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NOT FOR CIRCULATION
NOT TO BE TAKEN AWAY
THE UNIVERSITY OF HONG KONG
Faculty of Business & Economics
Master of Economics Examination
2004-2005 First Semester
ECON6021 Microeconomic Analysis
Dr. Stephen Chiu
2:30pm – 5:00pm
December 18, 2004 (Saturday)
Candidates may use any self-contained, silent, battery-operated and pocket-sized
calculator. The calculator should have numeral-display facilities only and should be used
only for the purposes of calculation. It is the candidate’s responsibility to ensure that his
calculator operates satisfactorily.
Candidates must record the name and type of their calculators on the front page of their
examination scripts.
University No.: _____________________________
Name & Type of Calculator: ___________________
Candidates are allowed to bring in a 4” x 6” card containing formula.
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There are two parts (22 points and 54 points, respectively) in this paper. Answer both of them,
and in your answer book. The total score is 76 points.
Part I. Multiple Choice Question. Choose the best answer. (2 points per question)
1) An example of adverse selection is
a. the consumer purchasing a new car based on the recommendation of a neighbor.
b. High health insurance premiums resulting from the poor health of people who buy
policies.
c. Suppliers charging more for better quality clothing than for lower quality clothing.
d. Being talked into buying a low-quality item because the price is lower.
2) Cournot duopolists face a market demand curve given by P = 90 – Q. Each firm can produce
output at a constant marginal cost of 30 per unit. The equilibrium quantity and price for the
total market will be
a. Q = 30, P = 60.
b. Q = 60, P = 30.
c. Q = 40, P = 50.
d. Q = 45, P = 45.
e. None of the above.
3) Drivers drive less carefully after having auto insurance. This is a problem of
a. adverse selection
b. Irrational behavior on the part of the driver
c. Poor management of the insuring company
d. moral hazard
4) The relationship between producer surplus and consumer surplus is
a. producer surplus is always greater.
b. consumer surplus is always greater.
c. producer and consumer surplus are always equal.
d. none of the above is necessarily true.
Answer questions 5 and 6 with the following information. Joe is self-employed in a store which
he rents for $500 a month. His other expenses are $100 a month for maintenance. He makes
$25,000 a year on net sales (total revenue minus the wholesale cost of the product). If he quit his
job and worked the same number of hours elsewhere, he estimates that he could make $20,000 a
year. No one else can be hired to work in the store.
5) Joe should
a. quit his job.
b. keep his job.
c. work part-time.
d. none of the above.
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6) Suppose that Joe owned the store. Now what should he do?
a. quit his job
b. keep the job
c. work part time
d. none of the above.
7) Output for a simple production process is given by Q = 2KL, where K denotes capital, and L
denotes labor. The price of capital is $25 per unit and capital if fixed at $8 units in the short
run. The price of labor is $5 per unit. What is the total cost of producing 80 units of output?
a.
$525.
b. $200.
c. $233.
d. $185.
e. none of the above.
8) According to the graph, the home country's producer surplus after trade would be
a. $ 900.
b. $1100.
c. $1500.
d. $2000.
9) Which of the following statement is true?
a. Under adverse selection, good products drive out bad products.
b. Under adverse selection, bad products drive out good product.
c. Under moral hazard, good products drive out bad products.
d. Under moral hazard, bad products drive out good products.
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10) Consider the following payoff matrix for two automobile companies each contemplating
making either a small car or a large car. Which of the following statements is TRUE?
Firm 1
Small Car
Large Car
Firm 2
Small Car
$600, $600
$900, $1200
Large Car
$1200, $900
$500, $500
a. Making a small car is the dominant strategy for each.
b. Making a large car is the dominant strategy for each.
c. Making a small car is the dominant strategy for firm 1.
d. Neither firm has a dominant strategy.
11) Which statement is true about Nash equilibria of the following game?
Player 1
a.
b.
c.
d.
U
M
D
Player 2
M
1, 5
4, 8
6, 9
L
3,4
1, 2
0, 3
N
2, 6
6, 3
8, 2
There is no Nash equilibrium.
There is a unique Nash equilibrium
There are multiple equilibria.
Nash equilibrium is not a well defined concept here.
Part II. Longer Questions. Answer any three out of four questions. Each question carries the same
points (18 points)
1)
a. True or False or Uncertain. Please explain in less than 40 words (add a diagram if you think
helpful). “If a firm has a production function, Q  L0.4 K 0.6 and factor prices are constant,
then long-run marginal cost equals long-run average cost.”
b. True or False or Uncertain. Please explain in less than 40 words (add a diagram if you think
helpful). “If the demand curve for a monopolist is linear, then the imposition of a specific tax
will raise the consumer’s price by an amount equal to the tax.”
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2) During the Iran-Iraq war, the same arms merchant often sold weapons to both sides of the
conflict. In this situation, a different price could be offered to each side because there was
little danger that the country offered the lower price would sell arms to its rival to profit on
the difference in prices. Suppose a French arms merchant has a monopoly of Exocet air-tosea missiles and is willing to sell them to both sides. Iraq's demand for Exocets is P = 400 0.5 Q and Iran's is P = 300 - Q, where P is in million of dollars. The marginal cost of Exocets
is MC = Q. What price will be charged to each country?
3) John is like all other managers in a perfectly competitive industry except in one respect:
Because of his great sense of humor, people are willing to work for him for half the going
wage rate. All other firms in the industry have short-run total cost curves given by
STC(q)= M + 10q + wq2,
where q is the firm’s output level, M is the salary paid to ordinary managers and w is the
going wage rate for the industry. If all firms in the industry face an output price of 28, and if
w = 2, how much more will John be paid than the other managers in the industry?
4) You are a self-employed profit maximization consultant specializing in monopolies. Four
firms, each a monopolist in its own market, are currently seeking your advice, and although
the information they have supplied to you is incomplete, your expert knowledge allows you
to make a definite recommendation in each case. Select one of the following
recommendations for each firm in the short run:
a. Remain at the current output level.
b. Increase output.
c. Reduce output.
d. Shut down.
e. Ask the firm to go back and recalculate its figures because the numbers supplied can’t
possibly be right.
Firm P
MR
A
B
3.00
3.90
5.90
C
D
TR
Q
TC
MC
2000
10000
7400
2.90
5.90 4.74
9.00 44000 4000
35.00
3990
1000
ATC
AVC
3.24
4.24
9.00 11.90 10.74
3300
-- END OF PAPER --
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