UNIVERSITY COLLEGE LONDON

EXAMINATION FOR INTERNAL STUDENTS

MODULE CODE SESS1003

ASSESSMENT SESS1003A
PATTERN

MODULE NAME Introduction to Microeconomics

DATE 28 Apri I 2017

TIME 10:00 am

TIME ALLOWED 2 hours

This paper is suitable for candidates who attended classes for this
module in the following academic year(s):

2015/2016, 2016/2017

2016/17-SESS 1003A-00 1-EXAM-150

© 2016 University College London TURN OVER
 OCL School of Slavonic and East European Studies

BA EXAMINATION 2016-17

Course: Introduction to Microeconomics

Course Code: SESS1003

Time Allowed: 2 hours

Instructions:

Answer ALL questions in section A. This Section is worth 20% of the total mark.

Answer TWO out of the four questions in section B. This Section is worth 40% of

the total mark. Each Question carries equal mark of 20%.

Answer TWO out of the four questions in section C. This Section is worth 40% of
. the total mark. Each Question carries equal marks of 20%.

Section A: Answer the following statements as true, false or uncertain. Please give
explanations for your answer.

1. If the demand curve of a good is a straight line then the price elasticity of

demand is constant throughout the curve. (2 marks)

2. A firm produces 200 units of a good when it employs 7 workers. The marginal

product of the eighth worker is 46 units. If the eighth worker is hired, the firm's

total product will decrease to 154 units e (2 marks)

3. Data in the US have shown that if the price of petrol increases from $3 to $4 per
gallon, the purchase of petrol would decrease by 5%. On this basis, we can claim
that the demand for petrol is inelastic with respect to price,,(2 marks)

4. A firm uses capital and labor to produce pencils. The cost of the machine is
£1000 per day, and that of a worker is £200 per day. At the current level of
production, the marginal product of the machine is an extra 200 pencils per day,
and the marginal product of labour is an additional 50 pencils per day. We do not
have enough information to assess whether the firm is currently minimising its
cost or not. (2 marks).

5. A firm's variable cost is VC=1001 and its fixed cost is FC=600. If the revenue is

1000, the firm should shut down. (2 marks)

6. If a firm has constant marginal costs, it implies that the law of diminishing

returns does not operate. (2 marks)

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7. A monopolist has an upward supply curve because it is the only seller in the
market. (2 marks)

8. Charlie likes chocolate and dislikes broccoli. This implies that Charlie's
indifference curves representing the utility of different bundles of broccoli and
chocolate are upward sloping. (2 marks)

LO.75Ko25
9. The production function q = implies a constant return to scale. (2 marks)

10. Tata wants to build a new plant in India, and it has to decide whether to locate
production in Kerala or Punjab. Many areas are hoping that Tata would decide to
build the plant in their state. To attract Tata, the states consider offering large
tax incentives. Assume that Kerala know if Punjab has a dominant strategy. Also
assume that each state has two options: no incentive or offer an incentive.
Notice that in the payoffs that follow, Tata selects Kerala if both states offer an
incentive. Given the payoff matrix bel~~t'he Nash equilibrium is for both states
to offer no incentive. -../)

Punjab(P)
No Incentive Incentive
K gets 10 K gets a
No Incentive
P gets a P gets 15
Kerala (K)
K gets 5 K gets 5
Incentive
P gets a P gets a

SECTION B

1. Suppose the demand for potatoes is Qd=22-4P and the supply function is Qs=5P­
5. Farmers are complaining that the price is too low and they are lobbying the
government to implement a price support policy.

a) Calculate the equilibrium price and quantity in the absence of the price
support policy. (5 marks)
b) Assume that the government needs to evaluate the implications of setting a
price support of P=4. What are the consequences of this policy on quantity
supplied and demanded? (5 marks)
c) Calculate the change in consumer and producer surplus after the
introduction of the policy. Support your answer with a diagram. (10 marks)

CONTINUED

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2.
a) A UK clothing firm has the following production function q= 1(O.5Lo. 5 .The price
of labor is w=10 and that of capital is r=10. What is the optimal combination
of K and L and what is the cost of producing q=100? (6 marks)
b) The company has a plant in China where wages are 10% lower than in the UK,
but the cost of capital is 10% higher. What is the optimal combination of K
and L and what is the cost of producing q=100 in. China? (6 marks)
c) What is the cost of production in China if the firm uses the same technology
used in the UK? (7 marks)

3. An orange farmer sells its product in a competitive market. Its total cost function
is C = 50 + 5q + q2 and the market price is £35.

a) What is the profit-maximizing output level? What is the total revenue? What
are the profits? (10 points)

b) Assume that fixed costs increase to £250. Should the firm continue to operate
in the short run? (10 points)

4. a) A person flying round-trip from London to Edinburgh is responsible for

approximately 0.7 metric tonnes of carbon dioxide emissions. The UK
Environment Agency has estimated the marginal cost of one tonne of carbon
dioxide emissions to be between £12 to £60 per metric tonne. Based on these
estimates, what can the government do to address the negative externality that
arises from flying? Illustrate your answerwith a graph. (15 marks)

b) Assume that the government implements a tax based on the £60 per metric
tonne estimate, but that the estimate is significantly greater than the true cost.
What are the implications of implementing such a tax? (5 marks)

SECTION C

1. a) Mark consumes wine and other goods. Suppose that after the implementation
of new trade restrictions, the price of wine increases by 40%. What happens to
Mark's utility given that he spends some of his income on wine? Illustrate in a
diagram using relevant budget constraint and indifference curves. (10 Marks)

b) Assume that after the price change Mark consume less wine. Explain such a
change in consumption with reference to the income and substitution effect. (10
Marks)

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2. Data on the US labor market shows that over the last 100 years real wages have
increased, however the number of hours worked has decreased. Explain this
phenomenon with reference to the income and substitution effect. Support your
answer with a diagram.

3. A monopolist drug company faces the following inverse demand function: p=100­
Q. The firm cost function is C=10+5Q.

a) What are the profit maximising price and quantity? How much profit does the
firm make?

b) Assume that the government imposes a price ceiling, which is above the
monopolist price but below the level that would prevail in a perfectly
competitive market. With the use of a diagram explain the impact of this policy
on output and welfare .

. 4. Lucy and Hanna are the only two babysitters in town. The following table shows
the market demand curve for babysitting services. Lucy and Hanna can also work
as many hours as they like at the local restaurant making £5 per hour.

Price (£ per hour) Quantity (Hours)

9.00 0
8.00 10
7.00 18
6.00 24
5.00 30
4.00 34

a) If Lucy and Hanna offer identical services and parents and children do not
care who babysits their kids, what price would you predict for babysitting
services? Why?
b) Suppose some families prefer Lucy and some families prefer Hanna. Would
you expect to see the same price for babysitting as you answered for part A?
Explain.
c) Assume that Lucy and Hanna decide to form a cartel. What will be the price
of babysitting per hour (they can only pick a price in increments of £1)?

END OF PAPER

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