December 2015

Final Examination
VERSION 1

Microeconomic Theory
Econ 230 Section 1 & 2

12/22/2015 at 2:00 pm

Examiner: Fabian Lange Assoc Examiner: Theodore Papageorgiou

Student Name: McGill ID:

INSTRUCTIONS:

 Calculators are permitted

 Dictionaries are permitted
 This examination consists of 11 multiple choice / fill in the blank questions, 5 True, False,
and Uncertain question, and 4 Long questions. The exam also contains a Math help sheet.
 Please indicated your answers to the multiple choice / fill in the blank questions on the
exam.
 Provide your answers to the True, False, Uncertain and the Long Questions in the exam
booklets provided.
 The exam consists of a total of 9 pages including the cover page and the Math help sheet.
 This examination is PRINTED ON BOTH SIDES of the paper
 The examination paper MUST BE RETURNED

Course:230 Page number: 1

Microeconomic Theory Econ 230 D1 Version 1

Multiple Choice / Fill in the Blank

Questions

There are 11 questions in this section (8 multiple choice questions + 3 ll in

the blank questions). Each is worth 3 points. More than one answer might be
correct. To get a question marked as correct, you need to indicate ALL correct
answers and none that are incorrect. Clearly indicate your answers on the exam
sheet. Hand the exam sheet in at the end of the exam.
1. Which of the following represents an economic cost in a year?

(a) the foregone interest on cash holdings that a rm requires to pay bills during the

year.

(b) the possible earnings of the owner of a rm in an alternative profession.

(c) a share of past investments into establishing a reputation for a brand, if this past

investment raises the name recognition of a brand today.

2. The elasticity of Demand along a linear Demand function

(a) is constant

(b) increases (in magnitude) with the price.

(c) decreases (in magnitude) with the price.

(d) is zero

(e) is innite

3. In the long run with free entry,

(a) the elasticity of the Supply function of a rm is innite.

(b) the elasticity of the Supply function of an industry is innite.

(c) the price is equal to the break even price.

(d) the share of taxes passed through to consumers is zero.

4. Along a production isoquant

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Microeconomic Theory Econ 230 D1 Version 1

(a) consumers are indierent.

(b) rms prots are constant

(c) input combinations achieve the same output.

(d) output combinations achieve the same prot.

5. Which of the following production functions has constant return to scale?

(a) q = 2LK
√
(b) q = L+K
1
(c) q = (3L2 + 3K 2 ) 2
(d) None of the above.

6. The break-even price is:

(a) The lowest price at which a rm can make a prot

(b) The minimum cost.

(c) The minimum marginal cost

7. Bob's attitude towards risk is described by utility function U (C) = C 2 . If Bob is given

the chance to win $100 if the toss of a fair coin gives Head and lose $100 if Tail. Bob's

consumption without participating in the coin-toss is 10,000. Assume that it costs $1

to participate in the game. Will Bob participate?

(a) Bob will participate.

(b) Bob will not participate.

(c) Bob will either participate or not participate.

8. Suppose the demand function is QD = 100 − 10P . What is consumer surplus when

price is $5? Put the number in the space provided

CS =

9. Suppose the supply function is QS = 10P . What is producer surplus when price is $5?
Put the number in the space provided

PS =

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Microeconomic Theory Econ 230 D1 Version 1

10. Fill in the Blank: A prot-maximizing rm's marginal product of labor equals 4 tons

of output, while the marginal product of capital equals 6 tons of output and the rm

uses both labor and capital. Assume that the rental rate of capital is priced at $9 per

unit. Then the wage has to be __________?

11. A prot maximizing rm in a competitive market will

(a) produce only if the price is at least as large as the minimum average cost

(b) set production such that the output price equals the marginal cost of production

(c) choose input combinations such that the ratio of input prices equal the marginal

rate of technical substitution

(d) choose input levels such that the value of the marginal product equals the input

price.

(e) none of the above

True, False, Uncertain?

There are 5 True, False, Uncertain questions. Each is worth 10 points. For
each of the True, False, or Uncertain questions indicate whether the statement is
True, False or Uncertain. Explain your answer - points are awarded based on the
quality of the explanation. No points will be awarded without an explanation.
Limit yourself to no more than 150 words for each question.

Question 1: True, False, or Uncertain? When analyzing taxes, the Dead Weight Loss is a

measure of the loss of gains from trade. When analyzing price ceilings, the Dead Weight

Loss is a measure of the minimum loss of gains from trade.

Question 2: True, False, or Uncertain? In the long run, the tax incidence in competitive

markets with free entry falls entirely on consumers.

Question 3 True, False, or Uncertain? Utility functions are cardinal and Production functions

are ordinal.

Question 4 True, False, or Uncertain? Costs that are Fixed Costs at some point in time

might be considered Sunk at a later point.

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Microeconomic Theory Econ 230 D1 Version 1

Question 5 True, False, or Uncertain? The Marginal Rate of Technical Substitution is equal

to the ratio of input prices.

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Microeconomic Theory Econ 230 D1 Version 1

Long Questions

Long Question 1 (40 points): Assume that Anne has a Utility function over clothes C

and food F given by UA (F, C) = 0.4ln(C) + 0.6ln(F ) respectively. In 2014, Food and Clothes

both cost 10 per unit. Anne's income is 2,000.

LQ1.A How much Food and Clothes did Anne purchase in 2014?

LQ1.B In 2014, the price of Food increased by 10% and the price of Clothes declined by 10%.

Please calculate ination according to the Laspeyres index and according to the Paasche

index.

LQ1.C The Laspeyres index and the Paasche index are meant to approximate the Ideal

Cost of Living Index. Explain what this Ideal Cost of Living Index is.

LQ1.D Use a graph to explain why the Laspeyres index overestimates the Ideal Cost of

Living Index.

Long Question 2 (20 points): Being a bond trader implies earning a high expected wage

but also facing a lot of risk. Assume that bond traders earn $1,000,000 with probability 1/4

and $10,000 with probability 3/4.

LQ2.A What is the expected income of a bond trader?

√
LQ2.B Assume that John has preferences U (C) = C where C is consumption. Mary's

preferences are given by U (C) = ln(C). Please solve for John's and Mary's certainty equiv-

alent for being a Bond Trader.

Long Question 3 (32 points) Consider the welfare of two individuals (Ann and Bob) as
represented by their utility UA and UB .

LQ3.A In a graph with Ann's on the horizontal axis and Bob's utility on the vertical axis

indicate the set of pareto-ecient allocations in a society with nite resources.

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Microeconomic Theory Econ 230 D1 Version 1

LQ3.B In this same graph, illustrate the concept of Pareto superiority and inferiority.

LQ3.C Use a similar graph to show (using a counterexample) that the ranking imposed

by the Pareto criterium is not transitive.

LQ3.D In the same graph, illustrate Bentham's Social Welfare function and John Rawls

Social Welfare function and what allocations would be chosen based on these welfare func-

tions.

Long Question 4 (15 points) In the world copper market, the equilibrium quantity is

observed to be Q∗ = 15 million metric tons per year (mmt/yr) and price is P ∗ = $2.00 per

pound. Market research indicates that if the price of copper rises by 1%, the supply of copper
will rise by 1.5% , and the demand of copper will decline by 0.5%.
LQ4.A What is the elasticity of copper demand? Put your answer in the space provided:

D =

LQ4.B Suppose a new copper deposit is discovered. This shifts the supply of copper out by

1%. What will be the new equilibrium price PN∗ ew after this supply shock? Put your answer

in the space provided:

PN∗ ew =

LQ4.C What will be the new quantity exchanged Q∗N ew ? Put your answer in the space

provided:

Q∗N ew =

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Econ 230 Math Help Sheet 8

Math Cheat Sheet

1 Rules of Dierentiation

Below are a few rules of dierentiation. (A, a, b, n) are parameters and f (x) , g (x) , h (x):
∂f (x)
f (x) = Ax + b ⇒ =A
∂x

∂f (x)
f (x) = xn ⇒ = nxn−1
∂x

∂f (x) 1
f (x) = ln (x) ⇒ =
∂x x
∂f (x)
f (x) = exp (x) ⇒ = exp (x)
∂x

∂f (x) ∂g (x) ∂h (x)

f (x) = g (x) h (x) ⇒ = h (x) + g (x)
∂x ∂x ∂x

∂f (x) ∂g (x) ∂h (x)

f (x) = g (h(x)) ⇒ =
∂x ∂h ∂x

The following might also be useful reminders:

(xa )b = xa∗b

1
= x−1
x
√
x = x1/2
 
ln xa y b = a ∗ lnx + b ∗ lny
Econ 230 Math Help Sheet 9

2 Percentage Changes
For a product x ∗ y , we have that the percentage change of the product is the sum of the
percentage changes of x and y:
d (x ∗ y) dx dy
= +
xy x y
For a ratio xy , you have that the percentage change of the ratio is the dierence of the
percentage changes of x and y:
d (x/y) dx dy
= −
x/y x y