SUMMER TERM 2017

ECON2001: MICROECONOMICS

TIME ALLOWANCE: 3 hours

Answer ALL questions from Part A on the Multiple Choice Question sheet. Answer THREE questions
from Part B, including at least ONE from Part B.I and at least ONE from Part B.II.
Part A carries 40 per cent of the total mark and questions in Part B carry 20 per cent of the total
mark each.
In cases where a student answers more questions than requested by the examination rubric, the policy
of the Economics Department is that the student’s first set of answers up to the required number will
be the ones that count (not the best answers). All remaining answers will be ignored.
PART A
Answer ALL questions from this section on the Multiple Choice Question sheet. For each question
there are four possible answers labelled (a), (b), (c) and (d). Indicate which you think is correct by
placing a horizontal mark in the corresponding box on the answer sheet. To get full marks for this
section it is not necessary to provide any explanation for your answers.

(I) Consider an industry with two firms. The demand for the firms’ output is given by the
function p = 20 q, where q is the total output produced by the firms. Firm one pro-
duces output q1 at the total cost cq1 and firm two produces output q2 at the total cost cq2 .
A.1 If the firms compete on price then the total quantity produced in equilibrium is:
20 c
(a) 3
(b) 20 c
40 2c
(c) 3
20 c
(d) 2

A.2 If the firms compete on quantity then the price in equilibrium is

(a) 2
20 c
(b) 3
20+c
(c) 2
20+2c
(d) 3

A.3 If the marginal cost of both firms increases, and they compete on quantity, then one would
expect
(a) Equilibrium output to fall and equilibrium price to rise.
(b) Equilibrium output to fall only.
(c) Equilibrium output to rise and equilibrium price to fall.
(d) Equilibrium price to rise only.
 A.4 Suppose that firm 2 exits the industry, then firm 1 would respond to this exit by
(a) Increasing its output, if the firms were competing on price.
(b) Decreasing its output if the firms were competing on quantity.
(c) Leaving its output unchanged if they were competing on quantity.
(d) Leaving its output unchanged if the firms were competing on price.

(II) Consider the following game in strategic form:

X Y Z
X (0,0) (0,0) (-1,2)
Y (0,0) (0,0) (0,0)
Z (2,-1) (0,0) (1,1)

A.5 Which of the following statements is true?

(a) This game is solvable by the iterated elimination of strictly dominated actions.
(b) This game has a unique Nash Equilibrium.
(c) This game has three pure strategy Nash Equilibria.
(d) This game is solvable by the iterated elimination of weakly dominated actions.

(III) An insurance company decides to o↵er two kinds of insurance policies to customers. One policy
is cheap but requires the customer to pay the first £1000 of any claim. The other policy is
expensive but does not require any payment by the customer.

A.6 This is an example of

(a) Screening.
(b) Signalling.
(c) Failure of price discrimination.
(d) Mechanism design.

(IV) A monopolist is regulated and the regulator decides to impose a maximum price that the mo-
nopolist can set.

A.7 Such regulation has the following e↵ect:

(a) It increases the monopolist’s Marginal Revenue curve.
(b) It always decreases the amount the monopolist will choose to produce.
(c) It always increases the amount of output the monopolist will choose to produce.
(d) The new Marginal revenue curve is never greater than the unregulated firm’s demand curve.
 A.8 It is important for a Principal to provide strong incentives, if
(a) The Agent’s performance is easy to monitor.
(V) (b) The Agent’s performance is difficult to monitor.
(c) The Agent’s performance has little e↵ect on the Principal’s payo↵.
(d) The Agent has severe disutility of risk.

(VI) Consider a firm with the production function y = (z1 + z2 )1/3 where y is its output and z1 and
z2 are the levels of two inputs, priced at w1 and w2 respectively.

A.9 Which of the following statements is true

(a) This firm has increasing returns to scale.
(b) This firm’s production function does not satisfy the free-disposal assumption.
(c) This firm’s unconditional demand for z1 is a decreasing function of y.
(d) This firm’s conditional input demand for z1 jumps from a positive
value to zero as the input’s price increases.

A.10 This firm has the cost function

(a) max{w1 , w2 }y 3
(b) min{w1 , w2 }y 1/3
(c) min{w1 , w2 }y 3
(d) max{w1 , w2 }y 1/3
 ANSWERS
SUMMER TERM 2016
ECON2001: MICROECONOMICS

TIME ALLOWANCE: 3 hours

Answer ALL questions from Part A on the Multiple Choice Question sheet. Answer THREE questions
from Part B, including at least ONE from Part B.I and at least ONE from Part B.II.
Part A carries 40 per cent of the total mark and questions in Part B carry 20 per cent of the total
mark each.
In cases where a student answers more questions than requested by the examination rubric, the policy
of the Economics Department is that the student’s first set of answers up to the required number will
be the ones that count (not the best answers). All remaining answers will be ignored.

PART A
Answer ALL questions from this section on the Multiple Choice Question sheet. For each question
there are four possible answers labelled (a), (b), (c) and (d). Indicate which you think is correct by
placing a horizontal mark in the corresponding box on the answer sheet. To get full marks for this
section it is not necessary to provide any explanation for your answers.

A.1 Which of the following statements is correct?

(a) Every subgame perfect equilibrium of an extensive form game is also a Nash equilibrium of that game
(b) A game in extensive form has a unique Nash equilibrium.
(I)
(c) A game in extensive form has a unique subgame-perfect equilibrium.
(d) If a game is solvable by backwards induction, then it does not have a subgame perfect
equilibrium.

A.2 Suppose a firm has unconditional input demand functions D1 (p, w1 , w2 ) and D2 (p, w1 , w2 )
and conditional input demand functions H1 (q, w1 , w2 ) and H2 (q, w1 , w2 ).
(a) These two types of demand are equal at the cost-minimizing output level q.
(II) (b) The conditional input demand is homogeneous degree one in prices.
(c) The unconditional input demand is homogeneous degree one in prices.
(d) The derivative of the cost function with respect to output equals the sum of the conditional
input demands.
(III) Consider an industry with two firms producing exactly the same product. Firm 1 has the cost
function 4q1 and firm 2 also has the cost function 4q2 , where qi is the output of firm i = 1, 2.
The demand for the firms’ product is given by the demand function p = 24/Q, where Q is the
total output produced by the industry.

A.3 If the firms compete by choosing prices, then

(a) The equilibrium price will be 6.
(b) The total equilibrium supply will be 6.
(c) Each firm will produce 6 in equilibrium.
(d) The equilibrium profit will be 6.

A.4 If firms compete by choosing quantities the reaction function of firm 2 is

(a) (q1 + q2 )2 = 6q2 .
p
(b) q1 = 6q2 q2 .
(c) q22 = 6q2 q12 .
p
(d) q2 = 6q1 q1 .

A.5 At the Cournot-Nash equilibrium

(a) q1 = q2 = 3.
(b) q1 = q2 = 1.5 and price is 16.
(c) q1 = q2 = 1.5 and profits are zero.
(d) q1 = q2 = 1.5 and neither (b) nor (c) is true.

A.6 If firm 1 were a monopolist in this industry, then

(a) There is no optimal level of output to produce.
(b) It makes profits greater than 24.
(c) It sets p = 4.
(d) It produces output 3.
(IV) There is a firm with a production function q = ↵ log z1 + ↵ log z2 + , where ↵, 0 and
z1 , z2 0.

A.7
(a) This production function is homogeneous.
(b) This production function has increasing returns to scale.
(c) This production function is homothetic.
(d) This production function is quasi-convex.

A.8 For what set of parameter values does this production function have constant returns to
scale?
(a) None.
(b) ↵ = 1.
(c) = 0.
(d) ↵ > 0.

A.9 In a second price auction,

(a) A player’s pure strategy is a function mapping bids to their values.
(V) (b) A player should form their best estimate of the next-highest value.
(c) A player has a weakly-dominant pure strategy.
(d) How ties in bidding are resolved has a big e↵ect on the optimal bid.

A.10 In situations of adverse selection. . .

(a) Economists are interested in the problem of giving incentives for agents to take the correct
action.
(VI) (b) Typically the problem is deterring the “good types” from taking a bad action.
(c) Markets tend to function efficiently.
(d) Uninformed agents should be pessimistic about who they are dealing with.
 SUMMER TERM 2015
ECON2001: MICROECONOMICS ANSWERS

TIME ALLOWANCE: 3 hours

Answer ALL questions from Part A on the Multiple Choice Question sheet. Answer THREE questions
from Part B, including at least ONE from Part B.I and at least ONE from Part B.II.
Part A carries 40 per cent of the total mark and questions in Part B carry 20 per cent of the total
mark each.
In cases where a student answers more questions than requested by the examination rubric, the policy
of the Economics Department is that the student’s first set of answers up to the required number will
be the ones that count (not the best answers). All remaining answers will be ignored.

PART A
Answer ALL questions from this section on the Multiple Choice Question sheet. For each question
there are four possible answers labelled (a), (b), (c) and (d). Indicate which you think is correct by
placing a horizontal mark in the corresponding box on the answer sheet. To get full marks for this
section it is not necessary to provide any explanation for your answers.

(I) Consider the following two person game.

L R P MP
U (3,2) (0,0) (1.2,0.9) (0,0)
D (0,0) (2,3) (0,0) (1.4,1.5)
P (1,1.2) (0,0) (0,0) (0,0)
MP (0,0) (1.5,1.4) (0,0) (0,0)

A.1 Which of the following statements is true?

(a) The game can be solved using dominance arguments.
(b) The game is a zero-sum game.
(c) Some pure strategies are weakly dominated.
(d) This game has only two Nash equilibria.
 A.2 This game has a mixed strategy Nash equilibrium where the column player plays L with
probability 2/5 and R with probability 3/5 and where the strategy for the row player is:
(a) Row plays D with probability 2/5 and U with probability 3/5 .
(b) Row plays P .
(c) Row plays M P .
(d) Row plays U with probability 2/5 and D with probability 3/5.

A.3 Suppose we now allow the column player to move first and then the row player moves second.
This change will a↵ect the outcome of the game in the following way.
(a) The number of Nash equilibria increases.
(b) (D, M P ) will be played.
(c) (D, R) will be played.
(d) (U, L) will be played.

A.4 Suppose we revert to the original game with simultaneous moves, but now the game is
played three times one after the other. We attempt to build a subgame perfect equilibrium
(SPE) of the twice-repeated game where (U, P ) is played in the first period and, if no deviation
from (U, P ) occurred in the first period, then (U, L) is played in the second period and (D, R)
in the third period. If a player 1 deviates from (U, P ) then (D, R) is played twice and if player
2 deviates from (U, P ) then (U, L) is played twice. Which of the following statements is true?
(a) This is SPE.
(b) This is not a SPE because at SPE it is essential that a Nash equilibrium is played in every
period.
(c) This is not a SPE because the column player can deviate and earn strictly more
than playing out (U, P ) then (U, L) then (D, R). (The structure is we get
(1.2,0.9)+(3,2)+(2,3). If row deviates they get 0+2+2. If column deviates they get
2+2+2. So column gains from the deviation.)
(d) This is not a SPE because the row player can deviate and earn strictly more than playing
out (U, P ) then (U, L) then (D, R).

(II) There is a firm with a production function q = ↵ log z1 + ↵ log z2 where ↵ > 0. (The input prices
are w1 , w2 .)
A.5 The elasticity of demand for input 1 with respect to changes in its own price is?
(a) 1/2.
(b) 1/2. ( From the Lagrangian L = w1 z1 + w2 z2 + (eq z1↵ z2↵ ) we have first order conditions
dL/dz1 = w1 ↵z1↵ z2↵ /z1 = 0 and dL/dz2 = w2 z1↵ z2↵ /z2 = 0 and therefore w1 /w2 =
q 1 1
w1 w2
z2 /z1 . Substitution into the constraint eq = z1↵ z2↵ gives z1⇤ = e 2↵ ↵
2
↵
2
.
(c) 1/(2↵).
(d) 1/(2↵).

A.6 Which of the following statements is true?

q 1 1
w1 w2
(a) Average costs are U-shaped. (Total costs are w1 z1⇤ + w2 z2⇤ = e 2↵ ↵
2
↵
2
(2↵). Hence
q 1 1
w1 w2
the LR average cost function is e 2↵ /q ↵
2
↵
2
(2↵). )
(b) Increasing average costs.
(c) Decreasing average costs.
(d) Constant average costs.

A.7 When firms engage in Bertrand competition it is usual to assume that:

(a) The highest priced firm gets all the customers.
(b) Firms have the same marginal cost.
(c) Firms are producing the same product.
(d) Demand is constant.

A.8 When a monopolist has a maximum price imposed on it by a regulator:

(a) Its marginal cost curve becomes flat.
(b) There is a jump down in the marginal revenue curve.
(c) It responds by cutting output.
(d) The efficiency of the market is harmed.
A.9 Consider a first-price auction for one good where the bidders have independent private
values. Which of the following statements is true?
(a) It is optimal to pick your bid by estimating the next highest value to yours.
(b) It is a weakly dominant action to bid truthfully.
(c) It is strictly dominant action to bid truthfully.
(d) Because of the winners curse you should bid more aggressively.

A.10 Incentives help to solve the moral hazard problem when agents’ e↵ort is not directly
observed. Incentives should be strongest when
(a) Performance can be accurately measured.
(b) Extra e↵ort is costly.
(c) Individuals have the greatest costs of risk.
(d) Extra e↵ort produces a small improvement in performance.
 SUMMER TERM 2014
ECON2001: MICROECONOMICS

TIME ALLOWANCE: 3 hours

Answer ALL questions from Part A on the Multiple Choice Question sheet. Answer THREE questions
from Part B, including at least ONE from Part B.I and at least ONE from Part B.II.

Part A carries 40 per cent of the total mark and questions in Part B carry 20 per cent of the total
mark each.

In cases where a student answers more questions than requested by the examination rubric, the policy
of the Economics Department is that the student’s first set of answers up to the required number will
be the ones that count (not the best answers). All remaining answers will be ignored.

PART A
Answer ALL questions from this section on the Multiple Choice Question sheet. For each question
there are four possible answers labelled (a), (b), (c) and (d). Indicate which you think is correct by
placing a horizontal mark in the corresponding box on the answer sheet. To get full marks for this
section it is not necessary to provide any explanation for your answers.

(I) Consider the following strategic form game

H D
H 0, 0 5, 1
=
D 1, 5 4, 4

A.1 Which of the following statements is true?

(a) The game can be solved using dominance arguments.
(b) The game is a zero-sum game.
(c) The game has more than one Nash equilibria.
(d) It is the Stag-Hunt game.
 A.2 This game has a mixed strategy Nash equilibrium where
(a) Column plays D with probability one.
(b) Row plays H with probability 4/5.
(c) Column plays D with probability 1/5.
(d) Row plays H with probability 1/2.

A.3 Suppose we now allow the row player to move first and then the column player moves. This
change will a↵ect the outcome of the game in the following way.
(a) The number of Nash equilibria increases.
(b) The outcome of the game is (0,0).
(c) It gives an advantage to the second mover.
(d) It gives an advantage to the first mover.

Ans: The row player will chose H and get its best possible payo↵.

A.4 Suppose we revert to the original game with simultaneous moves, but now the game is
played two times one after the other. We now look for a subgame perfect equilibrium of the
twice-repeated game where (D, D) is played in the first period. Which of the following statements
is true.
(a) After playing (4,4) in the first period we must play a mixed strategy Nash equilibrium in
the second period.
(b) If a player fails to play D in the first period they are rewarded by playing D in the second
period.
(c) Such a subgame perfect equilibrium does not exist.
(d) After playing (4,4) in the first period we must play (1,5) in the second period.

Ans: For subgame perfection to hold the second play of the game must be a Nash equilibrium. If
a pure Nash equilibrium (5,1) was played after (4,4) in the first period the column player would
have an incentive to deviate and get 5 in the first period and then get 1 in the second period.
 1/2 1/2
(II) There is a firm with a production function q = z1 z2 + z3 .(The input prices are w1 , w2 , w3 .)

A.5 Which of the following statements is true?

(a) Average costs are not monotonic.
(b) Increasing average costs.
(c) Decreasing average costs.
(d) Constant average costs.

Ans: This is a CRS production function so average cost is constant.

A.6 Suppose that in the short run the input z2 is fixed. Which one of the following statements
is true?
(a) The unconditional short run input demand for z3 is max{y w3 z2 /(2w1 ), 0}.
(b) The conditional short run input demand for z3 is max{y w3 z2 /(2w1 ), 0}.
(c) The conditional short run input demand for z1 is w12 z2 /(4w32 ).
(d) The unconditional short run input demand for z1 is w12 z2 /(4w32 ).

Ans: It is cost minimizing either to use all z1 or all z3 to produce q, just compute the costs of
these plans and compare.

A.7 Consider a second-price auction for one good where the bidders have private values. Which
of the following statements is false?
(a) It is a weakly dominant action to bid truthfully.
(b) It is strictly dominant action to bid truthfully.
(c) The seller expects to raise the same revenue as in a first-price auction.
(d) Players’ strategies are a function from their value to their bids.

Ans: A player is indi↵erent between bidding truthfully and overstating their bid, if theirs is the
winning bid.
 A.8 One reason banks may require borrowers to put up collateral when they take out a loan is
(a) To give the borrower incentives to put e↵ort in to make the project successful.
(b) Because the loan may be risky.
(c) Because borrowers come in many di↵erent types and some may have more assets than
others.
(d) Because the bank may have insufficient funds to lend.

Ans: See example on moral hazard.

(III) A worker can choose any e↵ort level 0  e  1. When she puts in e↵ort e the firm gets revenue
y with probability e2 and with probability 1 e2 the firm has zero revenue. The marginal cost
of the e↵ort e to the worker is c.

A.9 The firm decides to pay the worker a wage w that is independent of output. The worker’s
expected utility is
(a) w.
(b) e2 w.
(c) e2 y w.
(d) w ce.

Ans: The worker always gets w and has costs ce.

A.10 The firm decides to pay the worker the wage w1 when output is produced and w2 when it
isn’t. The condition

w1 e2 + (1 e2 )w2 ce w1 (e0 )2 + w2 (1 (e0 )2 ) ce0

ensures
(a) The worker wants to work for the firm.
(b) The worker’s best e↵ort level is e.
(c) The worker prefers e↵ort e0 to e.
(d) The worker prefers e↵ort e to e0 .

Ans: This computes the worker’s expected payo↵ from e↵ort e and says it is greater than her
expected payo↵ from e↵ort e0 .
 SUMMER TERM 2013
ECON2001: MICROECONOMICS

TIME ALLOWANCE: 3 hours

Answer ALL questions from Part A on the Multiple Choice Question sheet. Answer THREE questions
from Part B, including at least ONE from Part B.I and at least ONE from Part B.II.
Part A carries 40 per cent of the total mark and questions in Part B carry 20 per cent of the total
mark each.
In cases where a student answers more questions than requested by the examination rubric, the policy
of the Economics Department is that the student’s first set of answers up to the required number will
be the ones that count (not the best answers). All remaining answers will be ignored.

PART A
Answer ALL questions from this section on the Multiple Choice Question sheet. For each question
there are four possible answers labelled (a), (b), (c) and (d). Indicate which you think is correct by
placing a horizontal mark in the corresponding box on the answer sheet.

(I) Firm 1 chooses an advertising budget x > 0 and Firm 2 chooses an advertising budget y > 0.
The market is worth V and the share of the market captured by each firm is determined by their
advertising. Hence, Firm 1 has profits ⇡1 (x, y) and Firm 2 has the profits ⇡2 (x, y) where
x y
⇡1 (x, y) = V x; ⇡2 (x, y) = V y.
x+y x+y

A.1 Firm 1’s reaction function is?

p
(a) y = V x x
p
(b) x = V y y
p
(c) y = V x
p
(d) x = y/V y

A.2 This market has

(a) One Nash equilibrium that is increasing in V .
(b) One Nash equilibrium that is decreasing in v.
(c) Many Nash equilibria.
(d) No pure-strategy Nash equilibrium.
 A.3 Suppose we now allow the firms to set x = 0 or y = 0 or both. (We assume that the firms
split the market 50:50 if no firm advertises at all.) This market now has
(a) One Nash equilibrium that is increasing in V .
(b) One Nash equilibrium that is decreasing in v.
(c) Many Nash equilibria.
(d) No pure-strategy Nash equilibrium.

(II) There is a firm with a production function q = z1↵ z2↵ , where ↵ > 0.(The input prices are w1 , w2 .)
Suppose that z2 is fixed in the short run.

A.4 This firm has an average cost function that is independent of output if
(a) ↵ = 2.
(b) ↵ > 2.
(c) ↵ < 1/2.
(d) ↵ = 1/2.

A.5 This firm’s short-run average cost function is

(a)
1
⇣w ⌘ 1 ⇣w ⌘1
1 2 2 2
q 2↵
↵ ↵
(b)
1
q ↵ /z2

(c)
1
w 2 z2 + w 1 q ↵ z 2 1

(d)
w 2 z2 1 ↵
+ w 1 q ↵ z2 1
q

(III) Two firms, A and B, are involved in Bertrand competition. There are 100 customers each willing
to pay up to £2 for one unit of output. The firms both have marginal costs of £1. (You may
assume the firms share the customers equally if they set the same price.)
 A.6 If the firms can only adjust prices in units of one penny, then this market has the equilibrium
price
(a) £1 only
(b) Either £1 or £1.01
(c) Either £1 or £1.01 or £1.02
(d) Either £1 or £1.01 or £1.02 or £1.03

A.7 Now suppose that the firms can adjust prices by arbitrarily small amounts, but the firms
move in order, firm A sets its price then firm B set its price. Which of the following statements
is true.
(a) This game has only one Nash equilibrium.
(b) This game has many subgame perfect equilibria.
(c) Firm B can force firm A to set a high initial price at some Nash equilibria.
(d) There is no Nash equilibrium because firm B’s optimal response is not defined.

(IV) A firm is selling insurance to customers with probability ⇡ of experiencing a loss, where ⇡ is
distributed uniformly on the interval 0  ⇡  1. If a customer experiences a loss, then they have
a wealth £5 whereas if a customer does not experience a loss they have wealth £10. Let p be
the price of insurance.

A.8 Which of the following is true if the customers are risk neutral
(a) If the price of insurance is £3 one fifth of the customers buy insurance.
(b) If the price of insurance is £5 everyone buys insurance.
(c) If the price of insurance is £2.50 half the customers buy insurance.
(d) 80% of the customers buy insurance if the price is £4.

A.9 If the customers have a utility function for wealth w2 and are risk loving, which of the
following is true
(a) If the price of insurance is £2.50 more than half the customers buy insurance.
(b) If the price of insurance is £5 everyone buys insurance.
(c) If the price of insurance is £2.50 half the customers buy insurance.
(d) If the price of insurance is £2.50 less than half the customers buy insurance.
 A.10 Which of the following is a phenomenon that arises only in the presence of adverse selection
(a) Individuals taking an outside option.
(V) (b) Cream skimming.
(c) Non-credible threats.
(d) Economies of scope.