Eco 310 Intermediate Microeconomics examination 2012/13
QUESTION ONE
a) The MRS for the Cobb-Douglas function: ( ) is given by:
( )
i) Does this result depend on whether .Does this sum have any relevance to the
theory of choice? Explain.
ii) For commodity bundles for which y = x how does the MRS depend on the values of
Develop an intuitive explanation of why, if . . Illustrate your argument with a
graph.
b) Explain why taking a monotonic transformation of a utility function doesn’t change the
marginal rate of substitution?
c) Show that if an individual’s tastes can be represented by a homothetic indifference map
Giffen’s paradox cannot occur.
(14 +6 + 5) = 25.MARKS
QUESTION TWO
a).Using the utility function given by: ( )
i).Calculate the uncompensated demand functions for x and y.
ii).Calculate the expenditure function for x and y
iii).Describe how the compensated demand curves for x and y are shifted by changes in income
or by changes in the price of the other good.
b). Define an economic model? Explain intituively how the validity of an economic model is
tested.
(5+5+10+5) = 25.MARKS
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Eco 310 Intermediate Microeconomics examination 2012/13
QUESTION THREE
a).Show that Euler’s theorem implies that, for a constant returns-to- scale production function
[ ( )] .Use this result to show that, for such a production function, if
then must be negative. What does this imply about where production must take
place? Can a firm ever produce at a point where is increasing?
⁄ ⁄
b).Suppose the total-cost function for a firm is given by
i). Use Shephard’s lemma to compute the (constant output) demand function for each inputs
ii).Use your results from part (i) to calculate the underlying production function for q.
(15 + 10) = 25.MARKS
QUESTION FOUR
a). Can the leader ever gets a lower profit in a Stackelberg equilibrium than he would get in the
Cournot equilibrium?Explain
b).With reference to Oligopoly Draw and explain a set of reaction curves that result in an
unstable equilibrium
c).The monopolist faces a demand curve given by ( ) Its cost function is
( ) .What is its optimal level of output and price?
(10 + 10 + 5) = 25
QUESTION FIVE
a).Explain economic and technological conditions that are conducive to the formation of
monopolies.
b).Suppose that a monopolist sells to two groups that have constant elasticity demand curves,
with elasticity .The marginal cost of production is constant at c.What price is charged
to each group
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Eco 310 Intermediate Microeconomics examination 2012/13
c). Suppose that a cost-minimizing firm uses two inputs that are perfect substitutes. If the two
inputs are priced the same, what do the conditional factor demands look like for the inputs?
(10 + 10 + 5) = 25 MARKS
QUESTION SIX
a).According to perfectly competitive model, what determines the amount of entry or exit a given
industry experiences? Explain.
b) Discuss this statement “Monopolistic competition can result in too much or too little product
differentiation.”
c) Indicate whether the following statements are true, false or uncertain and briefly explain. Your
grade will depend on your explanation.
i) An inferior good will always be inferior throughout the full range of incomes experienced by
the consumers
ii) Demand functions are always homogenous of degree zero
iii) Short run marginal and average costs of a firm will always be greater than its long run
marginal and average costs
(5+5 + 15) = 25 MARKS
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