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ECON 313 Practice Problem Set 0

The document provides a practice problem set to review key concepts from microeconomics including utility maximization, demand and supply analysis, cost minimization, and market equilibrium. It contains 8 questions assessing understanding of topics like cardinal vs ordinal utility, budget constraints, demand functions, production functions, perfect competition, and game theory concepts. Students are expected to answer at least 80% of the questions correctly and complete a review test by a given deadline.

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133 views2 pages

ECON 313 Practice Problem Set 0

The document provides a practice problem set to review key concepts from microeconomics including utility maximization, demand and supply analysis, cost minimization, and market equilibrium. It contains 8 questions assessing understanding of topics like cardinal vs ordinal utility, budget constraints, demand functions, production functions, perfect competition, and game theory concepts. Students are expected to answer at least 80% of the questions correctly and complete a review test by a given deadline.

Uploaded by

hongsik kim
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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ECON 313 Practice Problem Set 0

Review Questions from the Prerequisites. Our class discussions are based on my expectation that you
can handle the following questions. Please note that you should work through these questions no
later than the end of the first week of the class. If you find that you have trouble answering at least
80% questions correctly, you must review the materials in Econ 203. Submitting your attempt at
“Assignment” on Brightspace will give you access to a brief answer key. Your submission will not be
marked.

Please make sure to complete the “Review Test” at “Quizzes” on Brightspace by July 10. The questions
are based on this problem set, though they are not identical.

1. How is the cardinal utility approach different from the ordinal utility approach? Which one do
we usually use?

2. Tom spends all his $100 weekly income on two goods, apples and bananas. His utility function is
given by U (A, B) = AB, where A and B stand for the quantity of apples and bananas consumed
by Tom. If PA = $4 and PB= $10, how many apples and bananas will he consume? Make sure you
write out the utility maximization problem explicitly, including the decision variable(s). What if
his utility function is given by U (A, B) = A0.5B0.5?

3. For each of the following cases,


1) Write out the budget constraint and illustrate the constraint in a graph.
2) Add an indifference curve of the utility function.
3) Solve for the consumption bundle that maximizes the utility. Illustrate the result in the
graph.
4) What is the MRS (MUx/MUy) for each case at the optimal consumption point?

Utility Function Px Py Income


A x0.7 y0.3 1 1 100
B 4x + y 1 2 100
C 4x + y 1 0.25 100
D Min (2x, y) 1 10 60
E x 3 0.5 6

4. Tom spends all his $100 weekly income on two goods, apples and bananas. His utility function is
given by U (A, B ) = AB, where A and B stand for the quantity of apples and bananas consumed
by Tom. The price of apples is PA and that of bananas is PB . Derive the demand of apple by Tom.
(Hint: first, a demand function should give out the relationship between the quantity demanded
and the price of a good. For example, Q=10-P can be a demand function in a common first-year
textbook. Second, a person’s demand of a good is a result of his/her consumption decision, of
which question 2 is an example.)

5. There are 100 consumers in a market: 60 type A consumers, each has a demand function qA =
100 – 5P and, 40 type B consumers, each has a demand function qB = 150 – 3P. What is the
total market demand?
6. A firm’s production function is Q = 2K0.5L0.5. Suppose both the capital rental market and the
labour market are perfectly competitive, and the rental price of capital r = 1 and the wage rate
is w = 2.
a. In the short run, the firm has a fixed amount of capital, K is fixed at 16.
i. What is the firm’s cost function? What is its marginal cost? (a cost function
should give out the relationship of the total cost and the total quantity
produced. For example, C(Q) = 100 + 50Q . )
ii. In a perfectly competitive market where the market price of the output is 10,
how many units will the firm produce? What is the profit of the firm?
iii. In a perfectly competitive market where the market price of the output is p,
what is the supply function of the firm? (Hint: a supply function should give out
the relationship between the price and the quantity supplied at every given
price.)
b. In the long run, the firm can choose both the capital and labour amount used in
production.
i. If the firm plans to produce 200 units of its product, how many units of capital
and labour it should hire?
ii. Draw the isoquant of 200 units output. (an isoquant in a graph illustrates all
input bundles that offer the same amount of output. This graph should have K
and L as x-axis and y-axis.)
iii. What is the firm’s cost function? Illustrate the cost minimization problem in
your graph.
iv. What is its marginal cost?
v. Suppose the firm is a monopolist, and its market demand Q = 100 – P. What is
the price the firm will charge for its product?

7. Calculate the expected value of variable X and that of Y = X0.5.


a. a random variable X with the following probability distribution.

Probability Value
30% 5
50% 6
20% 7

8. Consider a two-stage competition between two firms. The total market demand curve is given
as P = 36- Q, where Q = Q1 + Q2. Both firms have a constant marginal cost and zero fixed cost.
Firm 1 will pick its output level in stage 1 and Firm 2 will pick in stage 2. How many units does
each firm produce in equilibrium? What is the profit level?

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