FACULTY OF ECONOMICS, MANAGEMENT & ACCOUNTANCY

DEPARTMENT OF ECONOMICS
JANUARY 2022 EXAMINATION SESSION

ECN2217 – Intermediate Microeconomics Thursday, 27th January 2022

Examination time: 14:30 – 16:30 + 30 extra minutes for uploading/downloading

In case of difficulty during the examination (issues with exam paper, electricity power cut,
internet connection, etc), you may contact the Faculty of Economics, Management &
Accountancy on the following:

Telephone: 2340 2734; 2340 2720; 2340 3787

Email: fema@um.edu.mt

Please note that for immediate feedback it is best to communicate using telephone. Use
email only if there are circumstances when the use of telephone is not possible.

Keep your mobile phone handy since important communications during the examination may
be communicated by the University through SMS.

For FLOWassign: before submitting your work, it is imperative that you check that you are
uploading the correct file/s, by using the preview function.

For FLOWmulti: you are unable to preview files that you may need to upload. It is imperative
that you open the file on your own device prior to uploading it, to make sure that this is indeed
the file that you wish to upload.

If you are submitting handwritten scans, it is important that you number your pages, and
double-check that your scan contains all the pages that you need to upload.

Please make sure that you have disabled any pop-up blockers and VPN, as these create
problems with the use of WISEflow.

By sitting for this examination, you acknowledge that you are aware of the provisions of the
regulations regarding conduct during examinations and you pledge to observe them.

You may not obtain or seek to obtain advantage in an examination, or give or endeavour to
give assistance to other students. If you are found guilty of a breach of the University
Assessment Regulations you are liable to disciplinary action which may result in the
examination being cancelled and other consequences.

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INSTRUCTIONS TO STUDENTS:

STUDENTS ARE REQUIRED TO ANSWER QUESTION 1 AND ANY OTHER TWO QUESTIONS

STUDENTS ARE TO WRITE THEIR ANSWERS USING PEN AND PAPER, THEN UPLOAD THEIR
SCANNED ANSWERS DURING THE 30 EXTRA MINUTES FOR UPLOAD.

NON-PROGRAMMABLE CALCULATORS ARE ALLOWED

1. Briefly discuss the following:

(a) Show that the equilibrium outcome of the Cournot model is different from
Stackelberg model. In your answer outline the main assumptions of both models.
(10 marks)

(b) What is the resulting equilibrium of the Bertrand model and the main assumption
behind it?
(10 marks)

(c) By using the Slutsky equation, explain how a consumer can optimise his utility
following a decrease in the price of a good. In your answer assume the case of a
Giffen good.
(20 marks)

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2. CableMT has a natural monopoly over the cable network. Let the demand function of
the monopolist be 𝑄 = 40 − 0.4𝑃, where Q denotes output and P the price. Total cost
is equal to 2.5𝑄 2.

(a) Suppose that there are no fixed costs. Show that the monopolist’s marginal
revenue curve is given by 𝑀𝑅 = 100 − 5𝑄, marginal cost is given by 𝑀𝐶 = 5𝑄 and
that the equilibrium output produced by the monopolist is 10. What profit will the
monopolist make? Briefly explain the intuition for the result.
(6 marks)

(b) Suppose now that much of the fixed line system that allows people to connect runs
a fixed cost of 100. Do the output and profit levels change? Explain why or why not.
(7 marks)

(c) The government plans to improve broadband access across the country and so it
willing to subside part of its variable costs so that CableMT could produce an
output level where marginal cost matches demand. Find this output level and the
maximum subsidy that the Government would be willing to grant. Explain why it
desirable to the country for firm to produce at this point.
(9 marks)

(d) Why does a monopoly never produce in the inelastic part of its demand curve?
(8 marks)

3. Two players, Tesco and Sainsbury, play a symmetric game where each can either
cooperate or defect. If both cooperate, they each get a payoff of 10. If both defect, they
each get a payoff of 8. If one cooperates but the other defects, the one cooperating
gets a payoff of 0, and the one defecting gets a payoff of 16.

(a) Does either firm have a dominant strategy? Explain.

(5 marks)

(b) Assume that firms set their quantities simultaneously. Find the Nash equilibrium of
this game. Is the Nash Equilibrium pareto efficient?
(5 marks)

(c) Suppose that Tesco chooses the quantity first. Find the subgame perfect
equilibrium of this game. Explain the intuition for the result.
(8 marks)

(d) “Collusion is a Nash equilibrium in the infinitely repeated game.” Discuss this
statement.
(12 marks)

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4. The relationship between output (Y) and the amount of labour (L) and capital (K) is: 𝑌 =
𝐾 0.5 𝐿0.4 subject to 4𝐿 + 3𝐾 = 108.

(a) Explain and derive the Marginal Rate of Technical Substitution of labour and
capital.
(6 marks)

(b) Does the production function exhibit increasing, decreasing or constant returns to
scale? Explain the intuition for the result.
(3 marks)

(c) Show the generic formula for the elasticity of substitution and explain why the
elasticity of substitution for this production function is equal to 1.
(6 marks)

(d) Formalise the Lagrange function and find the critical values for L and K that will
maximise the firm’s output. Show that at these input combinations generate an
output of 12. In your workings explain the intuition for the result.
(15 marks)

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5. Consider the following pure exchange economy. There are two goods, 𝑥1 and 𝑥2 , and
two individuals, Agent A and Agent B. The endowments 𝑤 𝐴 , 𝑤 𝐵 of 𝑥1 and 𝑥2 are as
follows:

x1 x2
Agent A 5 1
Agent B 1 5

The utilities 𝑈 𝐴 , 𝑈 𝐵 of the two agents are given by: 𝑈 𝐴 = 𝑥1𝐴 𝑥2𝐴 and 𝑈 𝐵 = 𝑥1𝐵 𝑥2𝐵 , where
subscript indicates the consumption of good 𝑥1 or good 𝑥2 and the superscript refers to
the agent in question.

(a) Draw the Edgeworth box representing this exchange economy, making explicit the
total dimensions, the endowment point, and the indifference curves of the two
individuals.
(6 marks)

(b) Define and calculate the marginal rate of substitution (MRS) of the two agents.
(6 marks)

(c) What is the equation of this contract curve? In this box draw the contract curve and
explain what condition will have to hold along the contract curve.
(9 marks)

(d) Now suppose that both Agents interact in a competitive market, where the market
yields a price of 𝑝1 and 𝑝2 . What condition should hold at equilibrium? Explain the
first and second theorem of welfare economics.
(9 marks)

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