Name: _________________________

5EN252/5EN752 Final Test A02

Instructions
You have 90 minutes to finish the test. The maximum score is 50 points. You can use a calculator but
not a cellphone, nor tablet, as its substitute. Any attempt to cheat will lead to failing in the course.

Describe all the graphs and procedures in detail – it must be perfectly clear, what you are doing. An
unclear answer is a wrong answer. Use correct economic terminology.

1) There are two possible views on utility. Characterize them in short. (3)

2) Adam consumes only bread (x) and apples (y). His utility function is 𝑈(𝑥, 𝑦) = √𝑥 + *𝑦.
a) Is bread good, bad or neutral for Adam? Support your answer with a mathematical
demonstration. (2)

b) Calculate Adam’s marginal rate of substitution (𝑀𝑅𝑆). (2)

c) What is the ‘marginal rate of substitution’? Define. (2)

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3) Given that Adam consumes 4 loaves of bread (x) and 9 apples (y) in his utility-maximizing
optimum.
a) What is the price of bread if the price of an apple is 10 CZK? What income does Adam
receive? (4)

b) The price of bread falls 5 CZK lower. What will be Adam’s new optimum? (2)

c) Capture the change in price graphically. Distinguish substitution effect and income effect.
What do they show? (4)

4) Can you give some example of goods for which the substitution effect can be expected to be
especially strong? Explain your choice of example. (2)

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5) Given Adam’s preferences over bread (x) and apples (y), 𝑈(𝑥, 𝑦) = √𝑥 + *𝑦, determine his
demand for apples if the price of bread is fixed at 20 CZK and his income at 100 CZK. (5)

6) Part of Adam’s income is his wage. Adam’s employer, Bob’s Bakery (BB), is the only employer on
a remote island where Adam lives and so it has a considerable market power.
a) What do we mean by ‘market power’? (3)

b) Show the situation in the labor market graphically. Compare the outcome with a perfectly
competitive labor market. (4)

7) Bob’s Bakery is not only the sole employer on the island but also its profitable natural monopoly
in the market for bread.
a) Show the situation in the bread market graphically – output, price, positive economic profit,
dead-weight loss (no particular numbers needed). (4)

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 b) What happens if the local government decides to restore efficiency by regulating BB’s prices
of bread? Graph. (3)

8) Adam’s preferences over leisure (H) and consumption (C) are 𝑈(𝐶, 𝐻) = 𝐻! ∗ 𝐶 " . We will
consider the bread and apples he consumes as a composite good with a unit price of 1 CZK. He
has 24 hours available to distribute between leisure and work.
a) What combination of work and leisure would Adam choose if his wage was 120 CZK/hour (no
other forms of income are considered here)? How many units of the composite good will he
consume? (6)

b) Graph Adam’s situation. (4)