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PPT – Microeconomics Course E PowerPoint presentation | free to download - id: 65bba0-YWQ3M

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Microeconomics Course E

- John Hey

Examinations

- Go to http//www.luiss.it/hey/microeconomia/esami.

htm - Read http//www.luiss.it/hey/microeconomia/detesen

.htm - Check on Answer Sheet
- Check on Aide/Memoire
- Check on grids

Aide-Memoire

Grids 1

Grids 2

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Example 2 of Exams Appello 2 Traccia 1

- 1-4 demand and supply
- 5-7 Edgeworth Box
- 8,9 inferring preferences
- 10,11 competitive firm
- 12,13 compensating and equivalent variations
- 14,15 risk
- 16,17 game theory

1-4 demand and supply

- Consider a market for a hypothetical good in

which there are a number of buyers and sellers,

each of which wants to buy or sell one unit of

the good. Assume that a buyer who is indifferent

about buying always buys and a seller who is

indifferent about selling always sells. The

reservation prices are given below, first for the

buyers and then for the sellers. - Buyers 6, 9, 10, 5, 8, 4, 8. Sellers 2, 6, 5,

3, 4, 4, 3.

Question 1 What is the maximum total surplus

generated in the market? (a) 28 (b) 23 (c) 22 (d)

25 Question 2 What is the maximum number of

trades (not necessarily with the same price)? (a)

6 (b) 7 (c) 5 (d) 8 Question 3 What price would

the buyers choose if they could? (a) 4 (b) 8 (c)

0 (d) 4 Question 4 What price would the sellers

choose if they could? (a) 10 (b) 5 (c) 8 (d) 4

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Questions 5-7

- Consider, in an Edgeworth Box, exchange between

two individuals, Individual A and Individual B,

with preferences as specified below, endowed with

two goods, Good 1 and Good 2. (Consider only

competitive equilibrium in which at least one

individual is better off compared to the initial

position.) - Individual A has Perfect Complement preferences

with parameter a 0.5. Individual B has Perfect

Substitute preferences with parameter a 1.

Total endowment of good 1 is 8 and that of good 2

is 6. - Individual A's endowment of good 1 is 0 and that

of good 2 is 1.

Question 5 What is the competitive equilibrium

price ratio? (a) 1.00 (b) 1.50 (c) 1.33 (d)

3.50 Question 6 What is the quantity exchanged

of good 1 to reach the competitive

equilibrium? (a) 4.00 (b) 2.00 (c) 3.00 (d)

1.00 Question 7 What is the quantity exchanged

of good 2 to reach the competitive

equilibrium? (a) 1.00 (b) 1.50 (c) 2.00 (d) 3.00

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Questions 8 and 9

- In the next two questions you will be asked to

consider an individual who has the following

demands. You will be asked to infer his or her

preferences, which will be either Perfect

Substitutes with parameter a, Perfect Complements

with parameter a, or Cobb-Douglas with parameter

a. - With income 10.00 and at prices 1.00 and 2.00 the

demands were 3.33 and 3.33. With income 20.00 and

at prices 1.00 and 0.50 the demands were 6.67 and

26.67. With income 20.00 and at prices 2.00 and

2.00 the demands were 3.33 and 6.67. - Question 8 What are the individual's

preferences? - Perfect Substitutes
- There is not enough information
- Cobb-Douglas
- Perfect complements
- Question 9 What is the value of the parameter a?
- 0.25
- 0.50
- 1.00
- 0.33

Questions 8 and 9

- Remember the following
- With PS preferences the individual (except in one

special case) spends all his or her income on the

relatively cheaper of the two goods and spends

nothing on the other. - With PC preferences the ratio of the quantities

q2/q1 bought is always equal to the parameter a. - With CD preferences the amount spent on Good 1

p1q1 is always a fraction a of income.

Questions 10 and 11

- In the next two questions you will be asked to

consider a competitive firm which has a cost

function C(y) a by cy2 where a, b and c

are given below. - a 20.0, b 0.0, c 1.0. Suppose that the

price of the firm's output is 40. - Question 10 Determine the optimal output of the

firm. - 60.00
- 40.00
- 20.00
- 0.00
- Question 11 What is the firm's profit?
- 380.00
- 0.00
- 800.00
- 1,619.76

Questions 12 and 13

- In the next two questions you will be asked to

evaluate the compensating and equivalent

variations for an individual facing a price rise

in the price of a good. The preferences of the

individual over the good and money are stated

below (note that the price of money is 1). - The individual has Perfect Substitute preferences

over the good and money with parameter a 0.50.

The individual has income 30 and faces a price

2.00 for the good. Suppose the price of the good

rises by 0.10. - Question 12 What is the compensating variation?
- 0.20
- 0.30
- 0.10
- 0.00
- Question 13 What is the equivalent variation?
- 0.40
- 0.20
- 0.00
- 0.30

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Questions 14 and 15

- In the next two questions you will be asked to

consider an individual, taking decisions under

conditions of risk, with Expected Utility

preferences and utility function u(x) x0.5

(that is, the utility of x is the square root of

x). Suppose the individual is faced with two

lotteries P and Q as specified below. A lottery

is denoted by (a,bp,1-p) and means that the

outcome is a with probability p and b with

probability 1-p. - The lotteries are P (25,160.25,0.75) Q

(1,360.25,0.75) - Question 14 Does the individual prefer P or Q?
- P
- Q
- We cannot say.
- The individual is indifferent
- Question 15 What is the individual's certainty

equivalent for P? - 27.25
- 18.25
- 22.5625
- 18.0625

Questions 16 and 17

- In the next two questions you will be asked to

consider a game played simultaneously, and

without communication between two players, 1 and

2, each of whom can choose one of two options A

and B. The payoffs to the two players are given

below, the first for Player 1 and then for Player

2. The order of the payoffs is AA, AB, BA, BB

where XY indicates the outcome when Player 1

plays X and Player 2 plays Y. - Player 1 5, 1, 6, 8. Player 2 10, 4, 8, 8.
- Question 16 Specify ALL the Nash Equilibria in

pure strategies. - There are not any
- AB
- BA
- BA BB
- Question 17 Specify ALL other outcomes (not a

Nash Equilibrium) that Pareto dominate any of

these. - AA dominates BB
- BB e AA dominate AB
- BB dominates AA
- There are none

Tips!

- Remember that you get 2 marks for a correct

answer and lose 1 mark for an incorrect. - DO NOT GUESS!
- Take coloured pencils and pens.
- Take a rubber.
- Do NOT apply MAGIC formulae.
- Good Luck!!