UNIVERSITY OF SOUTHAMPTON ECON1003 W1

SEMESTER 1 EXAMINATIONS 2018-19

ECON1003 - PRINCIPLES OF MICROECONOMICS

Duration: 120 minutes (2 hours)

Student number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Answer all questions.

PART A carries 60/100 points and you should aim to spend about 75 minutes
on it. This part consists of 20 equally weighted multiple choice questions. Write
your answers for this part on the multiple choice answer sheet; use a treasury
tag to join it to this sheet.

PART B carries 40/100 points and you should aim to spend about 45 minutes
on it. This part consists of 4 equally weighted questions. Explain your
answers in the space provided. Use the answer book for any extra material
if you find that the space provided for your answer is insufficient; use a treasury
tag to join it to this sheet.

Only University approved calculators may be used.

A foreign language direct ‘Word to Word’ translation dictionary (paper version)

ONLY is permitted. Provided it contains no notes, additions or annotations.

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PART A. Multiple choice questions.

A1 (3 points) Two individuals, A and B, consume two goods, x and y. To-

gether they have 8 units of x and 4 units of y. For Consumer A, the
A A
M RSx,y = (5y) / (3x) and for Consumer B the M RSx,y = (3y) /x. Which
of the following allocations is an efficient allocation of goods (x, y)?

(a) Consumer A has (5, 3), and Consumer B has (6, 2).
(b) Consumer A has (5, 3), and Consumer B has (3, 1).
(c) Consumer A has (3, 5), and Consumer B has (1, 3).
(d) Consumer A has (4, 2), and Consumer B has (4, 2).

A2 (3 points) Identify the true statement.

(a) Decreasing returns to scale and diminishing marginal returns are just
two different ways of saying the same thing.
(b) Returns to scale pertains to the impact on output of changing a single
input while holding all other inputs constant; diminishing marginal
returns pertains to the impact on output of increasing all inputs
simultaneously.
(c) Returns to scale pertains to the impact on output of increasing all
inputs simultaneously; diminishing marginal returns pertains to the
impact of changing a single input while holding all other inputs con-
stant.
(d) Returns to scale can be identified by calculating the slope of an
isoquant.

A3 (3 points) A market for a certain good is perfectly competitive. The price

elasticity of demand is zero. The price elasticity of supply is (+3). An
excise (per unit) tax:

(a) will not affect the price that producers receive because the demand
is so inelastic.
(b) will result in the consumer tax incidence of 0%.
(c) will result in the consumer tax incidence of 100%.
(d) may result in a consumer tax incidence between 0% and 100%, but
its size will depend on whether the tax is paid by consumers or
producers.

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A4 (3 points) Which of the following is not consistent with the profit-maximizing
behavior of a price-taking producer:

(a) Output is positive and the price is equal to marginal cost.

(b) Output is positive but profit is negative.
(c) Output is positive and the price is below average variable cost.
(d) Output is positive but below the Minimum Efficient Scale.

A5 (3 points) If an outcome is a Nash equilibrium then

(a) no player would want to change her action, given actions of others.
(b) no group of players would want to change their actions through co-
operation.
(c) it is efficient.
(d) there is no other Nash equilibrium.

A6 (3 points) The supply of apples can be represented by equation Qs =

2P + 500. The demand for apples can be represented by equation Qd =
900 − 3P . Which of the following is the equilibrium price in the market
for apples?

(a) 660
(b) 50
(c) 80
(d) 100.

A7 (3 points) A firm has a long run total cost T C(q) = 160 + 10q 2 and
the corresponding marginal cost M C(q) = 20q. What is the Minimum
Efficient Scale (MES) for this firm?

(a) indeterminate.
(b) 0.
(c) 2.
(d) 4.

TURN OVER

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A8 (3 points) Which of the following characterizes a public good?

(a) Its production creates a negative externality.

(b) It is not rivalrous.
(c) It will never be delivered by a private enterprise or volunteers.
(d) It is owned by the public.

A9 (3 points) Which of the following is a requirement of a perfectly compet-

itive market?

(a) Domestic markets are open to international competition.

(b) Firms may gain comparative advantage.
(c) Products are not regulated for health and safety.
(d) Buyers and sellers are price takers.

A10 (3 points) A profit-maximizing monopolist:

(a) always earns a profit in the long run and the short run.
(b) always earns a profit in the long run but never in the short run.
(c) can incur losses in the short run.
(d) can incur losses in the long run.

A11 (3 points) Which of the following changes would cause a competitive equi-
librium price and quantity to move along the market supply curve?

(a) Consumers’ income changes.

(b) The market opens to international competition.
(c) Firms adopt a better technology.
(d) Firms in this industry are forced to accept higher wages

A12 (3 points) A consumer purchases two goods. The second good is inferior.
Suppose that all the prices and her income double. Which of the following
is true?

(a) She will purchase more of both goods.

(b) She will purchase the same amounts of both goods.
(c) She will purchase more of the first good, and less of the second.
(d) She will purchase less of the first good, and more of the second.

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A13 (3 points) Suppose chicken breasts and pork steaks are substitute goods.
If the supply of chicken breasts increases we would expect the price of
pork steaks to go ________, and the equilibrium quantity of pork
steaks to go ________.

(a) down, down

(b) down, up
(c) up, down
(d) up, up

A14 (3 points) A profit maximizing monopoly will always produce where

(a) the long run average cost is at a minimum (i.e. at the Minimum
Efficient Scale).
(b) the marginal revenue is greater than marginal cost.
(c) the marginal revenue is lower than price.
(d) the market demand is inelastic.

A15 (3 points) Beef produced by domestic farmers is purchased by both do-

mestic and foreign consumers. All markets are competitive. The price
elasticity of supply is (+1/2), the domestic demand is perfectly inelas-
tic and the price elasticity of foreign demand is (−1). Current exports
account for about 4% of total sales. The ban on exports would

(a) decrease the equilibrium price of beef by 8% and decrease the quan-
tity demanded by domestic consumers by about 4%.
(b) decrease the equilibrium price of beef by 8% and leave the quantity
demanded by domestic consumers unchanged.
(c) decrease the equilibrium price of beef by 2% and decrease the quan-
tity demanded by domestic consumers by about 2%.
(d) decrease the equilibrium price of beef by 2% and leave the quantity
demanded by domestic consumers unchanged.

TURN OVER

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A16 (3 points) A Long Run Average Cost curve

(a) has to go up eventually, due to the fundamental assumption of di-

minishing marginal returns.
(b) is always flatter than a Short Run Average Cost.
(c) may be higher than a Short Run Average Cost curve, due to the fact
that costs accumulate over the longer time period.
(d) may be always decreasing.

A17 (3 points) Consider a competitive market for housing in the short run.
Suppose that due to new health and safety regulations, 1% of the initial
housing stock (fixed in the short run) is declared uninhabitable and with-
drawn from the market without any compensation. Which changes occur
in the short-run

(a) Consumer surplus goes up

(b) Producer surplus goes up
(c) Producer surplus goes down
(d) Producer surplus may go up or down.

A18 (3 points) When the British public is asked whether they want Soft Brexit
or Hard Brexit, they would choose Soft Brexit; when they are asked
whether they want Remain or Soft Brexit, they would choose Remain;
finally, when they are asked whether they want Hard Brexit or Remain,
they would also choose the Hard Brexit. Which of the following is true?

(a) “Completeness” is violated

(b) “Transitivity” is violated
(c) “More is better” is violated
(d) All standard assumptions on preferences are satisfied

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A19 (3 points) Laurel can harvest either 50 bananas or 40 pineapples in one

day (or their proportional combinations). Hardy can harvest either 100
bananas or 80 pineapples in one day (or their proportional combinations).
Laurel and Hardy both want to consume both kinds of fruit and have no
other neighbors. Which of the following is true?

(a) Hardy is more productive, so any trade beneficial to Laurel would

hurt Hardy.
(b) Laurel is less productive, so any trade beneficial to Hardy would hurt
Laurel.
(c) Mutually beneficial trade between Laurel and Hardy is possible be-
cause comparative advantage is what matters.
(d) Mutually beneficial trade between Laurel and Hardy is not possible
because Marginal Rates of Transformation between these products
are the same for Laurel and Hardy.

A20 (3 points) Economic models have endogenous and exogenous variables.

Which of the following is true?

(a) Price is an endogenous variable in the model of Bertrand competi-

tion.
(b) Quantity is an endogenous variable in a model of competitive market,
and an exogenous variable in a model of consumer choice.
(c) Quantity is an exogenous variable in the model of monopoly.
(d) Production function is endogenous is in the model of monopoly.

TURN OVER

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PART B. Write your answer in the space provided.

B1 (10 points) A firm is operating on an international market in which the

price is £40. The firm is too small to affect this price. Figure 1 shows
the firm’s cost curves.

(a) Judging from Figure 1, what is the firm’s optimal quantity? Indicate
the profit of the firm. Explain in a sentence.

£
MC
AC
50

40
AV C
30

20

10

200 400 600 q

Figure 1: Cost curves

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(b) Suppose that the government introduces a per unit tax of t pounds.
How is the firm affected and how does your answer depend on the
size of the tax? Explain briefly; you may use Figure 2 to illustrate
your point.

£
MC
AC
50

40
AV C
30

20

10

200 400 600 q

Figure 2: Cost curves not including tax

TURN OVER

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 10 ECON1003

(c) Suppose that instead of a per unit tax, the government introduces a
lump-sum tax of T pounds. How is the firm affected and how does
your answer depend on the size of the tax? Explain briefly; you may
use Figure 3 to illustrate your point.

£
MC
AC
50

40
AV C
30

20

10

200 400 600 q

Figure 3: Cost curves not including tax

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B2 (10 points) Explain in a few bullet points how equality of opportunity may
achieve an outcome that is both Pareto efficient and envy-free. What is
the role of competition and transferable endowments?

TURN OVER

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B3 (10 points) Suppose that there is a monopolist which produces its output
at a constant marginal and average cost of £10 per unit. Consumers’
willingness to pay for this product is described by the inverse demand
function p = 1110 − Q, where p stands for price and Q for the quantity
of product. (This demand function implies Marginal Revenue M R (q) =
1110 − 2Q).

(a) What is the monopoly optimal production and price? What is the
producer and consumer surplus?

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(b) Now, suppose that the government intervenes and splits the monop-
olist into 100 independent firms. This number is so great that the
resulting market is perfectly competitive. What is the competitive
production and price? What is the producer and consumer surplus?

TURN OVER

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B4 (10 points) Two players play a public good game. Each player starts with
a £10 banknote. The player can use this money in either of two ways.
She can Keep the banknote or Contribute it to a public project. All the
money that is contributed gets multiplied by 1.6 and then divided equally
among the two players.

(a) Fill out the following payoff matrix and find the Nash equilibrium.

Player 2
Keep £10 Contribute £10
Keep £10
Player 1
Contribute £10

(b) Is the Nash equilibrium efficient? What kind of externality does con-
tributing generate here? Give an example of government intervention
that could help with this type of externality and explain.

END OF PAPER

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Social Sciences Examination Feedback
2018/2019

Module Code & Title: ECON1003 Principles of Microeconomics

Module Coordinator: Max Kwiek

Mean Exam Score: 61

Mean Module Score*: 62.7

Percentage distribution across class marks:

Module marks*
1 st (70% +) 33%
2.1 (60-69%) 28%
2.2 (50-59%) 22%
3rd (40-49%) 11%
Fail (25-39%) 5%
Uncompensatable Fail 1%
(<25%)

*not including repeat year students and students who did not write the exam.

Overall strengths of candidates’ answers:

Overall performance was slightly above expectations. Students coped well with questions that were
somewhat unusual, such as A11, A17, A19

Overall weaknesses of candidates’ answers:

As often happens, questions that require precise and explicit analysis (and relevant calculations)
posed more problems. The prime example is A15.

Pattern of question choice:

n.a.

Issues that arose with particular questions:

B1 – part a. Most of the students were able to identify correctly the optimal quantity and profit in
the graph. Most of them also shows the algebraic procedure for calculating the profit and discussed
it showing that the concept was well understood. However, students also got confused often about
the difference between the optimal quantity given the market price and the optimal quantity which
would be offered at the break-even price, min AC = MC. Very few students mentioned the difference
between profit and operational profit and mentioned break-even and shutdown price.

B1 – part b. Most of the students mentioned that the tax shift all costs curve up, however many
students did not clarify that MC shift up and which are the consequences in terms of firm’s choice
and optimal quantity. Students referred generically to a loss in profit without specifying why that
happens. Very few students discussed the influence of the size of the tax on AVC and relative
shutdown decision. The students often got confused between a unit tax and a lump-sum tax and
indicated often that just the AC costs curve shifts up (and then the opposite in part c). Many
students discussed the consequences of the tax in equilibrium although the question required
an analysis at the level of single firm and its optimal choice.

B1 – part c. Most of the students mentioned that the AC curve would be the only one to shift up and
discussed reduction in profit as a consequence. Similarly to part b, few students clarified the
relationship between the curve shift and the magnitude of profit changes (e.g. break-even price
increases). Similarly to part b, they got confused between single-firm analysis and equilibrium
analysis.

B2 – The question is very standard. Many students learned a few definitions superficially and
obtained some points, but only those who understood the analysis behind this, could explain all the
points succinctly and obtained good marks.

B3 – part a. The solution of the first part of the exercise (identify quantity and price in equilibrium)
was done correctly. However, many students incorrectly reported MC=10q instead that MC=10 as
the text reported. The calculations of consumer surplus was correct most of the time, while when
calculating producer surplus they calculated a triangle area most of the time without realising that
they needed to calculate the area of a rectangle.

B3 – part b. The students that identified correctly the condition used to solve the exercise (p=MC)
showing the calculations, although often MC has been reported as equal to 10q instead of 10, as in
part a. Many students calculated producer surplus without subtracting production costs and they
were not able to identify that PS=0. Students that did not identify the correct condition that needed
to be used to solve the exercise often used the equilibrium quantities and prices calculated for the
monopoly equilibrium and re-arranged it for this exercise (e.g. Qm/100 firms). They did not show
equilibrium analysis for the two different markets.

B4 – the game itself was understood quite well and the Nash equilibrium presented correctly.
However, the interpretation of the fundamental economic problem of efficiency in part b was much
more problematic. This example could have been used to explain externalities, public goods,
pigouvian and coasian policies.

Further comments not covered above:

The correlation coefficient between coursework and exam is 41%

The correlation coefficient between part A and part B of the exam is 52%

Discipline vetting completed By (Name): E Mentzakis Date: 22 Feb 2019