k

January 2022 Exam

EC1A3
Microeconomics I

2021/22 LT Examination solution and commentary

 LSE LT 2022/EC1A3 Page 1 of 11

SECTION A:

Question 1 [6 marks] BDE

Question 2 [6 marks] BE

Question 3 [6 marks] A B E

Question 4 [6 marks] A D

Question 5 [6 marks] A C E

General Feedback:

Students struggled mainly on MCQ 4 and 5. In particular, many wrongly chose B in

MCQ 4 and D in MCQ 5, and a substantial proportion did not choose E in MCQ 5
which is a correct answer.

 LSE LT 2022/EC1A3 Page 2 of 11

SECTION B:
Question 6 [35 marks]

Consider the following strategic situation that has been enacted in a recent experiment: Participants are
grouped into groups of n participants. Participants sit, each in front of their own computer, in the lab and decide
about whether to volunteer or not. Each group was given two minutes to decide, with the experiment ending as
soon as someone volunteered. If no one volunteered, each group member received a payment of $1. Anyone
who volunteered received $1.75, while the other group members who have not volunteered each received $2.

a. Translating this situation into a simultaneous move game, write the primitives of the model, the set
of players, the set of actions for each player and the preferences of each participant on profiles of
actions by all players. [5 marks]

ANSWER: In this question we have to translate the description of the experiment into the formalisation of a
simultaneous game, even though the experiment takes place over time. A simultaneous game is defined by
the set of players, the set of actions for each player and the payoffs of players defined on profiles of actions
of all players. In this case the set of players is N={1,2,…,n}. The set of actions for each player is {Volunteer,
Not Volunteer}. Finally, each player gets a payoff of 1.75 whenever they volounteered and a payoff of 2
when someone else volounteered and they did not. Finally, they get a payoff of 1 if no one volunteered. 1
point for set of players (n players), 1 point for set of actions (Volunteer, not volunteer), 3 points for full
answer on preferences which should state the preference of the player as a function of any prifile of actions
(If no one else volunteered you get 1 if you do not and 1.75 if you do, if someone else volunteered you get 2
if you do not and 1,75 if you do.

b. Assume that n=2, write this game in a matrix form. [6 marks]

ANSWER: In this question we have to translate what we wrote in (a), assuming n=2, into a matrix form
game. The following matrix includes all the information about the game in matrix form, where the set of
players is two, the column and row player, the set of actions is V (volunteer) and NV (not volunteer), and the
payoffs as they appear in the matrix, each correspond to a profile of actions, the left number the payoff of
the row player and the right number corresponding to the payoff of the column player.

 LSE LT 2022/EC1A3 Page 3 of 11

 V NV
Player1/Player2
1.75,1.75 1.75,2
V
2,1.75 1,1
NV

c. Find a pure strategy Nash equilibrium in the game you found in (b). Explain and prove your answer. [6
marks]

ANSWER: A pure strategy Nash equilibrium is a profile of actions in the game, such that for each player,
their action in this profile is a best response to the actions of the other players in this profile of actions. In
this case we have two pure strategy equilibria, the first is when the row player volunteers, and the column
player does not and the second equilibrium is when the column player volunteers and the row player does
not. Let us see that the first profile of actions above is an equilibrium (given the symmetry of the game,
the proof will also be sufficient to prove that the latter profile is an equilibrium, as you can just switch the
names of the players). Let us first focus on the row player, given that the column player is not
volunteering, if the row player volunteers his/her payoff is 1.75 and if he/she does not volunteer his/her
payoff is 1. As a result, volunteering is the best response of the row player (as 1,75 is a higher payoff
than 1). Now let us consider the column player. Given that the row player is volunteering, the column
player gets a payoff of 1.75 if she/he volunteers as well but gets a higher payoff of 2 if she/he does not.
As a result the column player is best responding to the row player’s action in the profile. The above
arguments also prove that there are no otrher pure strategy equilibria in this game.

d. Find a mixed strategy Nash equilibrium of the game you found in (b). Explain and prove your answer.
[6 marks]

ANSWER: To compute the pure strategy of the game we have to find the probabilities of playing V and NV
that makes the other player indifferent between playing V and NV. Given the symmetry of the game
between players we can calculate this for one of the players and a similar calculation will hold for the
other. So suppose p is probability the column player choses V, then the row player needs to be indifferent
between V and NV. Given this strategy by the column player, the row player will get an expected utility of
p(1.75)+(1-p)(1.75) if they play V and an expected utility of p2+(1-p)1 if the play NV. Equating these two
expected utility terms, we need to solve p(1.75)+(1-p)(1.75)=p2+(1-p)1 and the solution is p=0.75. As we
said above, the same calculation will pin down the probability q with which the row player plays V in
equilibrium, and so q=0.75 as well.

e. Assume now that n=3. Find a pure strategy Nash equilibrium of this game. Explain and prove your
answer. [6 marks]

ANSWER: A pure strategy Nash equilibrium is a profile of actions in the game, such that for each player,
their action in this profile is a best response to the actions of the other players in this profile of actions. In
this case we have three pure strategy equilibria. To this let is call the three players player 1,2 and 3. The
first equilibrium is when player 1 volunteers, and the other two players do not. Similarly, a the second
equilibrium is when player 2 volunteers and players 1 and 3 do not. Finally, the last equilibrium has player
3 volunteering and playeys 1 and 2 not volunteering. Let us see that the first profile of actions above is an
equilibrium (given the symmetry of the game, the proof will also be sufficient to prove that the latter two
profiles are equilibria as well, as you can just switch the names of the players). Let us first focus on the
player 1, given that the other two players are not volunteering, if the player 1 volunteers his/her payoff is

 LSE LT 2022/EC1A3 Page 4 of 11

 1.75 and if he/she does not volunteer his/her payoff is 1. As a result, volunteering is the best response of
player 1 (as 1,75 is a higher payoff than 1). Now let us consider the other two players, where we focus on
player 2 and a similar argument will hold for player 3. Given that player 1 is volunteering and player 3 is
not, player 2 gets a payoff of 1.75 if she/he volunteers as well but gets a higher payoff of 2 if she/he does
not. As a result player 2 is best responding to the other player’s actions in the profile. The above
arguments also prove that there are no pure strategy equilibria in which two players volunteer and the
third does not. Finally, it is not an equilibrium that all do not volunteer, as in this case, one player would
want to volunteer (getting 1.75 rather than 1). Similarly, it is not an equilibrium for all to volunteer as then
one player would deviate to not volunteer (getting a payoff of 2 rather than 1.75).

f. Economists ran these experiments in groups of two and had participants play in many rounds where
they were able to see the gender of the other participant in their group. The economists measured the
proportion of time participants volunteered. The economists noticed that when the groups were
composed of only women or only men, there was no difference between proportion of volunteering
between men and women and these proportions were strictly between one and zero. But when they
ran the experiment with groups composed of both males and females, they found big gender
differences. Indeed, they found that the proportion of times men volunteered was almost zero and
that of the women was close to one. Use your analysis of this game, specifically the equilibria you
found above to support the claim that “this experiment dispels the notion that women are different
than men when it comes to volunteering, or that women are more inclined to volunteer, rather it is the
beliefs and expectations in society that make women volunteer more because men expect them to do
so more often, and woman know that men expect this”. [6 marks]

ANSWER: One way to interpret the results of the experiment is the following. When the group is single
gender, they seem to be playing the mixed strategy equilibrium in (d) as each subject seems to be
randomly choosing between volunteering or not, and there is no significant difference between genders.
When the group is mixed they seem to be playing the pure equilibria in (c) where females seem to be
volunteering almost surely and males seem to be not volunteering most of the time. So in this
interpretation we see that males and females might behave differently, but not because of their
preferences (as they seem to have the same behaviour in the mixed strategy equilibria e=when the
groups have homogenous gender). The reason they behave differently under this interpretation is that
they are playing different equilibria, the mixed or the pure, depending on the composition of the group.
One way to explain these two different equilibria is to think about prevalent beliefs in in society that
women like to volunteer and men don’t and this reinforces the pure strategy equilibrium in mixed groups
but does not affect the situation in homogenous groups.

General Feedback:
In this question some students failed to translate the description of the situation into a simultaneous move
game. Some did not add the situation in which both players volunteer as a possibility, others assumed a
payoff of zero for both players from this situation whereby this payoff was not included in the description.

 LSE LT 2022/EC1A3 Page 5 of 11

 In (a) many students did not elaborate on how the payoffs of each player depend on the profile of actions of
all players (as is written in the question). For example, some simply said “maximise payoffs” instead of
specifying what the payoffs from the different eventualities in the game are.

Many struggled to come up with a convincing answer to (f).

Question 7 [35 marks]

You eat only Pink lady apples, 𝑥𝑥1 , or Granny smith apples, 𝑥𝑥2 . You are comparing two local supermarkets,
Weightrose and Senseberries. In Weightrose the price of Pink lady apples is £2 and the price of Granny
smith apples is £3. In Senseberries the price of Pink lady apples is £3 and the price of Granny smith
apples is £2. Your utility from a consumption bundle (𝑥𝑥1 , 𝑥𝑥2 ) is given by 𝑈𝑈(𝑥𝑥1 , 𝑥𝑥2 ) = 𝑥𝑥1 𝜃𝜃 𝑥𝑥21−𝜃𝜃 . You have
£60 to spend.

a. Compute the MRS between 𝑥𝑥1 and 𝑥𝑥2 . [6 marks]

ANSWER: The MRS between x1 and x2 is computed by dividing the marginal utility of x1 by the marginal
utility of x2.

 LSE LT 2022/EC1A3 Page 6 of 11

 b. Write the formula for the budget constraint in each of the supermarkets. Draw the budget
constraints you have found. [5 marks]

ANSWER: The general formula for the budget line is p1x x1+ p2x x2=Income. In our case the prices differ in
the two supermarkets and the income is 60. So we can plot the two budget lines in the following way,
substitution for the prices in each supermarket:

c. Compute the optimal consumption bundle (𝑥𝑥1 , 𝑥𝑥2 ) in each supermarket as a function of θ. [6
marks]

ANSWER: The optimal consumption is computed by solving two equations. The first is the tangency of the
indifference curve to the budget line, that is the equation of the MRS computed above to the slope of the
budget line (the price ratio). The second equation is the budget line itself. Together we have two equations

 LSE LT 2022/EC1A3 Page 7 of 11

 with two unknowns and we can compute the optimal consumption bundle (x1, ,x2):

d. Assume that θ=0.6. On the same graph, show the optimal consumption at each supermarket. By
looking at your drawing or by doing some calculations can you tell which supermarket would you
prefer to do your shopping in? Explain your answer. [6 marks]

ANSWER: In this question, if one draws the graph correctly, one can easily see the solution to the question.
We can use the above calculations to see what the optimal consumption bundles are in each supermarket.
We can then carefully draw these two consumption points on the same graph (see below) being careful to
be as exact as we can when we draw the budget lines and indifferent curves. From the graph one can
immediately see that the consumer preffers weightrose; with weightrose prices they can afford to buy
the optimal bundle they would buy at senseberry’s but can actually do better! One can also compte the
level of utility from consuming at weightrose or at senseberry’s (see below) and validate this .

 LSE LT 2022/EC1A3 Page 8 of 11

 e. Assume that θ=0.4. On the same graph, show the optimal consumption at each supermarket. By
looking at your drawing or by doing some calculations can you tell which supermarket would you
prefer to do your shopping in? Explain your answer. [6 marks]

ANSWER: In this question, if one draws the graph correctly, one can easily see the solution to the question.
We can use the above calculations to see what the optimal consumption bundles are in each supermarket.
We can then carefully draw these two consumption points on the same graph (see below) being careful to
be as exact as we can when we draw the budget lines and indifferent curves. From the graph one can

 LSE LT 2022/EC1A3 Page 9 of 11

 immediately see that the consumer preffers senseberrry; with senseberry prices they can afford to
buy the optimal bundle they would buy at weightrose’s but can actually do better! One can also
compute the level of utility from consuming at weightrose or at senseberry’s (see below) and validate
this .

f. For what value of θ would you be indifferent as to which supermarket would you prefer to do your
shopping in? Explain your answer. [6 marks]

ANSWER: To see this we can plug in the optimal consumption bundles as a function of θ we computed
above to get the level of utility from shopping in each supermarket, as a function of θ. By equating these

 LSE LT 2022/EC1A3 Page 10 of 11

 two expressions we can find the level of θ for which the two utilities are equal:

General Feedback:
In (d) and (e) many failed to draw the indifference curves right. In particular a substantial number of students
have had the indifference curves of the same consumer cross (which they can never do). If drawn right, the
graphs in this question can actually provide a proof and an answer to the sub questions.

 LSE LT 2022/EC1A3 Page 11 of 11