Microeconomics

B.Sc. in Economics and Business

Prof. Lorenzo Ferrari

Final Exam - 05/05/2023

Time: 120 minutes

Last - First name: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

University ID number: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Question Points Valuation

1 1
2 1
3 2
4 2
5 2
6 2
7 5
8 5
9 5
10 5
Total 30
Microeconomics Mock Exam 12/05/2021

For questions 1 to 2, select your answer. Wrong answers are assigned zero points.

1. [1 point] Suppose a firm’s production process employs labor (L) and capital (K) according to the
following production function:
Q = min {L, K} .
Consider positive and finite prices for both inputs (w > 0, r > 0) and suppose L is on the x-axis. Then
the long-run expansion path:
A. Is always downward sloping.
B. Shifts to the left with a change in the price of L.
C. Shifts to the right with a change in the price of L.
D. Is always upward sloping and does not shift with changes in prices.

2. [1 point] The one-shot Prisoners’ Dilemma game is characterised by:

A. No Nash equilibrium.
B. One non-Pareto optimal Nash equilibrium.
C. One Pareto optimal Nash equilibrium.
D. Two Pareto optimal Nash equilibria.

For questions 3 to 6, select your answer and motivate it with a short comment

3. [2 points] In the figure below, which represents how the optimal labor/leisure choice of a consumer
changes when the wage rate increases from w to w′ > w, the income effect outweighs the substitution
effect (in the figure, x represent the amount of leisure).

w′ > w
′
24w
b

Py
b
C

24w B
b b

Py

A
BLd
b
x
24

A. True B. False

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Microeconomics Mock Exam 12/05/2021

4. [2 points] Suppose the unit price of good A is PA = $20, the price price of good B PB = $10, and the
consumer’s income is I = $1, 000 per month. The basket A = 2.5, B = 95 is on the budget line.

A. True B. False

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5. [2 points] In the long-run the supply curve of a firm coincides with its marginal cost curve.

A. True B. False

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6. [2 points] A public good is a good that when consumed by an individual does not reduce the access to
the good but reduces the quantity of the good to all other consumers.

A. True B. False

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Microeconomics Mock Exam 12/05/2021

7. [5 points] Let a consumer’s utility function be U (x, y) = xy. The consumer’s income is I = 300
and prices for the two goods are, respectively, px = 3 and py = 5.
(a) Write down the utility maximization problem and compute the optimal consumption basket.
(b) Suppose now the price of good x is equal to 2. Compute the new optimal consumption basket.
(c) Compute and represent graphically the substitution, income and total (price) effects.
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Microeconomics Mock Exam 12/05/2021

8. [5 points] Consider a firm producing a given output; the inputs employed for producing are labour L,
which costs w per unit, and capital K, which costs r per unit. The firm produces a quantity Q according
to the following function: Q(K, L) = KL + 4K. Suppose the firm’s target is to produce 100 units (i.e.
Q = 100).
(a) Compute the cost-minimising input quantities when input prices are w = 5 and r = 0.2.
(b) Compute the cost-minimising input quantities when input prices are w = 5 and r = 1.25.
(c) Compared to case (b), what will happen to the total minimum cost required to produce Q = 100 if
capital is fixed at a level equal to 10? (Hint: you do not need to compute it; a graphical argument
is enough)
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Microeconomics Mock Exam 12/05/2021

9. [5 points] In New Crak the chocolate industry is perfectly competitive. There are 36 identical producers.
Each firm has a total fixed cost of 200, a total variable cost of 6Q2 , and non sunk fixed costs of 150.
The market demand is QD = 720 − 3P .
(a) What is the shoutdown price and the short-run supply curve for the individual firm? Explain.
(b) What are the short-run equilibrium price and quantity when there are 36 firms in the market?
(c) What is each firm’s profit in the short-run equilibrium?
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Microeconomics Mock Exam 12/05/2021

10. [5 points] The market demand for widgets is given by P d = 400−Q, where Q is the quantity consumers
demand when the price they pay is P d . Widgets are competitively supplied according to the inverse
supply curve (and marginal private cost) M P C = 7Q,where Q is the amount suppliers will produce
when they receive a price equal to M P C. The production of widgets releases a toxic effluent into the
water supply, creating a marginal external cost of M EC = 2Q.
(a) Calculate the market equilibrium quantity and price of widgets. Is the amount produced efficient
and why?
(b) Calculate the socially efficient quantity and price of widgets.
(c) Find the level of specific tax, T, imposed on producers, that would make this market attain the
social optimum. Show that at this tax market price is equal to the efficient one.
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