I True or false（2points*10）.
1.
A Giffen good must be an inferior good.
2.
If preferences are homothetic and all prices double while income remains
constant, then demand for all goods is halved.There is a positive consumer
surplus when the total amount one pays for something is less than the
amount one would be willing to pay rather than do without it altogether
3.
Wilma is not risk averse. She is offered a chance to pay $10 for a lottery
ticket that will give her a prize of $100 with probability 0.06, a prize of
$50 with probability 0.1, and no prize with probability .85. If she
understands the odds and makes no mistakes in calculation, she will buy
the lottery ticket.
4.
If the value of the marginal product of labor exceeds the wage rate, then a
competitive, profit-maximizing firm would want to hire less labor.
5.
The cost function C (y) = 10 + 3y has marginal cost less than average cost
for all levels of output.
6.
In Cournot equilibrium each firm chooses the quantity that maximizes its
own profits assuming that the firm's rival will continue to sell at the same
price as before.
7.
A general has the two possible pure strategies, sending all of his troops by
land or all of his troops by sea. An example of a mixed strategy is where
he sends 1/4 of his troops by land and 3/4 of his troops by sea.
8.
If the initial endowment is on the contract curve, then there must always
be a competitive equilibrium in which no trade takes place.
9.
If there are constant returns to scale in an industry, then in competitive
equilibrium, profits in that industry must necessarily be zero.
10. A dominant strategy necessarily leads to a Nash equilibrium.
II. Fill in the blanks for the following questions（2points*10）:
(1) If someone has the utility function U  1000  2 min x, y then x and y are
______________ (Please fill the special type of preference which is proper in the
blank.) for that person.
(2) Mr. Cog has 18 hours per day to divide between labor and leisure. His utility function
is U (C , R)  CR ; where C is dollars per year spent on consumption and R is hours of
leisure. If he has 5 dollars of nonlabor income per day and gets a wage rate of 18
dollars per hour when he works, his budget equation, expressing combinations of
consumption and leisure that he can afford to have, can be written
as____________________.
(3) Suppose that Agatha has $ 420 to spend on tickets for her trip. She intends to spend
the entire amount $420 on tickets and she prefers traveling first-class to traveling
second class. She needs to travel a total of 1500 miles. Suppose that the price of first
class-tickets is $0.30 per mile and the price of second-class tickets is $0.20 per mile.
How many miles will she travel by second class? _________________
(4) A profit maximizing firm continues to operate even though it is losing money. It sells its
product at a price of $100. From these facts we deduce that marginal cost is
____________ (increasing, decreasing or constant).
(5) Ann and Bruce each own a pizza store in Frostbite Falls, MN. Demand for pizza is
given by Q  200  40 P . Being the only two pizza stores in Frostbite Falls, they
attempt to profitably split the market without violating the Sherman Antitrust Act. Each
has the cost function C = 60 + 3Q. If Ann and Bruce behave as duopolists each earns
a profit of_____________.
III. Calculation (25 points)
1 A monopolist has two perfectly separated markets with inverse demand curves p =
120 - q/10 and p = 100 - q/10 respectively, where, as usual, p and q are the price and
quantity exchanged in the corresponding market. The total cost of the monopolist is
TC = 2000 + 50Q + Q2/5.
A Find the profit-maximizing overall output Q and its division between the two
markets. (10 points)
B Compare the prices and the price elasticities of demand in the two markets.(5
points)
Note: Roughly graph your solution.
2. Follow Problem 7, if the two markets are now open to each other and there is a
costless free commodity flow between them.
A Find the new best overall output Q and its division between the two markets.
(5 points)
B Compare the profits in the cases 7A and 8A.(5 points)
IV. Graphing and Analysis (35 points)
1. Draw to show a Giffen good in Fig. 1. (10 points)
a normal good
Fig. 1
a Giffen good
1. Draw both production function and isoquant to show a technology which does not
satisfy “Free Disposal”. Briefly explain.
3. Graph to show the supply curve of a typical firm with TC showed as fig. 2. Briefly
explain why. Depict the supply curve in a new graph. (15 points)
TC
Fig. 2
Q