UNIVERSITY OF SOUTHAMPTON ECON1001 W1

SEMESTER 1 EXAMINATIONS 2017-18

ECON1001 - FOUNDATIONS OF MICROECONOMICS

Duration: 120 minutes (2 hours)

Student number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Answer all questions.

PART A carries 60/100 points and you should aim to spend about 75 minutes
on it. This part consists of 20 equally weighted multiple choice questions. Write
your answers for this part on the multiple choice answer sheet; use a treasury
tag to join it to this sheet.

PART B carries 40/100 points and you should aim to spend about 45 minutes
on it. This part consists of 4 equally weighted questions. Explain your
answers in the space provided. Use the answer book for any extra material
if you find that the space provided for your answer is insufficient; use a treasury
tag to join it to this sheet.

Only University approved calculators may be used.

A foreign language direct ‘Word to Word’ translation dictionary (paper version)

ONLY is permitted. Provided it contains no notes, additions or annotations.

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PART A. Multiple choice questions.

A1 (3 points) In a two-good, two-consumer exchange economy, an allocation

is such that consumer A has a Marginal Rate of Substitution equal to 4
(thus, consumer A would need 4 extra units of good Y to be compensated
for a loss of 1 unit of good X ). Consumer B has a Marginal Rate of
Substitution equal to 6. Choose the correct statement:

(a) The allocation is Pareto efficient.

(b) The allocation is not equitable.
(c) Transferring some X from A to B, while transferring some Y from
B to A, at a rate of 1 unit of X to 5 units of Y, constitutes a Pareto
improvement upon original allocation.
(d) Transferring some Y from A to B, while transferring some X from
B to A, at a rate of 1 unit of X to 5 units of Y, constitutes a Pareto
improvement upon original allocation.

A2 (3 points) Which of the following characterizes a pure public good?

(a) It is rivalrous.
(b) It is excludable.
(c) Private provision of this good leads to inefficiency.
(d) It is owned by the public.

A3 (3 points) A market for a certain good is perfectly competitive. The price

elasticity of demand is (–2). The supply of this good is perfectly inelastic.
An excise (unit) tax:

(a) will not affect the price that producers receive because their supply
is so inelastic.
(b) will result in the consumer tax incidence of 0%.
(c) will result in the consumer tax incidence of 50%.
(d) may result in a non-zero consumer tax incidence, but its size will
depend on whether the tax is paid by consumers or producers.

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A4 (3 points) Which of the following may be consistent with the profit-

maximizing behavior by a price-taking producer:

(a) Output is set where price is equal to marginal cost.

(b) Output is set where marginal revenue is equal to marginal cost.
(c) No output is produced.
(d) All of the above.

A5 (3 points) Suppose deflation comes in the form of an across the board

decrease in all prices by some percentage k. For a consumer with a given
monetary income operating in a two-good world, this will cause the budget
line:

(a) to rotate inward.

(b) to rotate outward.
(c) to shift inward in a parallel way.
(d) to shift outward in a parallel way.

A6 (3 points) The supply and demand equations for Nantucket Nectar’s Kiwi-
berry juice are given by Qs = −4 + 5P and Qd = 29 − 6P respectively,
where price is in pounds per liter and quantity is thousands of liters. The
equilibrium market price and quantity is:

(a) P = $3, Q = 11 thousand liters.

(b) P = $2, Q = 6 thousand liters.
(c) P = $14, Q = 66 thousand liters.
(d) P = $22, Q = 106 thousand liters.

A7 (3 points) The concept of returns to scale is relevant:

(a) when some but not all inputs are fixed.

(b) in the long run.
(c) when all inputs are fixed.
(d) in the short run.

TURN OVER

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A8 (3 points) A factory producing calculators employs 6 workers. At current

levels of operation each worker produces 40 calculators per week. As-
suming labor is the only variable input and the weekly wage is £400 per
worker:

(a) average variable cost is £10.

(b) variable cost is £10.
(c) average variable cost is £40.
(d) average fixed cost is £60.

A9 (3 points) Which of the following is a requirement of a perfectly compet-

itive market?

(a) Buyers and sellers are price takers.

(b) There are barriers to entry.
(c) There are low indivisible set up costs.
(d) Firms maximize employment.

A10 (3 points) A profit-maximizing monopolist:

(a) earns a profit in the short run and the long run.
(b) earns a profit in the long run but not the short run.
(c) can earn profits or incur losses in the short run.
(d) can earn profits or incur losses in the long run.

A11 (3 points) EBay.com is a vast auction site that has some similarities to a
competitive market and some differences. In what way does eBay differ
from what economists define as a competitive market?

(a) Sellers in competitive markets are usually large firms, but on eBay
there are just a large number of sellers.
(b) Sellers on eBay sometimes mislead customers, while in a competitive
market deceit cannot happen.
(c) Sellers in competitive markets want to make a profit, but sellers on
eBay are small and hence are only selling for fun.
(d) It is easy to start selling on eBay, but to enter a competitive market
one must be organized as a corporation.

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A12 (3 points) The supply curve of a perfectly competitive firm is:

(a) the marginal cost curve only if price exceeds average variable cost.
(b) the marginal cost curve only if price exceeds average cost.
(c) the average total cost curve only if price exceeds average variable
cost.
(d) nonexistent.
A13 (3 points) If a monopolist produces below the quantity where M C = M R,
then:
(a) the increase in revenue is less than the increase in cost, when the
monopolist increases production.
(b) total revenue is less than total cost.
(c) the increase in revenue exceeds the increase in cost, when the mo-
nopolist increases production.
(d) total revenue exceeds total cost.
A14 (3 points) The profit-maximizing condition for a perfectly competitive
firm is:
(a) M R = P .
(b) M R = AV C.
(c) P = M C.
(d) P = AV C.
A15 (3 points) The following changes in a consumer’s economic circumstances
result in a flatter budget line with the vertical intercept unchanged. (De-
note the good on the horizontal axis as good 1 and the good on the vertical
axis as good 2.)
(a) A k percent decrease in the price of good 2 combined with a k percent
decrease in income.
(b) A k percent increase in the price of good 2 combined with a k percent
decrease in income.
(c) A k percent decrease in the price of good 2 combined with a k percent
increase in income.
(d) A k percent increase in the price of good 2 combined with a k percent
increase in income.
TURN OVER

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A16 (3 points) A perfectly competitive firm facing a price of £50 decides to

produce 500 widgets. Its marginal cost of producing the last widget is
£30. If the firm’s goal is to maximize profit, it should:

(a) produce more widgets.

(b) produce fewer widgets.
(c) continue producing 500 widgets.
(d) shut down.

A17 (3 points) Suppose that a firm producing furniture will be delivering 200
tables annually for many years to come. The firm employs 100 units of
labor and 100 units of capital (and nothing else). Isoquants are smooth.
Wages and the price of capital are both equal to one. Suddenly, the gov-
ernment introduces new stringent safety regulations – it is estimated that
the price of labor will effectively rise by 10%. After long-run adjustments
of labor and capital, the total cost will go up by:

(a) 5% exactly.
(b) more than 5%.
(c) less than 5%.
(d) more, less or exactly 5%. There is not enough information to deter-
mine this.

A18 (3 points) Usually we draw indifference curves as thin curves. Which

assumption would be violated if one drew an “indifference curve” as a
two-dimensional geometric shape such as triangle or disc?

(a) completeness
(b) rationality
(c) transitivity
(d) more is better

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A19 (3 points) The UK can produce either 1000 units of cheese or 1200 units of
wine (or their proportional combinations). The EU can produce either 500
units of cheese or 700 units of wine (or their proportional combinations).
They both want to consume both cheese and wine. Which of the following
is true:

(a) Mutually beneficial trade between the UK and the EU is impossible

because the UK is more productive in all sectors.
(b) Mutually beneficial trade between the UK and the EU in which the
UK sells cheese in exchange for wine is possible.
(c) Mutually beneficial trade between the UK and the EU in which the
UK sells wine in exchange for cheese is possible.
(d) Whether mutually beneficial trade between the UK and the EU is
possible depends on precise shape of consumers’ preferences.

A20 (3 points) Economic models have endogenous and exogenous variables.

Which of the following is not true:

(a) Price is an endogenous variable in a model of competitive market,

and an exogenous one in a model of consumer choice.
(b) Quantity of production is an exogenous variable in the model of
Cournot competition.
(c) Price is a decision variable in the model of monopoly.
(d) Price is endogenous is in the model of monopoly.

TURN OVER

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PART B. Write your answer in the space provided.

B1 (10 points) A certain product is produced and consumed in a certain

country, and the trade occurs in a competitive market. The domestic
supply is Qs = p, and the domestic demand is Qd = 100 − p.

(a) Suppose that this country is in autarky, that is, the imports and
exports are banned. What is the equilibrium price and quantity?
What is the Consumer Surplus? What is the Producer Surplus?
What is the total Social Welfare? Annotate Figure 1 and shade the
area that represents Social Welfare.
p
Demand Supply
(domestic) (domestic)

Q
Figure 1: Supply and Demand

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(b) Suppose that imports are allowed, and suppose that the world price
of this product is 30. Use Figure 2 below to draw the new market
supply in this country. Calculate the new total Social Welfare and
the Deadweight Loss (DWL) associated with the total ban of foreign
trade. Show them in Figure 2.
p
Demand Supply
(domestic) (domestic)

Q
Figure 2: Supply and Demand

TURN OVER

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B2 (10 points) Explain in a few bullet points how equality of opportunity may
achieve an outcome that is both Pareto efficient and envy-free. What is
the role of competition and transferable endowments?

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B3 (10 points) Consider a monopolist whose cost curves are depicted in Fig-
ure 3. The market’s demand function and the Marginal Revenue curve
that can be derived from this demand are also depicted.
p
MC
AC

AV C

Demand

MR Q

Figure 3: Monopoly

(a) Indicate the optimal quantity and price of this monopoly. Shade in
the area that represents profit or loss and operational profit or loss.
(b) Just judging from the Figure, is this monopoly a natural monopoly?
Why?

TURN OVER

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B4 (10 points) Suppose that there are two firms selling electricity in a certain
country. Electricity is a homogeneous good. The cost of production and
delivery is 5 pence per kWh. The demand is perfectly inelastic at 2,000
kWh per household (and there are 1,000,000 households in this country)
as long as the price does not exceed the choke price of 23 pence per kWh
(if the price exceeds that choke price, the quantity demanded drops to
zero). Firms choose prices simultaneously and the consumers buy from
the cheaper supplier; or, if prices are equal, the firms split the market
equally.
Colluding and charging the common price of 23 pence per kWh seems like
a good idea. Using appropriate jargon, provide a formal argument why
this behavior is difficult to sustain in an equilibrium.

END OF PAPER

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Social Sciences Examination Feedback
2017/2018

Module Code & Title: ECON1001 Foundations of Microeconomics

Module Coordinator: Max Kwiek

Mean Exam Score: 52.3

Mean Module Score: 56.3

Percentage distribution across class marks:

UG Modules PGT Modules

1 st (70% +) 19% 70% +
2.1 (60-69%) 23% 60-69%
2.2 (50-59%) 23% 50-59%
3rd (40-49%) 16% <50%
Fail (25-39%) 9%
Uncompensatable Fail 3%
(<25%)

Overall strengths of candidates’ answers:

On the whole, part A went fine, or at least according to expectations.

Overall weaknesses of candidates’ answers:

On the whole, part B required more “in depth” knowledge.

Those students for whom this is a core module (Econ programmes) should think that the exam mark
of 40-60 is a warning sign. To be prepared for ECON1002 and the following years, the aim should
be to score more than 60.
Pattern of question choice:
n.a.

Issues that arose with particular questions:

Part A went according to expectations.

Question B1: Overall most students were able to identify the social welfare on the graph and in most
cases recognised that the social welfare was the sum of the producer surplus and consumer surplus
in part a. Some students could not identify this and in some cases correctly labelled producer
surplus and consumer surplus but shaded in a separate (incorrect) area for social welfare. Some
students did not do any calculations in these questions and therefore lost marks. For those that did
do calculations on the whole they were correct (if they had correctly identified the correct areas for
producer surplus and consumer surplus), however there were some expected errors in the
calculations. Overall students struggled with part b of the question. Only a small handful correctly
labelled the new supply curve, however more students identified the correct area of the deadweight
loss. On the whole most students lost many of their marks on this part and overall it was poorly
answered.

Question B2: Most students mentioned a combination of correct ideas, but the problem is that often
they also added all kinds of unrelated issues. This question does have a short, succinct answer:
 The equal opportunity approach postulates: equal re-distribution of endowments & equal
access to markets; choices can be different, following heterogeneous preferences.
 Equal re-distribution is envy-free; choices after trades is also envy-free;
 Equal re-distribution may not be Pareto efficient; consumption after trades is Pareto efficient,
 if markets are perfectly competitive, by First Welfare Thm.
 Perfect competition and redistribution of endowments is necessary for this argument but
often questionable in practice.

Question B3: Students did poorly in 3.a. They had trouble finding the optimal Q and P, which led to
wrong profit/operational profit. Some did find Q and P, but could not shade the profit/operational
profit area. Many students found the correct Q but wrong P, which led to wrong arguments in 3.b.
Like 1003, the majority could not answer 3.b. A large proportion of students only answered by
saying "yes" or "no", with no explanation. Since many students found P to be below AVC, they
argued about "losses" and "shutdowns". Those who could argue about average and/or fixed costs,
barriers to entry, defining a natural monopoly (NM), examples of NMs, economies of scale, and so
on, did very well.

Question B4: This is not an essay question! A “formal” argument was expected (an explanation why
the suggested plan is not a Nash equilibrium, mentioning of Bertrand competition was expected),
and very few students provided one. Also a lot of students answered questions that were not asked,
e.g. about the legality of cartels.

Further comments not covered above:

none

Discipline vetting completed By (Name): Dr. H. F. Calvo- Date: 08/02/2018

Pardo