The University of Melbourne
Department of Economics

Semester 2 Illustrative Example of an Exam, 2022
ECON10004 Introductory Microeconomics

Writing Time: 180 minutes
Reading/Scanning/Uploading Time: 30 minutes


This exam paper has 8 pages (including the cover sheet).


Exam Overview

• This final exam contributes 60% to the assessment in ECON10004. To pass this
subject, you must pass this exam.
• There are three sections in this exam. You must answer all questions in all sections.
• The total score for this exam is 100 marks. The number of marks for each question is
indicated at the start of each section and/or question.
• For all multiple-choice questions in section A, no explanations are required. For
sections B and C, all answers must be written down in full, including all intermediary
steps.

• To answer multiple choice questions in Section A, please answer in the Quiz page in
Canvas (as you did for your weekly quizzes). All other questions can be found in the
Quiz page, however, write your answer on paper, then scan the pages, make a
single .pdf file, and upload it into the exam shell (as you did for your assignments).
Warning: You first need to upload the pdf, and only then submit the quiz!



Allowed Materials

• This exam is open book and open notes.
• You may use any dictionary or software that translates English to a foreign
language.
• You may use a calculator of any type.
• Communication with anyone during this test is not allowed.


After You Have Completed Your Exam

1. Answer multiple choice questions in the Quiz page in Canvas.
2. Convert your completed answer sheets for Sections B and C into a single PDF.
2. Upload your PDF to the canvas system.
3. Double check your submission to ensure that everything has uploaded correctly.


Good luck!
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Section A – Multiple choice. [20 marks]
(Each multiple-choice question is worth 2 marks. For each question, select one answer only.
Incorrect answers, multiple answers, or no answer, will receive a zero mark.)

A1) Consider a perfectly competitive market. The industry demand curve is
QD = 5-2P. The industry supply curve is QS = 4P. What are the equilibrium price and quantity
for this market?

a) P*=5/6, Q*=10/3
b) P*=2, Q*=3/2
c) P*=3/2, Q*=3
d) P*=2, Q*=7/2
e) None of the above


A2) Suppose there are a positive demand shock and a positive supply shock in a perfectly
competitive market. Which of the following cannot happen?

a) The equilibrium price increases.
b) The equilibrium price decreases.
c) The equilibrium quantity increases.
d) The equilibrium quantity decreases.
e) None of the above.


A3) Consider a perfectly competitive market. The industry demand curve is QD = 7-2P. The
industry supply curve is QS = P. Suppose the government introduces a tax t=1 on consumers.
What is the equilibrium quantity in this market?

a) Q*=3/2
b) Q*=3
c) Q*=7/3
d) Q*=7/2
e) None of the above


A4) Suppose a domestic market in a country is perfectly competitive. The domestic market is
small and cannot influence the international price. Assume the country imports from the
international market. Which of the following statements is correct about the effect of an
import tariff being imposed?

a) Increase domestic consumer surplus
b) Increase domestic producer surplus
c) Increase domestic total surplus (including tariff revenue)
d) Decrease domestic quantity supplied
e) None of the above
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A5) Consider consumption involving a negative externality. Which one of the following is
correct?

a) A tax on consumption could increase quantity traded to the socially optimal quantity
b) A subsidy on consumption could increase quantity traded to the socially optimal
quantity
c) A tax on producers could bring quantity traded to the socially optimal quantity
d) A tax on producers could increase the consumer surplus
e) None of the above.


A6) Consider the following game:
Player B
U D
Player A U 5, 3 4, 4 D 3, 6 5, 6

Which method can be used to find a Nash equilibrium? (Assume you cannot use a
combination of the methods)

a) Backward induction
b) Best response strategies analysis
c) Strictly dominant strategies
d) Iterated elimination of dominant strategies
e) None of the above

A7) In the following game, which one of the following statements is correct?
Player B
U D
Player A U x, 3 4, 4 D 3, 6 5, 5

a) If x=4, U is a strictly dominant strategy for player A
b) If x=4, D is a strictly dominant strategy for player A
c) If 2 < x, both players choosing D is a Nash equilibrium
d) If 1 < x < 2, player A choosing D and player B choosing U is a Nash equilibrium
e) None of the above

A8) Which of the following statements is true about the Cournot Competition?

a) The firms are producing perfect substitutes
b) All the consumers pay the same price
c) The firms’ quantity choices are strategic substitutes
d) The total quantity produced is lower than under a monopoly
e) All of the above


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A9) Which one of the following statements is wrong?

a) A public good can be a common good
b) Cheesecake is a excludable good
c) Public roads are rival goods
d) Luxury goods can also be normal goods
e) None of the above


A10) Which one of the following are true:

a) Under first-degree price discrimination, each consumer is offered a single price
(instead of multiple prices)
b) Under second-degree price discrimination, each consumer is always offered a choice
between two prices
c) Consumer surplus under first-degree price discrimination is larger than under perfect
competition
d) Producer surplus under first-degree price discrimination is lower than that under third-
degree price discrimination
e) None of the above
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Section B – Short questions [Each question has 10 marks // 40 marks in total]


B1) Country A has 10 million workers and Country B has 20 million workers. Each worker
in Country A can produce 2 units of wine and 4 units of fabric in a year. Each worker
in Country B can produce 3 units of wine and 5 units of fabric in a year.

a) What is Country A’s opportunity cost of producing wine (in terms of fabric given
up)? What is Country A’s opportunity cost of producing fabric (in terms of wine
given up)?

b) What is the maximum production of wine in country A in a year? What is the
maximum production of wine in country B in a year?

c) Which country has a comparative advantage in producing fabric? Explain your
answer in no more than two sentences. Which country has absolute advantage in
producing fabric? Explain your answer in no more than two sentences.

d) Which country should import wine? Explain your answer.

e) What is the range of trading prices (in terms of fabric) for wine between the two
countries?


B2) There is a single supplier of concrete in a market. The market demand of the market is
QD = 10-2P. The marginal cost of production is c=1. There are no other costs.

a) If the price of concrete is P=2, compute the supplier’s profit. Explain your answer in
one sentence

b) What is the price elasticity of demand when P=2? Explain your calculation.

c) When price is P=2, compute the marginal gain and inframarginal cost if the supplier
increases the price by a very small amount? Explain the definitions of marginal gain
and inframarginal cost in no more than 2 sentences.

d) What is the profit maximizing price?

e) What is the Lerner’s index at the profit maximizing price?








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B3) Suppose there are 150 buyers in the market for used cars. There are two types of cars in
the market: the high-quality cars have a 90% chance to work, and the low-quality cars have a
40% chance to work. All buyers value a car that works at $10,000 and a car that does not
work at $0. The buyers are risk-neutral. Sellers know the quality of their cars. There are 70
sellers with low-quality cars, and 30 sellers with high-quality cars. The sellers’ value of a
high-quality car is $8000, and their value of a low-quality car is $5000.

a) What is the value of a high-quality car to a buyer? What is the value of a low-quality
car to a buyer?

b) Suppose the buyers do not know the quality of cars. With all the sellers in the market,
what is the maximum price that a buyer is willing to pay for a car?

c) If the buyers are only willing to pay the maximum price solved for in part b), are the
high-quality car sellers willing to sell? How about the low-quality car sellers?

d) Combine your answers in parts b) and c), explain which sellers sell their cars in the
market, and what is the range of possible prices in the market.

e) Suppose there are 70 sellers with high-quality cars and 30 sellers with low-quality
cars. Is it possible that the high-quality car sellers are willing to sell? If yes, explain
when they are willing sell. If no, explain why.

f) Explain how the percentage of sellers in the market with high-quality cars affects the
possibility of high-quality cars being sold. Use no more than four sentences.



B4) Suppose Anna’s utility for goods x1 and x2 is represented by the following utility
function: (!, ") = !!/""!/".

(a) Find Anna’s marginal rate of substitution, MRS12.
(b) If the price for good x1 is p1 = 1, the price for good x2 is p2 = 2 and Anna’s available
income is m = 12, write down Anna’s budget constraint.
(c) For the utility, prices and income given above, find Anna’s optimal consumption
choice (Marshallian demand) and her utility level.

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Section C – Long questions [Each question has 20 marks // 40 marks in total]


C1) Only elves live inn Rivendell. Elves in Rivendell are expert jewellery makers. In the
perfectly competitive market for jewellery in Rivendell, the demand and supply are given by

QD = 10– 2P
QS = 5P

Jewelry made in Rivendell is also desired by humans who live in the world outside Rivendell.
Jewelry can be sold to those humans in a perfectly competitive world market where Pw = 2.
Jewelry can be traded within Rivendell and in the world outside.

a) What will be the price at which trade of jewellery occurs? What quantity will be sold
to elves in Rivendell and what quantity will be exported?

b) Calculate the producer surplus and consumer surplus in Rivendell and illustrate them
in a demand and supply graph.

c) In 2021, humans are badly affected by Covid, and all of them must stay at home. As a
result, no human buys any jewellery. Assume no one else outside of Rivendell buys
jewellery. Elves are immune to Covid, and hence the demand within Rivendell stays
the same as before COVID. What is the competitive equilibrium (PCE, QCE) at Rivendell
in 2021?

d) To increase the producers’ surplus back to the pre-Covid level, Elrond, the King of
Rivendell, decides to host regular parties, so the elves have more chance to show off
their jewelry. As a result, the demand in Rivendell becomes QD =10 – 2P+x if Elrond
spends x to host the parties. What will be the new equilibrium quantity traded and price?

e) As a result of the new demand in part d), what will be the expression for producer
surplus at the new equilibrium?

f) How much should Elrond spend on the parties, so that the producer surplus in part e) is
the same as the pre-Covid level?

g) Given the expenditure x you derived in part f), what is the resulting total surplus? Is it
higher than the total surplus in the environment of part b)? Explain whether the King’s
party plan is a good idea



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C2) Company A is the only supplier of glass in Big Apple City used for tall buildings’
exteriors. Its marginal cost of production is cA=1, and it has no other production costs. The
demand for such glass in Big Apple city is QD=2-P. Company B in Jersey City produces the
same glass and is considering whether to expand to Big Apple city. If it enters, it needs to get
a permit to allow it to be a supplier in the Big-Apple city at a cost of L=0.5, which does not
vary with quantity of output, and its marginal cost of production is cB=0.5. If it expands to the
Big-Apple city, companies A and B both supply to the market, and the market price P
satisfies QA+QB=2-P, where QA is company A’s production level and QB is company B’s.

a) If company B expands to the Big-Apple city, what is the resulting price in a Nash
equilibrium?

b) Company B hires a consulting company to advise whether it should expand to the
Big-Apple city. If you’re running the consulting company, what is your advice?
Explain your advice. What is the largest value of the permit cost L such that you
would advise company B to enter the market?

c) Suppose both companies are in the market of Big-Apple city. Company A persuades
the mayor of the city to pass an environmental law. Because of its production
technology Company B is affected by the law, and to meet the new environmental
standards its marginal cost of production increases by 0.7. However, Company A has
a technology which meets the requirements of the law, so its marginal cost does not
change. As a result, Company B’s business starts to suffer.

What are the profits of both firms after the law is passed?

d) After the law in part c) is passed, if company B can use company A’s technology and
hence avoid the increase in its marginal cost due to the environmental law, what
would be each firm’s profit?

e) After the law in part c) is passed, company B is considering purchasing a license from
Company A to use A’s patented production technology. If you are the manager of
Company A, how much should you charge for the license?