Answer sheet

I.
1 a 2 d 3 c 4 c 5 c
6 b 7 c 8 c 9 c 10 c
11 a 12 d 13 b 14 d 15 c
16 a 17 a 18 c 19 c 20 b
21 a 22 d 23 c 24 a 25 a

II.
1 T 2 F 3 F 4 F 5 T

III.
1. To maximize profit: py-c
MR=p(1-1/|e|), MC>0, so |e|>1, p=MC/(1-1/|e|) > MC
3/ 2
2. a. MP1 = ∂ y = 1 x1−2 / 3 ~ MRP1 = p × MP1 =
p * − 2 / 3 ~1 / 3
x2 = w1.
 p  ~
∂ x1
x21 / 3 .
3 3
( x1 ) x1* =   x21/ 2
 3w1 
1/ 2
 p 
b. y * = ( x1* )1/ 3 ~
x21/ 3 =   ~
x21/ 2 .
 3w1 
Π = py * − w1 x1* − w2 ~
x2
1/ 2 3/ 2
 p  ~  p  ~
= p
 3w 
 x21 / 2 − w1 
 3w 
 x21 / 2 − w2 ~
x2
 1   1 
1/ 2 1/ 2
 p  ~ p  p 
= p
 3w 
 x21 / 2 − w1 
 3w 
 − w2 ~
x2
 1  3w1  1 
1/ 2
2p  p  ~
= 
 3w 
 x21 / 2 − w2 ~
x2
3  1 

~ p3
∂Π x2 = x2* =
1/ 2
1  4 p3  ~ .
0= =   x2−1 / 2 − w2
∂ x2
~ 2 27 w1

 27 w1w22
3/ 2 1/ 2
 p   p3  p3
x1* =    2
 = .
 3w1   27 w1w2  27 w12 w2
1/ 2 1/ 2
 p   p3  p2
y * =    
2 
= .
 3w1   27 w1w2  9w1w2
w1 MP x w
c. w2
= MP1 = x2 --> x2 = (w1 )x1
2 1 2

1/3 1/3 1/3 w w w

y� = x1 x2 =x1 [(w1)x1 ]1/3--> x1 = (w2 )1/2 y� 3/2, so x2 = (w1)1/2 y� 3/2
2 1 2

c=w1 x1 + w2 x2 = 2(w1 w2 )1/2 y� 3/2

3. a. y1 = (a-c)/2b, y2 = (a-c)/4b
b. y1=y2=(a-c)/3b
c. y1+y2=(a-c)/2b
d. y1+y2=(a-c)/b
e. cartel. profit=py-c
f. no. when a firm increases the output, its profit will rise.

1
 MU x yA MU x 2 yB
=
4. a. MRS A = =
MRS B =
MU y 2 x A MU y xB

b. MRS A = MRS B

yA 2 yB 2(6 − y A )
=
MRS = =
MRS =
9 − xA
A B
2 xA xB

8 xA
yA =
3 + xA

c.
=
x A 3,=
y A 4;=
xB 6,=
yB =
2; p 3 / 2

5. a. 1000*(100/G2) = 10 --> G=100

b. xi + G/100 =1000, U(Xi;G) = Xi +100/G, MRS=price --> G=100

6. a. Externalities: an individual’s behavior will have an influence on others. It might be positive or negative.
b. Solutions: impose Pigou taxes, issue emission permits, establish externality market and so on. Reasonable
solutions to solve Taihu pollution problem: Issue emission permits and establish permission transaction
market.