Final Micro 2022 Spring

Name:
Shanghai University of Finance and Economics
School of Economics
Intermediate Microeconomics
Final Exam
Wednesday, May 18; Time Limit: 100 minutes
1. The exam is open-book and open-notes. You may not consult another human.
2. Total number of points is 100.
3. In providing answers, do not simply provide the appropriate equations. Make

explicit what assumptions you are making about the environments in questions
beyond those stated on the exam or assumed in class if you make any. To receive
full credit for your answers, explain your calculations. Correct answers without
correct explanation will receive 0 points.
4. Once you are done, upload all materials on the course bb.
Good luck!
1
Part 1: True/False/Uncertain. Please answer the following questions. Credit will be
based solely on the quality of your justification. Limit your answers to the space
provided.
1. If goods are perfect complements, the substitution effect is zero.
2. The compensating variation always measures welfare change at a higher utility level
than the equivalent variation.
2
3. If an individual consumes only three goods (x,y,z) then at least two of them must be
normal.
4. People have different preferences. Therefore, at their current level of consumption,

they must have a different marginal rate of substitution.
3
5. If marginal cost is increasing, then the average cost must increase as well.
6. It is economically more efficient to have a monopolist that discriminates perfectly

than a monopolist that sets a single price.
4
7. If a firm’s production function exhibits constant returns in each factor, then it must
also exhibit constant returns to scale.
8. p = M C is a sufficient condition for a firm to choose the optimal supply.
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Part 2: Choose 2 questions out of the following 3 questions to answer.
Question 1: Theory of Consumers. (30 points, each part is worth 5 points)
The utility function of Jianhui has the form U (C, Y ) = CY 99 , where C stands for
anti-COVID antibiotics pill CA (measured in tablets), and Y stands for everything else
(measured in RMB)
a. Write down Jianhui’s utility maximization problem and the expressions for Jianhui’s
demand functions for CA and everything else, given that the price of CA is pC and the
price of everything is pY , and Jianhui’s income is m. You may use shortcuts in deriving
the answer.
b. How many tablets of CA is Jianhui consuming if his income is 100RMB and the
price of CA is 2 RMB per tablet? Note that pY = 1. How many tablets would Jianjui
consume if we further assume that Jianjui cannot consume fractional CA tablets?
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c. Yajing works in Beijing. Yajing’s utility function takes the form
U (C, Y ) = min{8C, Y }. Assuming that Yajing’s income is 100 RMB per day, how many
tablets of CA does Yajing consume at the price of 2 RMB per tablet?
d. Although Yajing tested negative for COVID, she still consumes a large amount of
CA. To prevent people like Yajing, the government decides to limit Yajing’s
consumption of CA by increasing the price of CA to 12 RMB per tablet. How many
tablets would Yajing consume at this new price?
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e. After increasing the price of CA to 12 RMB, the government realizes that it is
making people like Yajing very unhappy. Therefore, the government decides to
compensate Yajing so that her optimal consumption bundle in part c. is just affordable.
How large should this compensation be?
f. Calculate Slutsky income and substitution effects on Yajing’s CA consumption due to

the price change from 2 RMB per tablet to 12 RMB per tablet.
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Question 2: Theory of Producers. (30 points, each part worth 5 points)
Consider a firm with the following production function,
f (L, K) = L1/2 + K 1/2 .
The prices of labor and capital are given by w and r, respectively.

a. Find the expressions for marginal products of L and K. Are they increasing or
decreasing? Explain what they mean.
b. Suppose in the short-run, K is fixed at 0. Solve the firm’s short-run cost

minimization problem, obtain the conditional input demands and the cost function.
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c. If w and r are multiplied by t > 1, does the amount of inputs demanded by the firm
to produce a fixed amount ȳ change? What is the intuition for this?
d. Compute and graph the marginal cost and the average variable cost. Make sure the
shapes and positions of the curves are consistent with your math expressions.
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Now, we are solving the firm’s long run problems.
e. What is the minimum cost necessary to produce y units of the output in the long
run?
f. Find the firm’s long run profit-maximizing level of output.
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Question 3: Oligopoly/Monopoly. (30 points, each part worth 6 points)
Suppose an industry consists of two firms, A and B, with the following cost functions:
cA (yA ) = yA2 , cB (yB ) = ayB .
Let the inverse demand function for the good produced by the industry be:
p(y) = c − dy.
Let a, c, d > 0. The two firms are competing in a Cournot fashion.

a. Find each firm’s reaction function.
b. Find the output levels and the price in a Cournot-Nash equilibrium.
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Now, suppose that an industry is consist of two firms. The firms made an agreement to
collude. Let the cost function of firm 1 given by
C1 (y1 ) = c1 y1
and that of firm 2 given by

C2 (y2 ) = c2 y2 .
The inverse market demand function is given by:
p(y) = a − by.
Let’s assume that if c1 = c2 , each firm produces exactly one half of industry output.
c. Find the cartel’s cost function. (Hint: you need to consider 3 different cases. These
cases can be summarized into one function.)
d. Setup and solve the cartel’s profit maximization problem. Calculate the equilibrium
price, quantity, and profit. You may assume that the cartel’s cost function equals
C(y) = c̄y.
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e. Now, let’s assume that c1 = c2 . Suppose that firm 1 believes that firm 2 will produce
at the quantity, and decides to cheat. Setup firm 1’s profit maximization problem.
Calculate the quantity that firm 1 would produce. Calculate the price and profit of each
firm.
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Name:

Shanghai University of Finance and Economics

Wednesday, May 18; Time Limit: 100 minutes

2. Total number of points is 100.

3. In providing answers, do not simply provide the appropriate equations. Make

4. People have different preferences. Therefore, at their current level of consumption,

6. It is economically more efficient to have a monopolist that discriminates perfectly

8. p = M C is a sufficient condition for a firm to choose the optimal supply.

f. Calculate Slutsky income and substitution effects on Yajing’s CA consumption due to

f (L, K) = L1/2 + K 1/2 .

The prices of labor and capital are given by w and r, respectively.

b. Suppose in the short-run, K is fixed at 0. Solve the firm’s short-run cost

f. Find the firm’s long run profit-maximizing level of output.

cA (yA ) = yA2 , cB (yB ) = ayB .

Let a, c, d > 0. The two firms are competing in a Cournot fashion.

b. Find the output levels and the price in a Cournot-Nash equilibrium.

and that of firm 2 given by

The inverse market demand function is given by:

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