EC1002 ZA Exam Paper (May 2024)

EC1002
Introduction to Economics
Candidate should answer all EIGHT questions in Section A and BOTH

questions in Section B.
Please find questions on the following page.
© University of London 2024 Page 1 of 4

Section A
Please indicate if the statement is true/false/uncertain and provide an

explanation.
1. Isocost curves are usually downward sloping and convex to the origin.
2. Kai and Alexei got into a fight over the best book that was ever written. They
must decide whether to insist on their own book and escalate the situation or
attempt to de-escalate it by talking about movies. Given their payoffs in the
game tree below Kai has a dominant strategy.
Kai/Alexei Insist on book Change topic

Insist on book 2,2 0,3
Change topic 0,0 1,3
3. If a government sets a tax to provide a public good, the amount provided will
be the efficient one.
4. In an Edgeworth box, there are two endowment points.
5. Consider a small closed economy. We have 𝐶𝐶 = 𝑎𝑎 + 𝑐𝑐𝑐𝑐, 𝐺𝐺 = 𝐺𝐺0 and 𝐼𝐼 = 𝐼𝐼0 −
𝑏𝑏𝑏𝑏 + 𝑗𝑗𝑗𝑗 where 𝐺𝐺0 is autonomous government expenditure, 𝐼𝐼0 is the
autonomous part of investment, 𝑎𝑎, 𝑏𝑏, and 𝑗𝑗 are positive parameters, and 0 <
𝑐𝑐 < 1. In this case the multiplier is 1/(1 − 𝑐𝑐).
6. The Purchasing Power Parity theory proposes that, in the long run, the value of
the exchange rate between two currencies depends on their relative purchasing
power.
7. If the monetary authority reduces the interest rate then investment will fall as
return from financial assets falls.
8. If oil prices temporarily rise, the monetary authority is unlikely to intervene as
this will not affect the long run equilibrium output.

Section B
Q9
Atorvastatin is commonly used to lower cholesterol levels and reduce the risk of
cardiovascular events.
a) Pfizer produced this drug under the brand-name Lipitor. Assuming that Pfizer
is a monopoly, calculate the profit maximising quantity, price and profits that
Pfizer would set if the demand was 𝑃𝑃 = 150 − 2𝑄𝑄 and the total cost function was
𝐶𝐶(𝑄𝑄) = 6𝑄𝑄. [7 marks]
b) The patent for Lipitor expired in 2011. Following its expiry, a competitor,
GenericPharma, entered the market. Determine the Bertrand-Nash equilibrium
in this market assuming the same demand as in part a), where 𝑄𝑄 = 𝑞𝑞𝑃𝑃 + 𝑞𝑞𝐺𝐺𝐺𝐺
where 𝑞𝑞𝑃𝑃 is the production of Pfizer and 𝑞𝑞𝐺𝐺𝐺𝐺 the one from GenericPharma and
each firm has 𝐶𝐶(𝑞𝑞) = 6𝑞𝑞.Explain whether consumers and firms gained from the
expiry of the patent. [8 marks]
c) Discuss how the market outcome would change if additional generic
manufacturers could enter the market freely. Consider the changes this would
imply for consumer and producer surplus. [5 marks]
d) Suppose the government introduces a subsidy per unit for producers of
Atorvastatin. Using a diagram, illustrate the impact of this subsidy on the market
outcome. Discuss the implied changes in prices, quantities, and the overall
welfare. [10 marks]

Q10
a) Consider the Solow growth model where 𝑌𝑌 = 𝐹𝐹(𝐾𝐾, 𝐿𝐿). 𝑌𝑌 is output, 𝐾𝐾 is capital
stock and 𝐿𝐿 is the work force. Derive the steady state equilibrium condition of
this model if 𝛿𝛿 is the depreciation rate, 𝑠𝑠 is the savings rate, and 𝑛𝑛 is the labour
force growth rate, and draw the diagram showing the equilibrium. [10 marks]
b) Recently there have been many storms that have caused much damage to the
capital stock in the US. Assess the impact of this on output per worker and,
capital per worker and growth of output in the short and the long run. [10 marks]
c) Assume 𝐹𝐹(𝐾𝐾) = 𝐾𝐾 1/2 𝐿𝐿1/2 , 𝑠𝑠 is 20%, 𝛿𝛿 is 4% and 𝑛𝑛 is 4%. Specify the production
function and find how much capital per worker will change over time starting
from 𝑘𝑘 = 4. What is the steady state value of 𝑘𝑘? [10 marks]
End of paper

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EC1002

Candidate should answer all EIGHT questions in Section A and BOTH

Please find questions on the following page.

© University of London 2024 Page 1 of 4

Please indicate if the statement is true/false/uncertain and provide an

Kai/Alexei Insist on book Change topic

© University of London 2024 Page 2 of 4

© University of London 2024 Page 3 of 4

© University of London 2024 Page 4 of 4

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