
(c) How does the price ratio change after the introduction of the technology described in (b)? Explain. [8 marks]
(d) Compute the utilities of the consumers before and after the introduction of the technology discussed in (c) to show how much each group benefits from the new technology. Explain your finding intuitively. [8 marks]
(e) Contrast your answer in (d) with the benefits of this new technology discussed in (b) if prices did not change in response and use this calculation to explain why it is important to look at the introduction of new technologies in general equilibrium? [8 marks]
(f) Suppose that the new technology requires an investment of 54 which would need to be funded through a lump-sum tax on the good 1 producers (i.e. each of them would pay 0.6). Does a Utilitarian welfare criterion support the introduction of the new technology discussed in (c)? [8 marks]
(g) Use the framework developed here to discuss the consequences of different ways of financing technological change. [6 marks]
Question 9 微观经济学原理考试助考
A community is deciding whether to fund a statue of Margaret Thatcher (the first female UK Prime Minister). There are three groups of individuals: Rees-Moggers (R) who value the statue at £15, Corbynistas (C) who value it at -£5 and Blairites (B) who value it at £1. There are 100 of each. The statue costs £600 to build.
(a) In what sense is building the statue a public good? [6 marks]
(b) Suppose that a group can choose to fund the statue with the cost distributed equally among their group members. Which groups would be willing to fund the statue? [6 marks]
(c) From now suppose that the government has the power to tax and divides the cost equally among all citizens, i.e. each citizen has to pay £2 towards the cost. Is building the statue a Pareto improvement? [5 marks]
(d) Will a Utilitarian government choose to build the statue? [5 marks]
(e) Suppose that there is a majority vote over whether to build the statue where everyone pays £2 towards the cost. Will the statue be built? [5 marks]
(f) Why do the voting outcome in (e) and Utilitarian welfare optimum in (d) diverge? [8 marks]
(g) Suppose that the statue is not built by government. Would you expect the statue to be built without government intervention given the payoffs that you found in answers to part (b) of the question? [8 marks]
(h) Suppose that the statue is not built by government. Use this example to comment on why private provision of a public good (such as a statue) can be welfare superior to public provision/funding of a statue. [7 marks]
