Faculty of Economics and Business Universitas Indonesia (FEBUI)

Undergraduate Program (S1 Reguler)

Quiz
Odd Semester 2016/2017

ECON 10101-Mikroekonomi 1

Maximum Time: 2.5 hrs

Lecturer/Tutor: Maddaremmeng A. Panennungi/Angga

Closed Book

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Please Answer 5 problems from 7 problems below. Each problems has 20

points. Student is not allowed to use programmable calculator!

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1. Uncertainty and Consumer Behavior (P&R Chapter 5, Exercise No 6)

Suppose that Natasha’s utility function is given by u(I)= (10*I)1/2, where I

represents annual income in thousands of dollars.

a. Is Natasha risk loving, risk neutral, or risk averse? Explain.

b. Suppose that Natasha is currently earning an income of $40,000 (I= 40) and
can earn that income next year with certainty. She is offered a chance to take
a new job that offers a 0.6 probability of earning $44,000 and a 0.4
probability of earning $33,000. Should she take the new job?
c. In (b), would Natasha be willing to buy insurance to protect against
the variable income associated with the new job? If so, how much would she
be willing to pay for that insurance? (Hint: What is the risk premium?)

2. Monopolistic Competition and Oligopoly (P&R Chapter 12, Exercise No 10)

Two firms produce luxury sheepskin auto seat covers, Western Where (WW)
and B.B.B. Sheep (BBBS). Each firm has a cost function given by C (q)= 30qi +
1.5qi2

The market demand for these seat covers is represented by the inverse demand
equation P = 300 – 3Q; where Q= q1+ q2, total output.
a. If each firm acts to maximize its profits, taking its rival’s output as given (i.e., the
firms behave as Cournot Oligopolists), what will be the equilibrium quantities
selected by each firm? What is total output, and what is the market price? What are
the profits for each firm?

b. It occurs to the managers of WW and BBBS that they could do a lot

better by colluding. If the two firms collude, what will be the profit-maximizing
choice of output? The industry price? The output and the profit for each firm in this
case?

c. The managers of these firms realize that explicit agreements to collude are illegal.
Each firm must decide on its own whether to produce the Cournot quantity or the
cartel quantity. To aid in making the decision, the manager of WW constructs a payoff
matrix like the one below. Fill in each box with the profit of WW and the profit of
BBBS. Given this payoff matrix, what output strategy is each firm likely to pursue?

BBS
Profit Pay Off Matrix Produce Cournot Produce Cartel
Produce Cournot
WW Produce Cartel

d. Suppose WW can set its output level before BBBS does. How much will WW choose
to produce in this case? How much will BBBS produce? What is the market price, and
what is the profit for each firm? Is WW better off by choosing its output first? Explain
why or why not.

3. Game Theory and Competitive Strategy (P&R Chapter 13, Exercise 7)

We can think of U.S. and Japanese trade policies as a prisoners’ dilemma.

The two countries are considering policies to open or close their import markets.
The payoff matrix is shown below.

Japan

Open Close

Open (10, 10) (5, 5)

U.S.

Close (-100, 5) (1, 1)

a. Assume that each country knows the payoff matrix and believes that the
other country will act in its own interest. Does either country have a dominant
strategy? What will be the equilibrium policies if each country acts rationally to
maximize its welfare?
b. Now assume that Japan is not certain that the United States will behave rationally.
In particular, Japan is concerned that U.S. politicians may want to penalize Japan
even if that does not maximize U.S. welfare. How might this concern affect Japan’s
choice of strategy? How might this change the equilibrium?

4. Market for Factor Inputs (S&N-Extension, Chapter 16, Problems 16.4)

Suppose demand for labor is given by

L = -50w+450

And supply is given by

L= 100w,

Where L represents the number of people employed and w is the real wage rate per
hour.

a. What will be the equilibrium levels for w and L in this market?

b. Suppose the government wishes to increase the equilibrium wage to $4 per hour
by offering a subsidy to employers for each person hired. How much will this subsidy
have to be? What will the new equilibrium level of employment be? How much total
subsidy will be paid?

c. Suppose instead that the government declared a minimum wage of $4 per hour.
How much labor would be demanded at this price? How much unemployment would
there be?

d. Graph your results.

5. GE and Economic Efficiency (P&R Chapter 16, Exercise 1)

Suppose gold (G) and silver (S) are substitutes for each other because both
serve as hedges against inflation. Suppose also that the supplies of both are fixed in
the short run (QG= 75 and QS= 300) and that the demands for gold and silver are
given by the following equations:

PG= 975 - QG+ 0.5PS and PS= 600 - QS+ 0.5PG.

a. What are the equilibrium prices of gold and silver?

b. What if a new discovery of gold doubles the quantity supplied to 150. How will this
discovery affect the prices of both gold and silver?
6.Market with Asymmetric Information (Chapter 17, Exercise No 8)

You have seen how asymmetric information can reduce the average quality of
products sold in a market, as low-quality products drive out high-quality
products. For those markets in which asymmetric information is prevalent, would
you agree or disagree with each of the following? Explain briefly:

a. The government should subsidize Consumer Reports.

b. The government should impose quality standards — e.g., firms should not be
allowed to sell low-quality items.

c. The producer of a high-quality good will probably want to offer an extensive

warranty.

d. The government should require all firms to offer extensive warranties.

7. Externalities and Public Goods (P&R Chapter 18, Exercise 6)

The market for paper in a particular region in the United States is characterized by
the following demand and supply curves QD=160,000−2000P and QS
=40,000+2000P, where QD is the quantity demanded in 100-pound lots, QS is the
quantity supplied in 100-pound lots, and P is the price per 100-pound lot. Currently
there is no attempt to regulate the dumping of effluent into streams and rivers by
the paper mills. As a result, dumping is widespread. The marginal external cost (MEC)
associated with the production of paper is given by the curve MEC=0.0006QS.

a. Calculate the output and price of paper if it is produced under competitive

conditions and no attempt is made to monitor or regulate the dumping of effluent.

b. Determine the socially efficient price and output of paper.

c. Explain why the answers you calculated in parts (a) and (b) differ.