# This paper is not to be removed from the Examination Halls

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1 ~~EC2066 ZA d0 This paper is not to be removed from the Examination Halls UNIVERSITY OF LONDON EC2066 ZB BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the Social Sciences, the Diplomas in Economics and Social Sciences and Access Route Microeconomics Tuesday, 21 May 2013 : 10.00am to 1.00pm Candidates should answer ELEVEN of the following SIXTEEN questions: EIGHT from Section A (5 marks each) and THREE from Section B (20 marks each). Candidates are strongly advised to divide their time accordingly. A calculator may be used when answering questions on this paper and it must comply in all respects with the specification given with your Admission Notice. The make and type of machine must be clearly stated on the front cover of the answer book. If more questions are answered than requested, only the first answers attempted will be counted. PLEASE TURN OVER University of London 2013 UL13/0034 Page 1 of 7 D1

2 SECTION A Answer eight questionsfromthissection(5markseach). 1. Mary s demand curve for food is given by Q = 10 2P where Q is the quantity of food and P is the price of food. Calculate her price elasticity of demand for food at P = Andy purchases only two goods, apples (A) andoranges(r). The price of apples is 2 and the price of oranges is 4. Andy has an income of 40 and his utility function is U(A, R) =3A + 5R What bundle of apples and oranges should Andy purchase to maximize utility? 3. Underfirst-degree price discrimination, a monopolist s marginal revenue is equal to average revenue. Is this true or false? Explain your answer. 4. Consider the following game. For what values of x does each player have a dominant strategy? Explain your answer. Player 2 A 2 B 2 C 2 A 1 3,3 3,0 1,2 Player 1 B 1 2,3 1,2 0,1 C 1 0,1 2,0 x, x 5. If the long-run average cost is decreasing in output, the long-run marginal cost must be decreasing in output as well. Is this true or false? Explain your answer. 6. If leisure is a normal good, the demand for leisure rises as wage rises. Is this true or false? Explain your answer. Page 2 of 7 UL13/0034 Page 2 of 7 D1

3 7. In an Edgeworth Box, a reallocation of resources from the initial endowment to any point on the contract curve always constitutes a Pareto improvement. Is this true or false? Explain your answer. 8. If consumption at all dates is a normal good, savers necessarily save less if the rate of interest falls. Is this true or false? Explain your answer. 9. Private provision of goods that are non-excludable and non-rival leads to overprovision compared to the socially optimal level. Is this true or false? Explain your answer. 10. The LSE requires mobile phones to be switched off in the library. Assuming this is strictly enforced, does such a restriction enhance efficiency? Explain your answer. Page 3 of 7 PLEASE TURN OVER UL13/0034 Page 3 of 7 D1

4 SECTION B Answer three questions from this section (20 marks each). 11. Suppose there are two identical firms in an industry. The output of firm 1 is denoted by q 1 and that of firm 2 is denoted by q 2. The total cost of production for firm i, i {1, 2}, is C(q i )=4 q i Let Q denote total output, i.e. Q = q 1 + q 2. The inverse demand curve in the market is given by P = 10 Q (a) Find the Cournot-Nash equilibrium quantity produced by each firm and the market price. (b) Suppose the firms can collude, and maximize joint profit. Calculate the deadweight loss arising under this scenario. (c) What would be the quantities produced by each firm and market price under Stackelberg duopoly if firm 1 moves first? (d) Now suppose the production process in the industry pollutes the environment and generates a marginal social cost given by MC E = 2Q Calculate the deadweight loss arising from the Cournot-Nash equilibrium in this case. Page 4 of 7 UL13/0034 Page 4 of 7 D1