1 Department of Economics, HKUST ECON 198 MICROECONOMIC THEORY I Semester: Spring 2008 Professor S. F. Leung Final Examination May 29, 2008 4:30 pm – 7:30 pm This is a closed book examination. You have 180 minutes to complete the test. Write coherently, lucidly, and legibly. Always explain your answer. The maximum score for this exam is 180 points. Points are marked next to the questions (the numbers in brackets refer to the points for each subquestion) and may be served as a rough guide to how much time you should allocate on each question. Points will be deducted for irrelevant materials. Use mathematics and/or diagrams wherever appropriate to support your answer. This examination contains 12questions. You may find the following formulas useful: 1nndydynydxdx−=, where nis a constant. ln( )1dydydxy dx=, y > 0.
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2 1.(6) Is salt (i.e., table salt) price elastic or inelastic? Use three different economic arguments to support your answer. 2.(6) According to a news report in the SCMP on May 15, 2008, “Hong Kong's 160,000 civil servants are in line for pay rises ranging from 3.9 per cent to 6.3 per cent, according to a government pay-trend survey released yesterday.” The following table contains the detailed information. Monthly Salary (HK$) Pay Rise (%) 0 – 14,989 3.9 14,990 – 45,970 5.29 45971 – 91,765 6.3 The inflation rate of the economy is 4.9%. Some commentators criticize that the pay rise for the civil servants earning less than HK$14,990 is unfair and immoral because it is lower than the inflation rate by more than 20%. Use economic theory to evaluate this criticism. 3.(25) Indicate whether each of the following statements or arguments is TRUE, FALSE, or UNCERTAIN, and explain your answer. Use mathematics and/or diagrams to support your answer. (a)If a good is price inelastic, then it is also income inelastic. (b)Dr. Samuel Johnson said, “He is no wise man who will quit a certainty for an uncertainty.” (c)An individual with a logarithmic utility function must be risk averse. (d)When there is insurance, there is moral hazard. (e)A firm spends a great deal of money in advertising to inform consumers of the brand name of its bananas. Consumers should therefore conclude that its bananas are likely to be of higher quality than unbranded bananas.