Vrije Universiteit Amsterdam

Intermediate Microeconomics

Problem Set 3

To be uploaded on Canvas by Friday 23-09-2022 9 AM by the team-leader in Excel format.

Q1 (2 points) According to the lecturer, the huge surge of the world spot-market price for natural gas seems
most likely explained by:
(a) an elastic very-short-run demand for gas and an elastic very-short-run supply of gas.
(b) an elastic very-short-run demand for gas and an inelastic very-short-run supply of gas.
(c) an inelastic very-short-run demand for gas and an elastic very-short-run supply of gas.
(d) an inelastic very-short-run demand for gas and an inelastic very-short-run supply of gas.

Q2 (2 points) On September 1st 2022, Damco Aluminium Delfzijl (Aldel) immediately quit production
because of the high gas- and electricity prices. The micro-economic rationale to do so is:
(a) The market price for aluminium dropped below the short run average cost price.
(b) The opportunity costs of resale of its gas contracts dropped below the short run average cost price.
(c) The short run average cost price jumped above the market price for aluminium.
(d) The short run average cost price jumped above the opportunity costs of resale of its gas contracts.

Q3 (2 points) Walras’Law holds in the Edgeworth box because consumers

(a) have strictly quasi-concave utility functions.
(b) have binding budget constraints.
(c) are utility maximizers.
(d) are allowed to have budget de…cits.

Q4 (5 points) Consider the electricity market on the Island of Rocks where all electricity is produced by a
single giant gas-generated power plant. The sales price of electricity is pe , the cost price of gas is pg and the
2 p
marginal cost function M C (QS ) = 41 (pg QS ) . The demand function is QD (pe ) = 10= pe . The …rst-order
change dpe =dpg in the partial equilibrium price pe due to a supply shock in the gas price pg is equal to:
(a) 2:5
(b) 5
(c) 7:5
(d) 10

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Q5 (5 points) Consider an exchange economy with two goods, x and y, and two consumers, A and B.
Consumer A is endowed with 6 units of good x and 4 units of good y. Consumer B is endowed with 4
units of good x and 6 units of good y. Consumer A has utility function UA (x; y) = ln x + y and B has
Cobb-Douglas utility function UA (x; y) = x1=2 y 1=2 . Which prices are general equilibrium prices?
(a) px = 1 and py = 1.
(b) px = 1 and py = 41 .
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(c) px = 2 and py = 1.
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(d) px = 3 and py = 1.

Q6 (5 points) Consider the exchange economy of the previous question. In the general equilibrium allocation
we have that:
(a) A consumes 5 units of good x and B consumes 5 units of good y.
(b) A consumes 2 units of good x and B consumes 4 units of good y.
(c) A consumes 6 units of good x and B consumes 6 units of good y.
(d) A consumes 1 units of good x and B consumes 9 units of good y.

Q7 (5 points) Consider the exchange economy of the previous questions. Consider the allocation ((1; 1) ; (9; 9)).
Can this allocation be supported as an equilibrium allocation after lumpsum redistribution?
(a) Yes, if good y is the numéraire and B pays a tax of 6.
(b) Yes, if good x is the numéraire and A pays a tax of 8.
(c) Yes, if good y is the numéraire and no redistribution required (B pays a tax of zero).
(d) No.

5px +5py
Q8 (2 points) For what positive values of , and is the function 10px
a demand function x (px ; py ; 5; 5)
in a general equilibrium model?
(a) = and = .
(b) + = 0 and = 1.
(c) = and = + .
(d) + = 1 and = 1.

Q9 (2 points) Consider an exchange economy with production. The production technologies are given by
1=4
x = lx and y = 14 ly . The total labor supply is given by lx + ly = 100. The production possibility frontier
is given by
(a) x1=4 + 41 y = 100.
(b) x1=2 + 21 y = 100.
(c) x2 + 2y = 100.
(d) x4 + 4y = 100.