Location via proxy:   [ UP ]  
[Report a bug]   [Manage cookies]                

Department of Economics: ECO 204 Microeconomic Theory For Commerce 2013 - 2014 Test 1 Solutions

Download as pdf or txt
Download as pdf or txt
You are on page 1of 32

Page 1 of 32

Department of Economics ECO 204 Microeconomic Theory for Commerce 2013 - 2014
Test 1 Solutions

IMPORTANT NOTES:
Proceed with this exam only after getting the go-ahead from the Instructor or the proctor
Do not leave during the first hour of the exam or the last 15 minutes of the exam
You are not allowed to leave the exam room unattended. If you need to go to the washroom, please raise your hand and a
proctor will accompany you to the washroom. You are allowed to go to the washroom ONLY.
You are required to stop writing and turn your exam face down when asked to stop by the instructor or proctor at the end of
the exam

Please note that proctors will take down your name for academic offenses, which will be treated in accordance with the policies as
published by the Faculty of Arts and Sciences.

Exam details:
Duration: 2 hours and 20 minutes
Total number of questions: 9 (see next page of test for breakdown of points)
Total number of pages: 32 (including title page)
Total number of points: 100

Please answer all questions. To earn credit you must show all calculations.

Exam aids:
This is a closed note and closed book exam.
You may use a non-programmable calculator. Sharing is not allowed.

University of Toronto Academic Code of Conduct:
The Universitys Code of Behavior on Academic Matters (Code) applies to all Rotman Commerce students. The Code prohibits all forms of
academic dishonesty including, but not limited to, cheating, plagiarism, working on the exam after the proctor has announced the exam
has ended and the use of unauthorized aids. Students violating the Code may be subject to penalties up to and including suspension or
expulsion from the University.

By signing my name and entering my name and student number, I am confirming that I have read and understand the Universitys Code of
Behavior on Academic Matters. I will conduct myself with the utmost integrity and I will neither give nor receive unauthorized aid in tests or
examinations.

Please provide the following information. Tests without the following information will NOT be graded.
Please circle the section in which you are registered
(not necessarily the same as the section you attend)
Mon 1 3
L0101
Tue 11 1
L0102
Tue 2 4
L0103
Wed 6 8
L5101
Signature
PRINT your
Last Name

PRINT your
First Name

9or 10 Digit
Student ID #



For use by Proctors only

Page 2 of 32


THIS TABLE IS FOR GRADERS USE ONLY
PAGES 3 11: SHORT QUESTIONS
TOTAL POINTS FOR SHORT QUESTIONS 31
SHORT QUESTION MAXIMUM POINTS SCORE COMMENTS
1 11
2 3
3 5
4 3
5 9
PAGES 12 33: LONG QUESTIONS
TOTAL POINTS FOR LONG QUESTIONS 69 + 2 BONUS
LONG QUESTION MAXIMUM POINTS SCORE COMMENTS
1 17
2 19
3 15 + 2 BONUS
4 18
TOTAL SCORE OUT OF 100 POINTS




GOOD LUCK!
KEEP YOUR ANSWERS AS BRIEF AS POSSIBLE AND SHOW ALL NECESSARY CALCULATIONS


Page 3 of 32
SHORT QUESTIONS

Short Question 1 [11 POINTS]
The following function is defined on the domain [ ):

()



Here are parameters.

(a) [2 POINTS] For what values of is this function concave? Show all necessary calculations.
(b) [2 POINTS] Assume . Solve the following problem:

()



Show all necessary calculations.

Page 4 of 32
(c) [2 POINTS] Calculate the change in

due to a small change in the parameter Show all necessary calculations.




(d) [5 POINTS] Calculate the change in

due to a small change in the parameter by two separate methods. Show all
necessary calculations.


Page 5 of 32
Short Question 2 [3 POINTS]
Consider the following general inequality constrained optimization problem:

()

Here is a constant and the function () is defined on the domain [ ). Your friend Crak-Bob attempts to
solve this problem by setting it up as follows:

()

() [ ]

()

[ ]

[ ]

Has Crak-Bob set up this problem correctly? If so, interpret if not, then set up but do not solve the problem
correctly. Show all necessary calculations.

Page 6 of 32
Short Question 3 [5 POINTS]
Consider the following inequality constrained optimization problem:

()

Here is a constant and the function () is defined on the domain [ ). Prove that that the optimal value of the
Lagrange multiplier

equals
(

Show all necessary calculations.


Page 7 of 32



Page 8 of 32
Short Question 4 [3 POINTS]
Consider the UMP:



The utility function is defined on the consumption set {(

) }. Assume that both goods are good goods.


True or false: the optimal quantities

from the UMP above will be identical to the optimal quantities

from
the UMP below:



Give a very brief explanation.
Page 9 of 32
Short Question 5 [9 POINTS]

(a) [3 POINTS] A consumer perceives two goods to be good goods and prefers to consume them as complements.
She prefers to consume four units of good 2 for every two units of good 1. Write down at least three utility functions
which represent this consumers preferences. Show all necessary calculations.


Page 10 of 32
(b) [3 POINTS] Suppose

and . What is the price of a unit of a good 1 and good 2


bundle/combo for the consumer in part (a)?
Page 11 of 32
(c) [3 POINTS] Now suppose that, perhaps due to persuasive advertising for good 2, the consumer likes good 2 more
than before. True or false: if her utility function was initially (

), then we can represent her greater


affinity for good 2 by a utility function with a higher value of and/or a lower value of ? Give a brief explanation.





Page 12 of 32
LONG QUESTIONS

Long Question 1 [17 POINTS]
The following demand function for a brand of soda sold across seven stores of a (monopoly) supermarket chain was
estimated from actual supermarket scanner data:

898 797



Here

quantity of soda (000s ozs.) and

average price per oz. of soda sold per week across all seven stores of
the supermarket chain. Currently,

7

(a) [10 POINTS] Suppose that the government has proposed imposing a 2% excise tax on all soda sold in this
supermarket chain. Calculate the potential impact on the representative soda consumers utility due to the proposed
2% excise tax. Show all necessary calculations and state all necessary assumptions. Provide all numerical answers to 4
decimal places.

Page 13 of 32
Page 14 of 32
(b) [3 POINTS] True or false: if instead of imposing an excise tax on soda, the government were to tax the supermarkets
(soda) customers income, the income tax would not impact the quantity of soda sold? Show all necessary calculations
and state all assumptions.







Page 15 of 32
(c) [4 POINTS] True or false: in general, a flat income tax is less bad for consumers than an excise tax on good 2 that is
designed to raise the same amount of tax revenue dollars as the flat income tax? Show all necessary calculations.
Assume both goods are good goods.

Page 16 of 32
















Page 17 of 32
Long Question 2 [19 POINTS]

(a) [3 POINTS] When faced with the budget constraint

) a customer chooses bundle A = (

):



Now suppose that the price of good 1 falls from

to

so that the consumer now faces the budget constraint

) where

. Faced with this budget constraint, suppose the consumer chooses bundle C = (

):

)
C
A



The total price effect of good 1 due to its lower price is:

. To isolate the total substitution and total


income effects, we imagine taking away income from

) until the original bundle A once again becomes


affordable this yields the budget constraint

) where

.

Explain why the optimal choice bundle B = (

) on the budget constraint

) cannot be to the left of


bundle A. Put another way, briefly explain why the total substitution effect of good 1 due to its lower price must be ,
i.e.

)
A

Page 18 of 32

)
C
A

)
B

Page 19 of 32
(b) [4 POINTS] In part (a), we saw that in order to isolate the substitution and income effects, starting at budget
constraint

) we imagine taking away income until the original bundle A becomes affordable this yields
the budget constraint

) where

. Derive an expression for

in terms of

and

Show all
necessary calculations.

Page 20 of 32
(c) [4 POINTS] [THIS PART IS INDEPENDENT OF ALL REMAINING PARTS BELOW]
Evaluate these statements separately:

True or false: a Giffen good must be an inferior good.

True or false: an inferior good must be a Giffen good.

Give a brief explanation.

Page 21 of 32
(d) [8 POINTS] Suppose that a consumer has the utility function:

(

)

Suppose that initially

) ( ) and then

) ( ). Calculate the
total price, substitution and income effect on good 1.


Page 22 of 32
Page 23 of 32
Long Question 3 [15 POINTS]
Ajaz and Michelle live for exactly two days ( ) and are addicted to the game Call of Duty (just as Rob Ford is
addicted to crack). To keep their gaming addiction under control, the game keeper gives Ajaz and Michelle one token
on each day specifying the maximum number of hours that Ajaz and Michelle can play Call of Duty on that day. Let


and

be the number of hours written on their tokens and let

and

be the number of hours of Call of Duty they


choose to play on day 1 and day 2 respectively.
Ajazs utility for gaming is:



Michelles utility for gaming is:



Their endowments of tokens are both fixed at 5 hours per day, i.e.

.

Ajaz and Michelle are the only two people in this game and they can choose to trade tokens with each other. Currently,

the real interest rate in this gaming economy is .



(a) [1 POINTS] Suppose that there is one saver and one borrower in this gaming economy. Without doing any
calculations, explain who will save and who will borrow? Give a brief explanation.

Page 24 of 32
(b) [8 POINTS] At the current interest rate, how many hours will Ajaz and Michele consume and save? Write down your
answers in the table below. Show all necessary calculations. Provide numerical answers to 4 decimal places. Hint: You
dont have to derive expressions for

by setting up and solving the Inter-temporal Cobb-Douglas UMP. Instead, you


can modify the following expressions from consumer theory Cobb-Douglas UMP:


Page 25 of 32
(c) [1 POINTS] According to your calculation above, is the current interest rate in this gaming economy too high, too
low, or just fine? Show all necessary calculations.



Page 26 of 32




(d) [5 POINTS] Draw Ajazs inter-temporal UMP problem on to the following graph and show the consumption and
endowment points, the equilibrium indifference curve, and net savings over the two periods.



Page 27 of 32





(e) BONUS [2 POINTS] Calculate the equilibrium real interest rate at which Ajazs savings equal Michelles borrowings.
Show all necessary calculations. Provide numerical answers to 4 decimal places.

Page 28 of 32
Long Question 4 [18 POINTS]

(a) [3 POINTS] Consider the following general UMP:



The utility function is defined on the consumption set {(


) } Show that if goods 1 and 2 are good goods
then expenditure must equal income. Show all necessary calculations.

Page 29 of 32

If the consumer likes at least one good then shell expend her entire income (budget).
(b) [15 POINTS] Consider the following general UMP:



The utility function is defined on the consumption set {(

) } Assuming that goods 1 and 2 are good goods


solve this general UMP and derive conditions and solutions for all possible cases. Show all necessary calculations.

Page 30 of 32
Page 31 of 32





Page 32 of 32

You might also like