ECON1210 Intorductory Microeconomics

University of Hong Kong

Final Examination
Date: December 15, 2020, 14:30-16:30 (+ 15 minutes of grace period)

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1. My university ID number is [ Answer01 = 1234567890 ].

2. Michelle is thinking about going to the museum with her friend. She is willing to pay $X to visit the
museum. A ticket to the museum costs $271 and she will have to cancel her part-time job that pays
$138. Normally, she would be unwilling to do the part-time job for less than $17. (Michelle views
the unpleasantness of the part-time job as an offset against her salary.) Michelle will decide to go
to the museum if and only if X is [ Answer02A = B ] (A. smaller / B. larger) than or equal to [
Answer02B = 392 ].

3. Camila would like to attend a three-hour cooking lesson which she has to pay a tuition fee of $155.
Her benefit from the cooking lesson is $890. If she does not go to the lesson, she can teach three hours
swimming class with an hourly wage of W dollars per hour. Or watch a TV program, for three hours
with a total of $235 of enjoyment. Assume there are no extra costs for the above events. Camila
should attend the cooking lesson if W is [ Answer03A = A ] (A. smaller / B. larger) than or equal
to [ Answer03B = 245.00 ].

4. After finishing all her homework, Sarah has 60 minutes of free time before dinner. She can use this
amount of time on the two activities: playing video games and reading comics. Her marginal benefit
from these two activites are

Video games: M B(v) = 1150 − 5v

Comics: M B(c) = 440 − 2c

where v and c are amount of time (in minutes) spent on playing video games and reading comics
respectively. Assuming perfect divisibility of time, Sarah would allocate [ Answer04 = 60.00 ]
minutes on playing video games.

5. In an hour, Jo can produce either 2 units of Pancake or 22 units of Cupcake, and Clara can produce
either 5 units of Pancake or 175 units of Cupcake. Suppose Jo has a total of 3 hours for work and
Clara has 5 hours. Suppose Jo and Clara will make consumption and production decisions together.
If they are going to consume 29 units of Pancake in total, they will produce [ Answer05 = 70.00 ]
units of Cupcake.

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6. Amy, Ben, Carol and David can produce bells and whistles. The table below shows their time required
to produce a bell and their time required to produce a whistle (in minutes).

Minutes per bell Minutes per whistles

Amy 16 6.4
Ben 10 5.88
Carol 14 7.37
David 2 1.54

Assume they work eight hours per day. If we let two persons with the comparative advantage of
producing bells to specialize in the production of bells, and the rest to produce whistles, we will have
a total of [ Answer06A = 288.00 ] bells in a day and [ Answer06B = 140.13 ] whistles in a day.

Please refer to the background information below to answer the following two questions.
The government hires eight workers to clean up trash in the three major hiking trails: “Trail A”,
“Trail B” and “Trail C”. The major decision is the allocation of the workers among the three trails, so
as to maximize the amount of trash collected. The following table shows the amount (bags) of trash
that will be collected in these hiking trails as a function of the number of workers deployed in the
corresponding trails. For instance, when 2 workers are sent to Trail C, a total of 438 bags of trash
will be collected there.

Number of Workers Trail A Trail B Trail C

1 237 244 239
2 433 450 438
3 582 612 622
4 686 729 769
5 753 841 877
6 790 909 966
7 822 928 1011
8 828 931 1016

7. To maximize the amount of trash collected , the government should allocate [ Answer07A = 2 ]
workers to Trail A, [ Answer07B = 3 ] workers to Trail B, and [ Answer07C = 3 ] workers to
Trail C.
8. Now suppose government hires N workers to clean up the trails. For any N workers, the government
always allocates them among the three trails to maximize the amount of trash collected. According
to the government’s allocation rule, in order to have at least three workers allocated to Trail B, N
must be at least equal to [ Answer08 = 8 ].

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 9. The following graph shows Neverland’s production possibilities, where the coordinates read A (0,
158), B (80, 70), and C (97, 0). Suppose the world price of Tea is $0.6 per kg and the world price of
Banana is $6 per kg, and Neverland decides to open up to the world market and trade. Neverland is
such a small nation that its behavior will not affect the world market prices. If they were to consume
48.5 kgs of tea, they could consume a maximum of [ Answer09 = 153.15 ] kgs of banana.

10. Eric, Flora, Glen and Howard can produce bells and whistles. The table below shows their productivity
(units per hour).

Bells Whistles
Eric 2 3.8
Flora 16 46.4
Glen 12 27.6
Howard 20 30

If this small economy wants to allocate two persons to completely specialize in the production of bells,
who should be allocated to the production of bells?
A) Eric and Flora
B) Eric and Glen
C) Eric and Howard
D) Flora and Glen
E) Flora and Howard
F) Glen and Howard
[ Answer10 = C ]

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 Please refer to the background information below to answer the following two questions.
11. Consider the following individual production possibilities curves (not drawn to scale), where a = 83,
b = 152, c = 152, d = 83.

If one standard maintenance service includes one clutch replacement and one brake replacement, if
they work separately, they can perform in total [ Answer11 = 107.37 ] standard maintenance
services (can be non-integer).
12. Continue with the previous question, if they work together, they perform in total [ Answer12 =
41.57 ] PERCENT MORE standard maintenance services than working separately.

13. Milk factories make low-fat milk from full-cream milk. In making low-fat milk, the factories produce
cream as a by-product. Cream then is used to make ice cream. How many of the following events
would cause an increase in the supply of low-fat milk?

(1) A new technology lowers the cost of producing ice-cream.

(2) The price of cream rises.
(3) The price of low-fat milk rises.
(4) Report shows the consumption of milk would increase the average height of
children and health-care experts advise children to drink more milk.

A) 0
B) 1
C) 2
D) 3
E) 4
[ Answer13 = C ]

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14. Consider the market of petrol. How many of the following events would cause an increase in the price
paid by the buyers?

(1) The use of robots in car production reduces the marginal cost of car production.
(2) Recent technology causes an advancement in the production of petrol.
(3) The price of crude oil rises.
(4) The price of cars rises.

A) 0
B) 1
C) 2
D) 3
E) 4
[ Answer14 = C ]

15. Consider the market for mini-bus service in Utopia. After the occurrence of the following events

(1) There is a decrease in the cost of fuel used by mini-buses.

(2) A recent report is released that walking can have a significant benefit to health.

We would expect the equilibrium price to [ Answer15A = B ] and the equilibrium quantity will [
Answer15B = C ].
A) increase
B) decrease
C) be undetermined

16. At the current equilibrium point, the price elasticity of demand for apples is −0.6 and the price
elasticity of supply for apples is 1.79. Suppose the demand decreases by 3%. This leads to a decrease
of [ Answer16A = 1.26 ]% in the equilibrium price and a decrease of [ Answer16B = 2.25 ]%
in the equilibrium quantity.

Please refer to the background information below to answer the following two questions.
The demand curve for product A takes the form of

QA = 2910 − 2.1PA − 1.5PB

where PB is the price of product B. At one equilibrium, QA = 6.69 and the cross-price elasticity
between good A and B is −2.1.
17. Then we can compute that PB = [ Answer17 = 9.37 ] at the equilibrium.
18. We can further compute that PA = [ Answer18 = 1375.84 ]

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 Please refer to the background information below to answer the following four questi-
ons.
Consider the following supply and demand schedule of chocolate.

Price ($ per unit) Quantity Demanded (units) Quantity Supplied (units)

40 240 40
45 220 60
50 200 80
55 180 100
60 160 120
65 140 140
70 120 160
75 100 180
80 80 200
85 60 220
90 40 240
95 20 260

19. Suppose initially the chocolate market is in an unregulated equilibrium. If the government imposes a
tax of $10 for each unit of the chocolate sold, the new equilibrium price paid by the consumers will
be $[ Answer19 = 70 ].
20. Given the above information, the government’s tax revenue will be $[ Answer20 = 1200 ].
21. Suppose initially the chocolate market is in an unregulated equilibrium. If the government imposes a
subsidy of $30 for each unit of the chocolate sold, the new equilibrium quantity would be [ Answer21
= 200 ] units.
22. Suppose initially the chocolate market is in an unregulated equilibrium. If the government sets a
price ceiling at $85, the quantity transacted will be [ Answer22A = 140 ] units. If the government
sets a price ceiling at $60, the quantity transacted will be [ Answer22B = 120 ] units.

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 Please refer to the background information below to answer the following six questions.
Two firms, X and Y, have access to seven different production processes, each one of which has
a different cost (dollars) and gives off a different amount of pollution (tons). The information is
summarized in the table below.

Process (daily smoke) Cost to Firm X Cost to Firm Y

A (6 tons) 20 640
B (5 tons) 160 1460
C (4 tons) 350 2370
D (3 tons) 820 3450
E (2 tons) 1420 4710
F (1 tons) 2230 6060
G (0 tons) 3110 7500

23. If pollution is unregulated, and negotiation between the firms and their victims is impossible, firm
X will use the production process [ Answer23A = A ], firm Y will use the production process [
Answer23B = A ], and the total smoke emitted will be [ Answer23C = 12 ] tons per day.
24. Suppose the city council set a tax of 1265 dollars on each ton of smoke emitted each day. We would
expect the firms will emit a total of [ Answer24 = 2 ] tons of smoke per day.
25. Suppose initially there is no regulation on pollution (in particular, no tax is imposed on pollution),
and the city council has recently decided to cut the total pollution (smoke emissions) by half. If the
city council requires each firm to cut its emission by half, the total cost of reducing the emssion to
the society will be [ Answer25 = 3610 ] dollars per day.
26. Continue to assume that the city council wants to cut total smoke emissions by half. Suppose the
city council like to set a tax of T dollars on each ton of smoke emitted each day. To achieve the
desired reduction in emission, the T should be more than [ Answer26A = 820 ] and less than [
Answer26B = 880 ].
27. Continue from the previous question. Using tax as a tool, the total cost of reducing the emission to
the society is [ Answer27 = 3030 ] dollars per day.
28. From the society’s perspective, to cut the emission by half, it would be optimal for firm X to adopt
process [ Answer28A = F ] and firm Y to adopt process [ Answer28B = B ].

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29. Donald owns a house near the peak overlooking the harbour, from which he enjoys a commanding
sunset view. Now Hillary purchases the property below Donald’s and is considering which of two
houses to build: a one-story house that would leave Donald’s view intact; or a two-story design that
would completely block Donald’s view. Suppose the gain to Donald from an unobstructed view is
$1720, the gain to Hillary from having a one-story house is $2590, and the gain to Hillary from a
two-story house is $3760. Suppose Hillary has the right to build as tall as she can, and the negotiations
between the two parties were costless. The private solution is:
A) Hillary builds a one-story house by receiving $1070 from Donald.
B) Hillary builds a one-story house by receiving $1820 from Donald.
C) Hillary builds a one-story house by receiving $1445 from Donald.
D) Hillary builds a one-story house without negotiating with Donald.
E) Hillary builds a two-story house by paying Donald $1070.
F) Hillary builds a two-story house by paying Donald $1820.
G) Hillary builds a two-story house by paying Donald $1445.
H) Hillary builds a two-story house without negotiating with Donald.
[ Answer29 = C ]

Please refer to the background information below to answer the following three questi-
ons.
Factory X is selecting between two production technologies, A and B. The following table shows the
cost of production to Factory X and the amount of pollution damage to nearby residents corresponding
to each technology.

A B
Cost of production to X: $193 $227
Damage to residents: $125 $57

30. It is socially efficient for Factory X to adopt technology [ Answer30 = B ].

31. Suppose negotiation costs are negligible. If Factory X is not liable for the pollution damage, technology
[ Answer31A = B ] will be chosen. If Factory X is fully liable for the pollution damage, technology
[ Answer31B = B ] will be chosen.
32. Suppose Factory X is not liable for the pollution damage and it costs $35 to the residents to hire a
lawyer and negotiate with Factory X. Then, technology [ Answer32 = A ] will be chosen eventually.

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 Please refer to the background information below to answer the following five questions.
The residents of Utopia has complained to the government that price of coffee (dollars per cup) is too
high. The administration promises to consider two policies proposed by the representatives of the
residents: (1) a price ceiling on coffee, and (2) a subsidy on coffee. The market supply and demand
curves of coffee are given by the following equations.

Demand: Q = 200 − 1.1P million cups per year

Supply: Q = 4.5P million cups per year

33. From the information, we can conclude that the unregulated market equilibrium price is [ Answer33A
= 35.71 ] dollars per cup and equilibrium quantity is [ Answer33B = 160.71 ] million cups per
year.
34. At the unregulated market equilibrium, the consumer surplus is [ Answer34A = 11740.49 ] million
dollars per year and the producer surplus is [ Answer34B = 2869.90 ] million dollars per year.
35. Consider a price ceiling on coffee at 17 dollars per cup. At this price ceiling, there will be a shortage
of [ Answer35 = 104.80 ] million cups of coffee per year.
36. At this proposed price ceiling, producer surplus is expected to be [ Answer36A = 650.25 ] million
dollars per year and the maximum possible consumer surplus will be [ Answer36B = 9948.48 ]
million dollars per year.
37. Now consider the policy of subsidizing coffee instead. In order to reduce the effective price consumers
have to pay to the level of 17 dollars per cup, the government needs to impose a subsidy of [ Answer37
= 23.29 ] dollars per cup.

Please refer to the background information below to answer the following three questi-
ons.
Factory X produces 10 tons of wastewater every day. Each ton of wastewater caused 17.5 (in thousand
dollars) worth of damage to nearby residents. It costs the factory n2 (in thousand dollars) to remove
pollutants from n tons of wastewater. Suppose n can only take integer numbers.
38. If pollution is unregulated and negotiation is impossible, Factory X will discharge [ Answer38 = 10
] tons of untreated wastewater to the sea every day.
39. It is socially efficient for Factory X to treat [ Answer39 = 9 ] tons of wastewater.
40. Consider levying a tax on wastewater. In order to achieve the socially efficient outcome, the minimum
amount of tax should be [ Answer40 = 17.00 ] thousand dollars per ton of wastewater.

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 Please refer to the background information below to answer the following three questi-
ons.
There is a small public beach in Utopia. The residents of Utopia, in total 20 of them, love to go to the
beach but prefer not to when it is too crowded. In particular, if n people share the beach together,
each individual gets an economic surplus of 10.5 − n dollars. Suppose n can only take integer numbers.
41. If the residents make their decisions individually, then [ Answer41 = 10 ] residents will go to the
beach in equilibrium.
42. The socially optimal number of beach occupants is [ Answer42 = 5 ].
43. If the government charges an entrance fee of $2.62, [ Answer43 = 7 ] residents will go to the beach
in equilibrium.

Please refer to the background information below to answer the following four questi-
ons.
The market demand and supply of widgets are described by the following equations.

Demand: P = 396 − Q dollars per widget

Supply: P = Q + 132 dollars per widget

For each unit of widget consumed, an external benefit of 132 dollars is generated. However, the
production process of widgets also generates negative externality. In particular, the marginal external
cost of widgets is Q + 132 dollars when Q units of widgets are produced.
44. From the information, the unregulated market equilibrium quantity is [ Answer44 = 132 ] .
45. The socially efficient quantity is [ Answer45 = 88.00 ].
46. Without any government intervention, the deadweight loss will be [ Answer46 = 2904.00 ] dollars
in the market equilibrium.
47. In order to induce the market to produce at the socially efficient quantity, it is optimal for the
government to impose a [ Answer47A = A ] ( A. tax; B. subsidy; C. price ceiling; D. price floor )
of [ Answer47B = 88.00 ] dollars per widget.

48. Which of the following situation is likely to incur the smallest amount of negotiation costs?
A) Sellers and buyers trading in a perfectly competitive market.
B) Residents of a housing estate deciding on the renovations of the club house.
C) Classmates deciding on when the reunion should be held.
D) Two drivers negotiating on the resolution of an accident.
[ Answer48 = A ]

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 Please refer to the background information below to answer the following three questi-
ons.
The market demand of widgets is given as follows.

Demand: P = 96 − 2Q dollars per widget

Suppose that the government imposes a price ceiling at 24 dollars per widget. After the ceiling is
imposed, 12 units are produced and traded.
49. After the ceiling is imposed, there will be [ Answer49 = 24.00 ] units of excess demand.
50. If there is a competitive market for bribery that determines the allocation, the equilibrium amount of
bribe for the right to purchase one unit of widget is [ Answer50 = 48.00 ] dollars.
51. If there is a competitive market for bribery that determines the allocation, the consumer surplus is [
Answer51 = 144.00 ] dollars.

Please refer to the background information below to answer the following four questi-
ons.
A competitive firm has the following functions of average variable cost and marginal cost.

AV C = Q2 − 14Q + 150
M C = 3Q2 − 28Q + 150

52. The quantity at which AVC is minimized is [ Answer52 = 7.00 ] unit.

53. The firm will shut down in the short run if the price is below [ Answer53 = 101.00 ] dollars.
54. When the market price equals 150 dollars, the quantity supplied by the firm is [ Answer54 = 9.33
] units.
55. Suppose the firm earns zero economic profit when the market price is 150 dollars. Then the fixed cost
of the firm must equal [ Answer55 = 406.52 ] dollars.

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56. The fortune cookie factory has a fixed cost of $288 per day. The daily wage of hiring a worker is $432.
The table below shows the total packs of cookies produced when different number of workers are hired
per day.

Employees per day Output per day

0 0
1 216
2 396
3 540
4 648
5 720
6 756

The factory should hire [ Answer56 = 4 ] workers if the price of each pack is $5.

Please refer to the background information below to answer the following three questi-
ons.
A perfectly competitive market is in a long run equilibrium. The demand curve and the supply curve
are given as follows.

Demand: Q = 210 − 7P units

Supply: Q = 8P − 9 units

57. The equilibrium price is [ Answer57A = 14.60 ] dollars and the equilibrium quantity is [ Ans-
wer57B = 107.80 ] units.
58. Suppose there is an increase in demand such that each consumer’s willingness to pay increases by
10 dollars and it is a constant cost industry, the quantity traded in the market is [ Answer58 =
177.80 ] units when the market reaches a long run equilibrium again.
59. Continue with the previous question. Suppose the new entrants and the incumbent firms are all
identical. After the increase in demand, 10 new firms eventually entered the market such that the
new long run equilibrium is reached. We then conclude that the average cost curve of an individual
firm is minimized at Q = [ Answer59 = 7.00 ].

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 Please refer to the background information below to answer the following six questions.
A monopolist faces a demand curve of P = 160 − 0.2Q and has a constant marginal cost of $6.
60. To maximize profit, the monopolist produces [ Answer60A = 385.00 ] units and charges [ Ans-
wer60B = 83.00 ] dollars.
61. If the government imposes a price ceiling at $7, the monopolist will produce [ Answer61 = 765.00
] units.
62. If the government imposes a price ceiling at $7, the deadweight loss [ Answer62A = B ] (A.
increases; B. decreases) by [ Answer62B = 14820.00 ] dollars compared to an unregulated market.
63. If the government imposes a price ceiling at $7, the monopolist will not exit the market in the long
run if the fixed cost is [ Answer63A = B ] (A. higher; B. lower) than [ Answer63B = 765.00 ]
dollars.
64. Suppose the fixed cost of the monopolist is $29645. The lowest ceiling price that can be imposed by
the government in the long run is [ Answer64 = 83.00 ] dollars.
65. If the government provides a per-unit subsidy of $1 to the monopolist, the deadweight loss in this
market is [ Answer65 = 14630.62 ] dollars.

66. Facing a downward sloping linear demand curve P = A − BQ, a monopolist maximizes its profit and
produces Q = 8, at which point the average total cost equals $15 and the price equals $100. We also
know that the U-shaped average total cost (ATC) curve is at its minimum level when Q = 8. Given
this information, we conclude that A = [ Answer66A = 185.00 ] and B =[ Answer66B = 10.62
].

Please refer to the background information below to answer the following three questi-
ons.
A souvenir store has six customers each day. Their willingness to pay for the souvenir are listed in
the following table.

Customer Willingness to pay

1 91
2 77
3 63
4 49
5 35
6 21

The marginal cost is constant at $28.

67. With perfect price discrimination, the store’s producer surplus will be [ Answer67 = 175.00 ]
dollars.
68. Suppose only consumers with willingness to pay below $70 will clip coupons and use them. The store
owner will optimally provide a coupon that takes [ Answer68 = 28.00 ] dollar off.

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69. Continue with the previous question. The deadweight loss equals [ Answer69 = 7.00 ] dollars.

Please refer to the background information below to answer the following three questi-
ons.
A monopolist serves two geographically separated markets. In market A, the demand curve is

Q = 130 − 0.2P

In market B, the demand curve is

Q = Y − 0.8P
where Y is a constant. The monopolist can set different prices and quantities in the two markets to
maximize the combined profit. Suppose the monopolist produces at constant marginal cost of $8.
70. When Y = [ Answer70 = 520.00 ], the prices charged in the two markets are the same.
71. When Y = 170, the monopolist supplies [ Answer71A = 81.80 ] units in market B at [ Answer71B
= 110.25 ] dollars per unit.
72. When Y = 170, the [ Answer72A = A ] (A. lowest; B. highest) transportation cost between the
two markets that prevent arbitrage equals [ Answer72B = 218.75 ] dollars.

Please refer to the background information below to answer the following two questions.
Andy and Betty each can consume at most one cheeseburger and one cup of drink. The following
table shows their willingness to pay for a cheeseburger and a cup of drink.

Andy Betty
cheeseburger 190 228
drink 1 0.4

73. If the restaurant sells cheeseburger and drink separately, the profit-maximizing price is [ Answer73A
= 190.00 ] dollars per burger and [ Answer73B = 1.00 ] dollars per cup of drink. If the restaurant
sells a combo that contains one cheeseburger and one cup of drink, the profit-maximizing price is [
Answer73C = 191.00 ] dollars per combo. To maximize the profit, the restaurant should sell them
[ Answer73D = B ] (A. separately; B. as combo).
74. Suppose Andy is really thirsty and change his willingness to pay for a cup of drink to $90. If the
restaurant sells cheeseburger and drink separately, and the profit-maximizing price is [ Answer74A
= 190.00 ] dollars per burger and [ Answer74B = 90.00 ] dollars per cup of drink. If the restaurant
sells a combo that contains one cheeseburger and one cup of drink, the profit-maximizing price is [
Answer74C = 228.40 ] dollars per combo. To maximize the profit, the restaurant should sell them
[ Answer74D = A ] (A. separately; B. as combo).

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END

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