Microeconomics

II Final Exam June 7th 2018 Permutation 1

Part I (70% of the grade)
Please respond to the following 12 questions. Every wrong answer subtracts 1/3 from a correct answer. You have
two hours to complete the exam.

1. A firm has two types of consumers with the following demand functions D1(p)=10-p and D2(p)=6-p. If the market
price is p=3, which of the below is correct?
a. Total Revenues would decrease if the price increases.
b. Total Revenues are the maximum possible.
c. Total Revenues would increase if the price increases, as long as it does not surpass p=4.
d. None of the above is correct.

2. An individual has preferences represented by the utility function U(x1, x2) = x13/4 x21/4 , is facing prices p1 = p2 = 3
and has an income of 300 euros. Suppose that the price of good 1 decreases to p’1 = 1, and indicate which of
the below answers is correct:
a. In order for the consumer to maintain the same level of utility as before the price change we would need
to decrease his income by 168,39 euros.
b. In order for the consumer to maintain the same level of utility as before the price change we would need
to increase his income by 168,39 euros.
c. In order for the consumer to maintain the same level of utility as before the price change we would need
to decrease his income by 383,15 euros.
d. None of the above is correct.

3. The aggregate demand and supply curves of a market are given by 𝐷 𝑝 = 40 − 2𝑝 and 𝑆(𝑝) = 6𝑝. The
government decides to give a per unit subsidy of 2 euros to consumers. Which of the following anwers is
correct?
a. The after subsidy market price (the one received by suppliers) is 3,5 euros.
b. The after subsidy market price (the one received by suppliers) is 5,5 euros.
c. The after subsidy market price (the one received by suppliers) is 5 euros.
d. The after subsidy market price (the one received by suppliers) is 3 euros.

4. In a monopolistic market, regulated by the government:
a. The consumer surplus is always smaller with regulation than without it.
b. With the optimal subsidy we have more production than if the government imposes to the firm to set a
price equal to their marginal cost..
c. With the optimal subsidy we have more production than if the government imposes to the firm to set a
price equal to their average cost.
d. With the optimal subsidy the same quantity would be produced as without subsidy, but the price faced by
the consumer would be smaller.

5. A monopolist is facing a unique consumer with demand function 𝑄- 𝑃 = 10 − 𝑃. She produces with constant
marginal cost equal to 2 and has no fixed cost. Choose from below the profit maximizing strategy for the
monopolist if she is free to do whatever she wishes.
a. Sell 4 units to the consumer at a price equal to 6 euros.
b. Sell 8 units to the consumer at a price equal to 2 euros.
c. Sell 8 units to the consumer at a price equal to 2 euros and fixed fee equal to 32 euros.
d. None of the above answers is correct.

6. There is a monopoly that applies second degree price discrimination using two part tarriffs; each consumer’s
individual demand is the same, and known to the monopolist. This would have as a result:
a. There would be no deadweight loss but also the consumer surplus would be equal to zero .
b. There would be no deadweight loss but also the firm’s profits would be equal to zero.
c. There would be deadweight loss, but both the consumer and producer surplus would be strictly positive.
d. There would be deadweight loss but the firm’s profits would be maximized.

7. In the market of a homogeneous good, where two firms with equal constant marginal costs simultaneously
compete in prices:
a. The total quantity produced will be smaller than the one resulting from a perfectly competitive market.
b. The total quantity produced will be equal to the one resulting from a perfectly competitive market.
c. The equilibrium price will be higher than marginal cost.
d. The two firms will produce different quantities in equilibirum.

8. In a small village where all the shops are situated on the central street, Calle Mayor, that starts at Calle Mayor
0 and ends at Calle Mayor 100, 4 identical supermarkets want to locate. What is the unique equilibirum
location for the firms if we assume that consumers are uniformly distributed from the beginning to the end of
Calle Mayor and will buy from the supermarket located closest to them, and that prices are given and equal
between firms?
a. All the supermarkets will locate at Calle Mayor 50.
b. The location (x1, x2, x3, x4) = (0,100/3,200/3,100).
c. The location (x1, x2, x3, x4) = (25,25,75,75).
d. There exists no equlibrium locations in this example.

9. There is a market with two fiirms where P = 64 − 2Q represents the inverse demand function, with Q = q3 +
q 5 ; TC q3 = 4 + 40 · q3 represents the total cost function of firm 1 and TC q 5 = 40 · q 5 represents the
total cost function of firm 2. Which of the following is correct:
a. If firms compete a la Cournot, they equilibrium quantities are 𝒒𝟏 = 𝒒𝟐 = 𝟒.
b. If firms compete a la Cournot, they equilibrium quantities are 𝑞3 = 𝑞5 = 6.
c. If firms compete a la Cournot, they equilibrium quantities are q3 = q 5 = 9.
d. If firms compete a la Cournot, they equilibrium quantities are 𝑞3 = 6 y 𝑞5 = 3.

10. In the same market as the one in the previous question, now firm 1 is the Leader of the market, and firm 2 the
Follower. According to the Stackelberg model, choose the correct statement from below:
a. The firms will produce 𝑞3 = 𝑞5 = 6.
b. The firms will produce 𝒒𝟏 = 𝟔 and 𝒒𝟐 = 𝟑.
c. The firms will produce 𝑞3 = 9 and 𝑞5 = 4,5.
d. Firm 1 cannot be the market leader as they have higher fixed costs.

11. In a pure Exchange economcy with two goods: X and Y, and two consumers:1 and 2, the total endowment of
each good is 50 units. The preferences of individual 1 are represented through her utility function 𝑈3 =
𝑥3 𝑦3 5 , and the preferences of individual 2 are represented through his: 𝑈5 = (𝑥5 )5 𝑦5 . The initial
endowments are (2, 50/7) for individual 1 and (48, 300/7) for 2. Thus:
a) The initial endowments are feasible but not Pareto Efficient.
b) The initial endowment is feasible but we do not have enough information to assess whether it is also
Pareto efficient.
 c) The initial endowment is Pareto Efficient but not feasible.
d) The initial endowment is feasible and Pareto Efficient.

12. The First Welfare Theorem implies:
a. Every efficient allocation is an equilibrium without having to redistribute the initial endowments.
b. All equilibirum allocations are Pareto Efficient.
c. An efficient allocation can never be an euilibrium given the initial endowments..
d. Any efficient allocation can be an equilibrium with an appropriate redistribution of the initial endowments.

Part II (30% of the grade)
Please answer the below questions in your own words and using the help of math and graphs whenever needed.

Question 1 [2 points]
A monopolist is operating with constant marginal costs: MC=20 euros, and is facing two markets. The demand
functions for the two markets are: 𝑄-3 𝑝 = 100 − 𝑝 and 𝑄-5 𝑝 = 200 − 4𝑝. What is the market price and
quantity that the monopolist will set if she is not allowed to price discriminate between the two markets? What are
the market prices and quantities if she is allowed to price discriminate across markets?

Question 2 [1 point]

Graphically represent the result obtained in question 11, graphing all the elements of the Edgeworth box, the
Pareto set and the initial endowment. Can it be that the initial endowment is the result of the competitive
equilibrium?