UNIVERSITY COLLEGE LONDON EXAMINATION FOR INTERNAL STUDENTS MODULE CODE ASSESSMENT PATTERN MODULE NAME : DATE TIME TIME ALLOWED : : SESS1003 : SESS1003A Introduction to Microeconomics : 21-May-15 : 14:30 2 Hours 0 Minutes 2014/15-SESS1003A-001-EXAM-131 ©2014 University College London TURN OVERUCL SCHOOL OF SLAVONIC AND EAST EUROPEAN STUDIES. BA EXAMINATION 2015 Course: Introduction to Microeconomics Course Code: SESS1003 Time allowed: 2 hours Instructions: Answer ALL questions in section A. This section is worth 10% of the total mark. Answer TWO of the three questions in section B. This section is worth 30% of the total mark. Answer FOUR of the six questions in section C. This section is worth 40% of the total mark. Each question carries equal marks (10%). Answer ONE question from section D. This question is worth 20% of the total mark, Calculators are permitted as per department regulations. Section A: Why are the following statements false? 1. Price elasticity of demand is given by the change in the number of units of the good demanded divided by the change in the price in pounds. (2 marks) 2. Ifyou are given a free lunch with a very boring economist, the full economic cost of this is zero. (2 marks) 3. A Pareto optimal situation is fair and just. (2 marks) 4, Economists illustrate demand curves with price and quantity on the axes, because the only thing that affects quantity demanded is the price of the good. (2 marks) 5. The production function Q=L+K (quantity of output is equal to number of units of labour plus number of units of capital) exhibits increasing retums to scale. (2 marks) Section B 1. You are given a ticket to see a football match between Brazil and Italy (in London), which has no resale value. On the same day, however, Argentina are playing Portugal (also in London), for which tickets cost £50. You do not have a ticket for this match, but they are still available to purchase. Assume that you would be willing to pay up to £75 to watch Argentina v Portugal, and that there are no associated transaction costs with either decision (for instance, that there are no transport costs). a. Ifyou choose to watch Brazil vs Italy, what is the full economic cost of your decision? Why? Refer to concepts of implicit and explicit ("accounting") costs. (8 marks) b. What is the smallest amount that seeing Brazil vs Italy would have to be worth to you to make watching Brazil vs Italy a better choice? (1 mark) c. Assume that the problem remains as above, but that you are now given a free ticket to watch Argentina v Portugal. What is the smallest amount that seeing Brazil vs Italy would have to be worth to you now to make watching Brazil vs Italy the better choice? Explain your answer. (6 marks) TURN OVER2. The equilibrium price in the perfectly competitive market for good x is £50. In the short-run, each firm makes a profit of £10. In the long-run, more firms with identical cost functions enter the market, each producing identical goods. a. What is the long-run level of profit for the firm? (1 mark) b. Why do more firms enter the market? (2 marks) ¢. Is the long-run equilibrium price for this firm 1) equal to £40, 2) less than £40, 3) greater than £40, or 4) do you not have enough information to say? You should explain your answer using two related diagrams: a) illustrating the new market price, and b) illustrating the firm's long run marginal cost, marginal revenue, average revenue, and average cost curves. (12 marks) 3. Afirm uses labour and capital to produce its output (Q) of cars. The firm can substitute labour for capital in production, but they are not perfect substitutes for each other. The price of a unit of labour is equal to the price of capital. ‘a, Assume that the firm has increasing returns to scale, Draw three isoquants: one showing Q=10, one showing Q=20, and one showing Q=30. Explain your diagram. (4 marks) b. Now sketch a diagram showing the firm's potential optimal choice of labour and capital if it wants to produce an output Q=20. What is the slope of the isoquant at this point, and why? (4 marks) ¢. The firm profit maximises where Q=20. If it chooses a combination of inputs using more labour than capital, can it be technically efficient? Can it be productively efficient? Explain your answer. (7 marks) Section C Answer FOUR out of the six following questions. This section is worth 40% of the total mark, Each question carries equal marks (10%). 1. A consumer's income is £500 per week, of which £200 are spent on rent. Assume that the remaining income is spent only on food and clothes. Each unit of food costs £5 and each item of clothing costs £10. Show graphically the budget constraint faced by thi 7 and indicate its slope. Show a hypothetical point at which the consumer maximises his/her utility in the diagram — what is the marginal rate of substitution (MRS) at that point? 2. Suppose that, when Jane's income per hour increases, she decides to start working less hours to enjoy more leisure time. Explain the substitution effect and the income effect in this situation, and illustrate with a labour supply diagram. 3. What is the impact of an indirect tax on consumers, producers and society as a whole? Mlustrate your answer with a diagram, and carry out a welfare analysis. 4, What is a public good? Explain, with the help of a diagram and examples. 5, Why is a monopoly likely to be both productively and allocatively inefficient? Explain, with the help of a diagram. CONTINUED6. What is monopolistic competition? Explain, with the help of diagrams. Is this type of market productively and/or allocatively efficient? Section D Answer ONE of the following questions. This question is worth 20% of the mark. Question D1: Why and how should governments intervene to protect the environment? Explain, using all the relevant diagrams and concepts covered in this course. oR Question D2: Why do governments impose high taxes on cigarettes, and how effective is this policy? Explain, using all the relevant diagrams and concepts covered in this course. END OF PAPER