Intro Micro

Topics: Nash equilibrium, Supply and demand, Game theory Pages: 22 (2996 words) Published: June 22, 2013
Introductory Microeconomics
2008 Exam

Solutions

Section A

1. C

|Hours of tutoring per week|Total Opportunity cost |Marginal Cost |Wage Payment (Marginal | | | | |Benefit) | |0 |0 | | | |1 |$20 |$20 |$50 | |2 |$30 |$10 |$60 | |3 |$40 |$10 |$70 | |4 |$80 |$40 |$70 | |5 |$160 |$80 |$70 |

MB is greater than MC for each of the first 4 hours, but for the 5th hour MB is less than MC. Hence the optimal choice of hours of tutoring is 4.

2. D
The opportunity cost to Leo of going to the CSS Ball is equal to the sum of (i) what he gives up by not using his time to attend the talk by Tim Undercover; and (ii) the cost of the ticket to the CSS Ball. With regard to (i), the net gain to Leo from attending Tim’s talk is $80, the value he places on attending the talk (and since he has already bought the ticket to Tim’s talk, this does not enter into his calculations of the net gain from attending the talk). With regard to (ii), Leo has been given a ticket to the CSS Ball, so this money cost is zero. Hence the opportunity cost is $80.

3. C
Imposing a maximum price below the equilibrium price means that the quantity traded will be determined by the amount that suppliers are willing to supply. Since supply is price-elastic there will be a relatively large decrease in the quantity traded.

[pic]

4. B
When demand by Australian consumers increases in the way that is described: (i) Trade will still occur at the world price ($2); (ii) Total quantity supplied by Australian suppliers will stay the same; and (iii) Quantity bought by Australian consumers will increase (from [pic] in the diagram below). Hence there will be: (i) An increase in CS for Australian consumers (equal the area A in the diagram below) because Australian consumers value bananas more highly and are consuming a larger quantity; and (ii) Producer surplus for Australian suppliers remains unchanged.

[pic]

5. D

|Quantity |FC ($) |TC ($) |VC($) |MC($) |AVC($) |ATC($) | |0 |10 |10 | | | | | |1 |10 |15 |5 |5 |5 |15 | |2 |10 |25 |15 |10 |7.50 |12.50 | |3 |10 |40 |30 |15 |10 |13.33 | |4 |10 |60 |50 |20 |12.5 |15 | |5 |10 |85 |75 |25 |15 |17 |

Can calculate VC as difference between TC and FC. Can then work out MC (from VC), and AVC and ATC. Only statement that is incorrect is that MC is constant with the quantity of output.

6. A
(b) and (c) are likely to increase the degree of product differentiation for the magazine and hence its market power. (d) is likely to increase barriers to entry and hence the magazine’s market power. (a) implies that there is an extra competitor for the magazine, that would be expected to decrease its market...
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