BEE2022

UNIVERSITY OF EXETER BUSINESS SCHOOL

April 2013

Intermediate Microeconomics MOCK EXAM (Module convenor: Dieter Balkenborg, Todd Kaplan)

Duration : THREE HOURS

Please ll in your student ID number:

and your candidate number:

Use a single answer book for working out your detailed answers before giving your summary answers in this handout. Materials to be collected after this exam: This question handout, answer book. Do not forget to return this handout. Otherwise your exam will be invalid! Approved calculators are permitted. This is a closed note examination. Full work must be shown on your script. Please write legibly.

Question 1 : (4+3 marks) (i) George has a utility function of x1 + 3x2 . The price of good 1 is 1 and the price of good 2 is 2. If George consumes 2 of good 2 how much does he consume of good 1? If there isn t enough information to answer, then write N.E.I. (Not Enough Information) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (ii) Marc consumes 2 pizzas and 4 beers. He wins 20 pounds in the lottery and now consumes 3 pizzas and 6 beers. Which type of preferences April he have? a Cobb-Douglas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b Perfect Complements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c Quasilinear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d More than one of the above. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e None of the above. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Question 2 : (2+2+2+2 marks) Which of the following preferences can be represented by a utility function? Check which ones. (i) Comparing jobs based upon which is better in the majority of 3 criteria.. . . . . . . . . (ii) Dieter compares two DVDs based upon the alphabetical order of their titles. He likes the one that alphabetically comes earlier. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (iii) Bradley who likes water and hates work. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (iv) Tim likes fruit, but does not care about which type of fruit he consumes.. . . . . . . Question 3 : (2+2 marks) True or False? (i) All Necessities are Normal goods.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TRUE/FALSE (ii) All Luxury goods are inferior.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TRUE/FALSE

Do not forget to return this handout. Otherwise your exam will be invalid! (BEE2022 April 2012) (Please turn over.)

Question 4 : (3 marks) Preferences with utility represented by x3a xb 2 can also be 1 represented by a utility function x1 x2 where equals a b=(a + b): . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b a=(a + b): . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c a=(3a + b): . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d b=(3a + b): . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e 3b=(a + 3b): . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Question 5 : (2+2 marks) Sam has utility u(x) = chance of receiving 0 and 50% chance of receiving 4. p x. There is a gamble of 50%

(i) What is the certainty equivalence of this gamble? . . . . . . . . . . . . . . . . (ii) What is the risk premium? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Question 6 : (4 marks) Chris that falls for the Alais paradox when given the following options: w is 80% chance of $4000, x is $3000 for sure, y is 20% chance of $4000 and z is 25% chance of $3000. a Chris would choose x over w and y over z. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b Chris would choose x over w and z over y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c. Chris would choose w over x and y over z. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d. Chris would choose w over x and z over y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e. None of the Above. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Do not forget to return this handout. Otherwise your exam will be invalid! (BEE2022 April 2012) (Please turn over.)

Question 7 : (1+4 marks) There is a production function of (i) What is the returns to scale?

` k

a Constant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b Decreasing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c. Increasing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d. It changes from one to another. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (ii) What is `(w; r; x)? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Do not forget to return this handout. Otherwise your exam will be invalid! (BEE2022 April 2012) (Please turn over.)

p Question 8 (3 marks) : (Mark your answer with .) A two-part tari April be used by a company to: a. Capture all the surplus of homogeneous consumers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b. Discriminate between high demand consumers and low demand consumers. . . . . . . c. Capture rents from a franchise. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d. All of the above. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e. None of the above. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Question 9 (2 + 2 marks) : The university has decided that only special calculators can be used during the exam. The Student Guild has a monopoly on the calculators that are sold before and not during the exam. Ari and Jodi are both students taking the microeconomics exam. Ari feels that he can get by with only one calculator. Jodi feels that a second calculator would be helpful in case the rst calculator breaks down. The following table shows their valuations (note the number under the heading 2 calculators means the valuation for two calculators rather than for the 2nd calculator). Assume it costs them 5 pounds per calculator. (Assume if indierent in valuation terms to buying or not, Jodi and Ari buy.) 1 calculator 2 calculators Ari 10 10 Jodi 30 40 (i) (Fill in the numbers.) If the Guild could not tell who is who, but can charge dierent prices for dierent quantities what would they charge? Price for 1: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Price for 2: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p (ii) (Mark your answer with .) If the Guild could tell who is who, but must charge a constant price per calculator, what would the prots be?

a. 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b. 20. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c. 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d. 40. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e. 50 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Do not forget to return this handout. Otherwise your exam will be invalid! (BEE2022 April 2012) (Please turn over.)

Question 10 (3 + 3 +3 marks) : Everstrong has developed a pill that tricks the body into thinking it has spent two hours weight-training. It has no unintended side eects. Only the US and UK have permitted its sale. Demand in the US is q = 500 p and in the UK is q = 200 p. Note that q is in thousands and p is in pounds and answer is in thousands of pounds. The marginal cost of the pill is zero. (i) What would Everstrong s prots be assuming that the Americans will only buy pills sold in America and English will only buy the English pills? a. 61250 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b. 62500. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c. 71250 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d. 72500. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e. 85000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (ii) What would Everstrong s prots be assuming that it only decides to sell to Americans and ignore the UK market? a. 61250 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b. 62500. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c. 71250 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d. 72500. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e. 85000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (iii) What would Everstrong s prots be assuming that the Americans can buy pills sold in the UK and vice-versa and Everstrong considers selling to both the British and Americans (at a price less than 200) or just sticking with Americans? a. 61250 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b. 62500. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c. 71250 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d. 72500. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e. 85000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Do not forget to return this handout. Otherwise your exam will be invalid! (BEE2022 April 2012) (Please turn over.)

Question 11 (7 marks) True or false? (Please encircle your answer.) If bidders are fully rational, then in a common-value, second-price auction, the winner will never lose money.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TRUE/FALSE In a private-value auction, a bidder will always submit a higher bid under second price than under all pay. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TRUE/FALSE In a rst-price auction, it can be advantageous to submit multiple bids. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TRUE/FALSE The possibility of a winner s curse helps seller revenue, even if buyers know this. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TRUE/FALSE In a private-value auction with two bidders, one should always bid half their value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TRUE/FALSE Even under asymmetry, auctions always yield e cient outcomes (the bidder with the highest value wins). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TRUE/FALSE Because of revenue equivalence, having a minimum bid will not aect revenue in an auction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TRUE/FALSE

Do not forget to return this handout. Otherwise your exam will be invalid! (BEE2022 April 2012) (Please turn over.)

p Question 12 : (3+3 marks) (Mark your answer with .) If the probability of winning in a rst-price, private-value auction is P robwin(b) = 3b and your value is 1/2, what should you bid? a. 1/4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b. 1/3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c. 1/2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d. 2/3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e. 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . If the probability of winning in a second-price private-value auction is P robwin(b) = b=2 and your value is 1, what should you bid? a. 1/4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b. 1/3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c. 1/2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d. 2/3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e. 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Do not forget to return this handout. Otherwise your exam will be invalid! (BEE2022 April 2012) (Please turn over.)

Question 13 : (8 marks) Consider the following 2 L 3 T 9 0 B 0 6 0 6 R 0

2game.

Let (1 p) T + pB denote the strategy where player 1 plays B with probability p. Let (1 q ) T + qB denote the strategy where player 2 plays R with probability q . Which of the following statements is correct? Write TRUE after the statements you consider correct, FALSE after the staments you consider false. a. (B; R) is the only Nash equilibrium of the game. . . . . . . . . . . . . . . . . . . . b.
2 T 3 1 +1 B; 4 L+ 3 R is a Nash equilibrium. . . . . . . . . . . . . . . . . . . . . . . . . 3 4

c. (T; L) and (B; R) are Nash equilibria. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d. The game has at most four Nash equilibria. . . . . . . . . . . . . . . . . . . . . . . . .

Do not forget to return this handout. Otherwise your exam will be invalid! (BEE2022 April 2012) (Please turn over.)

Question 14 : (1+2+5 marks) Consider the following game. First, player 1 can decide between F , and U . Then player 2 gets the move after observing the choice of player 1. She can decide between playing A or R . If she chooses R both players get zero. Otherwise, both players get 5 after Fwhile player 1 gets 10 and player 2 gets zero after U . (i) (2 marks) Draw the extensive form for this game on the graph paper provided. (i) (3 marks) Draw the normal form. (iii) (6 marks) Which of the following statements are correct? Write TRUE after the statements you consider correct, FALSE after the staments you consider false. a. (AF ; RU ) is a weakly dominated strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . b. (RF ; AU ) is a weakly dominated strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . c. (F; (AF ; RU )) is a subgame perfect equilibrium . . . . . . . . . . . . . . . . . . . . . d. (U; (AF ; RU )) is a subgame perfect Nash equilibrium . . . . . . . . . . . . . . . e.
1 K 2 1 1 +2 U; AF ; 1 A +2 RU is a subgame perfect Nash equilibrium . 2 U

Do not forget to return this handout. Otherwise your exam will be invalid! (BEE2022 April 2012) (Please turn over.)

Question 15 : (14 marks) Suppose that Tom and Jerry are the only sellers of designer umbrellas, which consumers view as dierentiated products. For simplicity, assume each seller has constant marginal costs equal to zero. When Tom charges a price of pT and Jerry charges a prices of pJ , consumers would buy a total of qJ = 100 umbrellas from Jerry and qT = 100 pT + pJ pJ + pT

umbrellas from Tom. To answer this question you need to calculate: i) the reaction curve, ii) the Nash equilibrium of the simultanoeus price setting game, when both rms set their prices simultaneously and independently, and iii) the Nash equilibrium of the Stackelberg-type leadership gamel, where Tom can set his price rst and then Jerry, having observed Tom s price, decides on his price. Which of the following statements are correct? Write TRUE after the statements you consider correct, FALSE after the staments you consider false. a. Suppose Jerry knew that Tom is setting a price of 200. Then it is a prot maximizing best reply of Jerry to set a price of 150: . . . . . . . . . . . . . . . . . . . . . . . . . . b. The reaction curve is upward sloping. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c. Tom sets a price of 20 in the Nash equilibrium of the simultaneous price setting game. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d. Tom and Jerry set the same price in the Nash equilibrium of the simultaneous price setting game. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e. In the Nash equilibrium of Stackelberg-type leadership game, Tom makes a prot of 1200.98. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . f. In the Nash equilibrium of Stackelberg-type leadership game, Tom makes a higher prot than Jerry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . g. In the Nash equilibrium of Stackelberg-type leadership game Tom makes a higher prot than he would make in the simultaneous price setting game. . . . . .

Do not forget to return this handout. Otherwise your exam will be invalid! (BEE2022 April 2012) (Please turn over.)

Question 16 : (5 marks) Astrid s utility function is UA (HA ; CA ) = HA CA , Birgers utility function is UB (HB ; CB ) = min [HB ; CB ] ; where H denotes the amount of herring and C the amount of cheese consumed. If Astrid s initial endowment is no cheese and 20 units of herring and if Birger s intial endowment is 9 units of chees and no herring, then, where p is the competitive price for herring when the equilibrium price for cheese is normalized to 1, demand equals supply in both markets. Which of the following statements are correct? a. 9=p + 20=2p = 20: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b. 9=20 = p. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c. 4=20 = p.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d. 9= (p + 1) + 10 = 20. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e. min [20; 9] = p. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Do not forget to return this handout. Otherwise your exam will be invalid! (BEE2022 April 2012) (End of the exam paper.)