Microeconomics II (FS 2019)

Exam

PART 1 (50 Points)

In this section of the exam, for each of the following statements there are three possible an-
swers: true, false or abstention. The number of attainable points is indicated in brackets.
For a correct answer, the points are added. For a wrong answer, the points are sub-
tracted. For an abstention, you receive 0 points. If the total number of points for a given
problem ends up being negative it will automatically be set to zero. Please enter all your
answers in the answer sheet enclosed (only the answer sheet will count for the evaluation).

Problem 1. Consumer Behavior (6 Points)

(a) Consider the consumption bundles A = (1, 2) and B = ( 12 , 1). If an individual

is indifferent between these two bundles (A ∼ B), his/her preferences violate the
assumption of monotonicity. (1.5 Points)

(b) If the preferences of an individual are transitive, any two indifference curves of the
individual cannot cross. (1.5 Points)
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(c) For α = 41 the two utility functions U1 (X, Y ) = X α Y 1−α and U2 (X, Y ) = X 3 Y
represent the same preferences. (1.5 Points)

(d) The indifference curves for perfect substitutes are linear. (1.5 Points)

Problem 2. Individuelle Nachfrage und Marktnachfrage (6 Points)

The preferences of an individual are described by the utility function U (X, Y ). The
individual spends all of his/her income I > 0 on the two goods X and Y . The associated
prices of the goods are given by PX and PY , where PX , PY > 0.

(a) Assume that the preferences of the individual can be described with the utility
function U (X, Y ) = min{aX, aY } where a > 0. If PX 6= PY and the individual
maximizes utility, then in the optimum X = Y . (1.5 Points)

(b) If PX 6= PY and a utility maximizing individual consumes only one of the two goods
in the optimum, then the good that is not consumed is a neutral good. (1.5 Points)

(c) In the optimal consumption point of an individual, we always have that the marginal
rate of substitution is equal to the price ratio. (1.5 Points)

(d) If the price of a good doubles, then the income of the individual I must double as
well to keep the individual equally well-off as before the price change. (1.5 Points)

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Problem 3. Production and Costs (8 Points)
Assume that a profit-maximizing firm produces with the production function Q(K, L) =
max{2K, L}. The price of one unit of capital K is R > 0, and the price of one unit of
labor L is W > 0.

(a) The two inputs K and L are perfect complements. (2 Points)

(b) If the firm produces some output Q̄ > 0, it will employ both factors of production
in the optimum. (2 Points)

(c) For R < 2W the cost function of the firm is given by C(R, W, Q̄) = 21 RQ̄. (2 Points)

(d) For any given output Q̄ > 0, the marginal cost of the firm are equal to the average
cost. (2 Points)

Problem 4. Game Theory A (8 Points)

Consider the following game in normal form.

Player 2
L R
O x, 1 − x 0, 0
Player 1
U 0, 0 1, 1

(a) If x = 2, then the strategy combination (U, R) is the only strategy combination that
survives the iterated elimination of strictly dominated strategies (IESDS).
(2 Points)

(b) If x ∈ (0, 1), then the game has exactly three Nash-Equilibria. (2 Points)

(c) If x = 0, then the strategy combination (O, L) is not a Nash-Equilibrium.

(2 Points)

(d) If x = 13 , there exists a Nash-Equilibrium in which player 1 plays strategy O with

probability 53 . (2 Points)

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Problem 5. Game Theory B (8 Points)
Consider the following sequential game.
1

L R
2

(1, 1)
L R

` r ` r

(2, 2) (0, 0) (0, 2) (0, 3)

(a) Player 1 has three information sets. (2 Points)

(b) The game has four subgames. (2 Points)

(c) The game has eight pure strategy profiles. (2 Points)

(d) The game has exactly three Nash-Equilibria in pure strategies, (L`, L), (R`, R) and
(Rr, R). (2 Points)

Problem 6. Imperfect Competition (8 Points)

Consider a market with the inverse demand function P (Q) = 10−Q, where Q denotes the
total quantity and P the price. The market is served by two firms, so that Q = q1 + q2 .
The cost function of firm 1 is given by C1 (q1 ) = 4q1 , the cost function of firm 2 is given
by C2 (q2 ) = q22 .

(a) The inverse price elasticity of demand is given by 1/η = 1 − 10

Q
. (2 Points)

(b) The reaction function of firm 1 is q1∗ (q2 ) = 3 − 12 q2 . (2 Points)

(c) In the Cournot equilibrium, firm 1 offers quantity q1 = 2. (2 Points)

(d) If the two firms form a cartel, then in the profit-maximizing optimum of the cartel
only one of the two firms produces a positive output. (2 Points)

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Problem 7. Selected Topics (6 Points)

(a) Consider the market for used cars from the lecture. If the buyer knows that the
quality s is uniformly distributed on the interval [0, smax ], then the quality he/she
expects increases if the equilibrium price increases. (1.5 Points)

(b) The income-expansion path of an individual with Cobb-Douglas preferences has a

constant slope. (1.5 Points)

(c) If the slope of the Engel curve is negative for a given income, then the good under
consideration is an inferior good at this income level. (1.5 Points)

(d) Consider a duopoly in which the Bertrand Paradox holds. Then the Herfindahl-
Hirschman Index is HHI = 14 . (1.5 Points)

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 PART 2 (40 Points)
In this section of the exam, you are given a list of five possible answers for each part
of each problem. Only one of these five answers is correct. Your task is to identify the
correct answer. The number of attainable points is indicated in brackets. For a correct
answer, the points are added. For a wrong answer you receive 0 points. For an abstention,
you receive 0 points. Please enter all your answers in the answer sheet enclosed (only the
answer sheet will count for the evaluation).

Problem 1. Decison Under Uncertainty (20 Points)

An individual obtains utility from his/her income w > 0 according to the function u(w) =
2 ln(w). The initial income is w0 = 100.
(a) Calculate the absolute degree of risk aversion r(w0 ). (4 Points)
A. r(w0 ) = 100
B. r(w0 ) = 0.1
C. r(w0 ) = 0.01
D. r(w0 ) = −0.01
E. None of the above.
(b) The individual suffers a loss of S with probability π ∈ (0, 1), where 0 < S < w. The
individual can obtain an insurance at a price of p < 1 per Euro of insurance cover
D. Indicate the expected utility EU of the individual with insurance. (5 Points)


A. EU = 2 ln π(w − S − pD + D) + (1 − π)(w − pD)
B. EU = π2 ln(w − S − pD + D) + (1 − π)2 ln(w − pD)
C. EU = π2 ln(w − pD) + (1 − π)2 ln(w − S − pD + D)
D. EU = π2 ln(w − S + D) + (1 − π)2 ln(w)
E. None of the above.
(c) Calculate the optimal insurance cover D if the individual suffers a loss S = 80 with
probability π = 21 and the price per Euro of insurance cover D is given by p = 34 .
(5 Points)
A. D = 20
B. D = 40
C. D = 80
80
D. D = 3
E. None of the above.
(d) Assume that the individual suffers the loss S = 51 with probability π = 12 . Calculate
the risk premium ρ of the individual without insurance and round the final result
to two decimal places if needed. (6 Points)
A. ρ = 8.50
B. ρ = 6.00
C. ρ = 4.50
D. ρ = 2.50
E. None of the above.

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Problem 2. Consumer Behavior (20 Points)
The utility function of an individual is given by U (X, Y ) = XY . The prices for the two
consumption goods X and Y are PX > 0 and PY > 0. The income of the individual is
I > 0.

(a) Calculate the Marshallian demands X M (PX , PY , I) and Y M (PX , PY , I).

(5 Points)
I I
A. X M (PX , PY , I) = 2PY
, Y M (PX , PY , I) = 2PX
I I
B. X M (PX , PY , I) = PY
, Y M (PX , PY , I) = PX
PX I PY I
C. X M (PX , PY , I) = 2 +P 2
PX
, Y M (PX , PY , I) = 2 +P 2
PX
Y Y
I I
D. X M (PX , PY , I) = 2PX
, Y M (PX , PY , I) = 2PY
E. None of the above.

Assume for the following questions that the price of good Y doubles, so that PYnew = 2PY .

(b) Calculate the total effect ∆Y of the price change on the consumption of good Y in
equilibrium. (4 Points)
A. ∆Y = 0
B. ∆Y = − 2PIY
2PY I PY I
C. ∆Y = 2 +4P 2
PX
− 2 +P 2
PX
Y Y

D. ∆Y = − 4PIY
E. None of the above.

(c) Calculate for good Y the substitution effect SE of the price change. (Hint: The
2
utility in the equilibrium before the price change is given by U0 = 4PXI PY .) (6 Points)
√
√ 2
1−
A. SE = 2 2PY
·I
√
1−2
√ 2
B. SE = 2 2PY
·I
C. SE = − P 2P+P
Y
2 · I
X Y
√
1−
√ 2
D. SE = 2 2PX
·I
E. None of the above.

(d) Calculate the expenditures C(PX , PYnew , Ū ) of the individual as a function of the
utility Ū after the price change. (5 Points)
p
A. C(PX , PYnew , Ū ) = 2 2PX PY Ū
p
B. C(PX , PYnew , Ū ) = 4PX PY Ū
q
C. C(PX , PY , Ū ) = 3 PX P2Y Ū
new

q
D. C(PX , PY , Ū ) = 5PX2PY Ū
new

E. None of the above.

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