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ECON 2514

Part A (15 questions, 2 marks each, 30 marks total)

Answer all 15 questions on one page in the answer booklet provided, not on the question sheet.

Identify the letter of the choice that best completes the statement or answers the question. Each question has one single correct answer.

2 marks are awarded for the correct answer, 0 marks for an incorrect answer.


Suppose you have been asked to draw a standard demand-supply diagram for a product with the demand curve:

  = 100 − 4 + 0.2

Income Y=100.

What would be the slope and the vertical intercept of this demand curve?

A)  Slope = 4, Intercept = 120

B)  Slope = 4, Intercept = 100

C)  Slope = 0.25, Intercept = 100

D)  Slope = 0.25, Intercept = 30


Suppose that lettuce has the demand curve below.

  = 100 − 4 + 0.5  + 0.02

If the price of lettuce, p, is $5, and the price of spinach, ps,  is $4, and income, Y, is $1000, the price elasticity of demand for lettuce (to 2 decimal places) is:

A)  - 0.20

B)  - 4.00

C)  - 5.10

D)  - 81.60


The transitivity assumption on consumer preferences, applied to flavours of ice-cream, means that

A)  You must either (strictly) prefer chocolate to strawberry, or (strictly) prefer strawberry to chocolate

B)  The more ice-cream you have of each flavour the better

C)  If you (strictly) prefer chocolate to strawberry, and you (strictly) prefer strawberry to vanilla, then you must (strictly) prefer vanilla to chocolate

D)  If you (strictly) prefer chocolate to strawberry, and you (strictly) prefer strawberry to vanilla, then you can’t (strictly) prefer vanilla to chocolate


The rate at which a consumer must give up y to get one more x is equal to

A)  -Px/Py

B)  -Py/Px

C)  -MUx/MUy

D)  -MUy/MUx


A production process is represented by the production function below:

(, ) = 120.2 0.3

What is an expression that represents the marginal product of capital (K)?

A)  2.4−0.8 0.3

B)  3.60.2 −0.7

C)  12−0.8 0.3

D)  12−0.8 −0.7


A production process has production function:

(, ) = 20. 5 0.5

In the short run capital K is fixed at 25 units.

The cost of capital per unit r is 4, and the cost per unit of labour w is 10.

What is the cost function?

A)  () =   2

B)  () =   2  + 100

C)  () =  

D)  () =   + 100


The profit maximising condition for a firm generally requires MR(q)=MC(q), this could be explained as because:

A)  If MR(q)<MC(q), then increasing q would lead to higher profits

B)  If MR(q)>MC(q), then increasing q would lead to lower profits

C)  If MR(q)<MC(q), then decreasing q would lead to higher profits

D)  If MR(q)=MC(q), then increasing q would lead to higher profits


Suppose that a perfectly competitive market is made up of many identical firms, each facing a cost function below:

() = 18 + 5 + 22

If the market price is initially 21, then what is the profit maximising level of output for the representative firm in the short run? And the long run?

A)  Short-run: q=4, Long-run: q=3

B)  Short-run: q=3, Long-run: q=4

C)  Short-run: q=4, Long-run: q=5

D)  Short-run: q=5, Long-run: q=4


Suppose that a monopolist at its profit maximising price and quantity has a Lerner Index equal to 0.42. What is the elasticity of demand at this point on the demand curve?

A)  -0.42

B)  - 1.86

C)  -2.38

D)  -4.20


Which of the following statements is true about the profit maximising two-part pricing outcome for identical consumers?

A)  Consumer surplus is maximised, and deadweight loss is zero

B)  Consumer surplus is maximised, and deadweight loss is non-zero

C)  Consumer surplus is zero, and deadweight loss is zero

D)  Consumer surplus is zero, and deadweight loss is non-zero


In the long run, a monopolistically competitive firm

A)  earns zero economic profit.

B)  produces at minimum average cost.

C)  operates at full capacity.

D)  All of these.

12) Suppose two duopoly competitors BigW and Kmart play a one-off simultaneous move      game against each other where they are choosing whether or not to charge the RRP              (recommended retail price) for a product, or to discount it. If they both charge RRP, they get  $8m profit each, if they both discount they get $6m profit each, if only one discounts while the other sets the RRP, the discounting firm steals market share and gets $10m while the other   firm gets $2m. The Nash Equilibrium is:

A)  Both firms set RRP.

B)  Both firms discount the product.

C)  Just one firm discounts with a Nash equilibrium for each option.

D)  There are no Nash Equilibrium.


In the Stackelberg model, the leader has a first-mover advantage because it

A)  has lower costs than the follower.

B)  chooses its output with knowledge of how its own choice will impact the choice of the follower.

C)  reacts to the follower's decision.

D)  differentiates its output.


Natasha is going to buy a risky asset that has an expected value of $62, which yields an expected utility of 146. Her risk premium is $19. What is her certainty equivalent?

A)  $19

B)  $43

C)  $81

D)  $208


As a result of knowing they have purchased car crash insurance, a person becomes a less careful driver, this is an example of:

A)  Adverse selection

B)  Moral hazard

C)  Signalling

D)  Screening

Part B (Answer 3 questions, 10 marks each, 30 marks total)

Answer only 3 out of the 4 questions below.

Please indicate clearly the question number at the top of the page, and also indicate sub- parts a), b) etc. if appropriate.

Should you wish to switch which questions you are answering, make sure to clearly indicate if there are question responses that you wish to be ignored.

B1 (10 marks)

Raj has a utility function between two goods X and Y given by:

() = 33 2

He has a budget of 600 to spend on these two goods, and the prices are:

 = 6,   = 8

Consider the bundle of X=40, Y=45.

a)  Show if this bundle is on, above, or below the budget line. (1 mark)

b)  What is the slope of the indifference curve through this bundle (40,45)? (2 marks)

c)   Use the slope of the IC compared to the slope of the BL at the bundle (40,45) to  explain whether the optimal bundle would have more or less X than 40. (3 marks)

d)  Solve for the consumer’s optimal bundle of X and Y, showing your working. (4 marks)

B2 (10 marks)

Explain in your own words the meaning of the concepts economies of scale’ and increasing returns to scale’ . How are they related, and how are they different? And what are some        reasons that each can come about?

B3 (10 marks)

Suppose there are two firms in a duopoly market selling an identical product.

They face the (inverse) market demand curve:  () = 200 − 4

Where Q is the total market output.

Each firm has zero fixed costs and constant marginal costs equal to 40.

a)  Find the Cournot-Nash equilibrium price. Show your working. (7 marks)

b)   If the firms merged, find the monopoly price. Show your working. (3 marks)

B4 (10 marks)

Explain why for private-value auctions the predicted outcomes of a second-price sealed bid auction are similar to those of an English auction.