EC202 Intermediate Microeconomics

School of Accounting, Finance and Economics

Discipline of Economics

Final Examination
Semester 1 2023

Online

Duration of Exam: 3 hours + 10 minutes

Reading Time: 10 minutes

Writing Time: 3 hours

Instructions:

1. There are three (3) sections in this examination. Answer each section on a fresh page,
of the answer booklet provided.
2. The exam is marked out of 100 and is equivalent to 50% of the course grade.
3. There are five (5) pages to this exam paper, including this cover page.

1
Section A Long Answers (20 Marks)

There are 5 questions in this section. Answer any 4 questions. Each question is worth 5 marks.
Spend about 40 minutes on this section.

Question 1
Discuss the difference between the price consumption curve and the income consumption curve.

Question 2
Discuss the Coase Theorem and its significance for correcting externalities.

Question 3

Discuss the significance of the shapes of isoquant for understanding the nature of production
function and marginal rate of technical substitution.

Question 4
Evaluate the following statement: “A firm that faces competition from many other firms cannot
have market power”.

Question 5
Suppose a firm seeks your advice regarding price discrimination. Discuss the difference between
first-degree and third-degree price discrimination. What conditions are necessary before the firm
can engage in either type of price discrimination?

2
Section B Graphical Analysis (30 Marks)

There are 6 questions in this section. Answer any 5 questions. Each question is worth 6 marks.
Spend about 50 minutes on this section. For each question, provide about 2-3 lines of brief
explanation.

Question 1

Suppose the government intends to impose an excise tax of $5 per unit. Using relevant diagrams,
show and discuss how the elasticity of demand will impact the price received by producers and
prices paid by consumers. You can assume the initial equilibrium price is $40 and the law of
supply holds.

Question 2

Using relevant diagram (s), show and discuss the impact of income changes on the position of
the budget constraint.

Question 3

Using relevant diagram (s), show and discuss any two types of returns to scale.

Question 4

Using relevant diagrams, show and discuss the difference between the increasing-cost industry
and the decreasing-cost industry.

Question 5

Using relevant diagram (s), compare and discuss the welfare implications of monopoly
equilibrium and perfectly competitive equilibrium.

Question 6

Using relevant diagram(s), show and discuss the impact of advertising on the firm’s profit.

3
Section C Calculations (50 Marks)

There are 5 questions in this section. Answer all questions. Each question is worth 10 marks.
Spend about 90 minutes on this section.

Question 1

John loves seafood. His preferences for fish (measured by F) and crabs (measured by C) are
described by the utility function U(F,C) = 5FC. Suppose fish costs $20 per unit and crabs cost
$40 per unit. She has an income of $200 to spend on fish and crabs. Find the optimal consumer
bundle for John and verify consumer equilibrium condition is satisfied. (10
marks)

Question 2

A firm has the production function Q = 2LK. The firm initially faces input prices w = $1 and r =
$1 and is required to produce Q = 1250 units. Later the price of labour w goes up to $5. Find the
optimal input combinations for each set of prices using the substitution method and use these to
calculate the firm’s price elasticity of demand for labour over this range of prices. (10 marks)

Question 3
Suppose you are the manager of a firm operating in a perfectly competitive market
and producing personal desktop computers. Your cost of production is given by 𝐶 =
100 + 2𝑞 2 , where q is the level of output and C is the total cost.

a) Determine the expression for marginal cost. (3 marks)

b) If the price of a computer is $200, how many watches should you produce to maximize
profit? (3 marks)
c) What will the profit level be? What will other firms outside the industry do in the long run?
(4 marks)

4
Question 4

A firm produces an output with the production function Q = KL, where Q is the number of units
of output per hour when the firm uses K machines and hires L workers each hour. The factor
price of K is 8 and the factor price of L is 4. The firm is currently using K = 32 and just enough L
to produce Q = 128. Determine the cost savings in the long run if the firm can adjust K and L to
produce 128 units in the least costly way possible. (10 marks)

Question 5
Suppose that a monopolist’s market demand is given by P = 400 - 2Q and that marginal cost is
given by MC = 16Q.

a) Calculate the profit-maximizing monopoly price and quantity. (2 marks each)

b) Calculate the price and quantity that arise under perfect competition with a supply curve P =
3Q. (2 marks each)

c) What can you conclude based on your answers in a) and b) above? (2 marks)

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