EC3II@I-9) Aug. d] Exam QP P. | HRGMAE EC311 ‘THE OPEN UNIVERSITY OF HONG KONG August 2007 Examination INTERMEDIATE MICROECONOMICS (Apr 2007) 06 August 2007 Time Allowed: 2 hours 18:30-20:30 SUTRE Zt [Materia/Stationery [Material to be provided to lreturned to the lcandidates linvigitator at the end| \(standard items) _[of the examination |Admissible/Inadmissible materials in this examination: 1. Calculators are allowed. (Please refer tothe OUHK |. 1 Examination 1. Examination Approved List.) Paper Paper |2. Dictionaries are NOT allowed. }2- 1 Answer Book |2. Answer Book | Violation of the above may lead to disqualification from |3._ 2 Graph Papers ithe examination, Instructions: 1, Answer this examination paper in English. Read the rubric(s) in the examination paper carefully and write your answers in the answer book, ‘graph papers as specified. Answers recorded elsewhere will not be marked, Begin each question on a new page and write the question number at the top of each page you have worked on. 3. Write any rough work in the answer book or this examination paper and cross it through afterwards. Rough work will not be marked. 4, Write clearly. It may not be possible to award marks where the writing is very difficult to read. 5. After the invigilator has announced that the examination has started, write your examination number, student number and course code on the cover of the answer book or other sheet as distributed by the invigilator. Failure to do so will mean that your work cannot be identified, 6. At the end of the examination, hand over the answer book and examination paper to the invigilator. 7. Do NOT open this examination paper until you are told to do so, otherwise you may be disqualified. ‘The Open University of Hong Kongee EC BUC1-9D Avs, 51 Exam QP P2e You should answer any FOUR of the five questions in this examination. Each question carries 25 marks. Total marks are 100. Question 1 a. Suppose Nancy loves buying bags and watching movie at cinema. Her utility function for the number of bags, B, and the number of movie, M, is U(B,M)=2BM, so MUs=2M and MUy=2B. It costs Nancy $50 to buy a bag or watch a movie. She has $500 to spend on these two goods. i. Derive Nancy's budget constraint. G marks) ii, What is the marginal rate of substitution for Nancy? (4 marks) iii, What is the optimum bundle for Nancy? (5 marks) iv. If Nancy joins the Super Club, she can purchase a bag or watch a movie at $25 with the membership fee at $300. Examine whether she should join the Club. (5 marks) b. Consider a lottery with three possible outcomes: $125 will be received with probability 0.2, $100 with probability 0.3, and $50 with probability 0.5 i, What is the expected value of the lottery? (5 marks) ii, What would a risk-neutral person pay to play the lottery? G marks) Question 2 a. Suppose Q units of output can be produced by capital (K) and labour (L) according to the production function Q = 10K"*L"*, The marginal product for labour and capital are SL°*K* and SL”*K** respectively. i. Does this production function exhibit the property of increasing return to scale, constant return to scale, or decreasing return to scale? Explain (4 marks) | ii, What is the marginal rate of technical substitution of the above production function? | (4 marks) | iii, _If the price of labour is $20 per unit and the price of capital is $80 per unit, what is the quantity of labour and capital should be used to produce 100 units of output at minimum | cost? (6 marks) iv. Suppose a Hong Kong based company operating in different countries with different costs for factors of production. To minimize the cost of production with different costs for factors of production in different areas, what should this company do? (6 marks) b. What are the differences between ‘Diminishing returns to a single factor of production’ and ‘Constant returns to scale’. Explain. (6 marks) EC311 (2007-0) Page 2 of 4ECZNC°) Auge) Exam @P. P3 Question 3 a. Suppose the demand curve for a good is Q= 9 -P and the supply curve is Q=2P in a perfectly competitive market, i. What are the equilibrium price and quantity? (4 marks) ‘Suppose a per unit tax oft = 1 is imposed (on the supply side). ii, What are new equilibrium price and quantity? (4 marks) ili, What are the loss in consumer surplus and producer surplus respectively? (6 marks) iv. What is the deadweight loss? (4 marks) b. What is economic efficiency? Is it the only goal for policymakers? Explain. (7 marks) Question 4 Suppose that two identical firms produce high definition television and that they are the only firms in the market. Their costs are given by C, = 60Q, and C, = 60Q,, where Q, is the output of Firm 1 and Q, the output of Firm 2. Price is determined by the following demand curve: P=300-Q where Q= Q, + Q, a. Find the Cournot-Nash equilibrium. (8 marks) b. Suppose Firm | is the only firm in the industry. What are optimum quantity and price charged by the firm? (Note: The marginal revenue curve is MR=300-2Q) (8 marks) ©. Suppose these two firms form a cartel to maximize joint profits. How would the market price and output differ from that found in part (b) above? (4:marks) 4d, What happens when the number of firms in the industry increases? (5 marks) EC311 (2007-0) Page 3 of 4EC BUEI-9) Aug,s) Exam QP. PL @ Question 5 cend >) a. Two firms are in the chocolate market. Each can choose to go for the high end of the market (high quality) or the low end (low quality), Resulting profits are given by the following payoff matrix: Firm 2 Low High Low [ -20,-30 | 900, 600 Firm! High | 100, 800 30, 50 i. What outcomes, if any, are Nash equilibria? Explain. (6 marks) ji, What is the cooperative outcome? Explain (6 marks) iii, Which firm benefits most from the cooperative outcome? How much would that firm need to offer the other to persuade it to collude? (6 marks) b. Many consumers view a well-known brand name as a signal of quality and will pay more for a brand-name product. Can a brand name provide a useful signal of quality? Explain. (7 marks) [END OF EXAMINATION PAPER] C311 (2007-0) Page 4 of 4