198s2008.final.key - Department of Economics HKUST ECON 198...

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Department of Economics, HKUST ECON 198 Microeconomic Theory I Semester: Spring 2007/08 Tutor: Peter K. Tsui Office number: Room 2393 (ext.7597) Email: [email protected] Office hours: Mon 3:00p.m. – 5:00p.m. Note: This set of solutions serves only as guidelines for grading. Giving the same answers as suggested below is no guarantee of full credits. Detailed explanation is required. Final Examination Solutions 1. Salt is price inelastic because (i) the share of income spent on it is small. (ii) it is an inferior good. (iii) no close substitute is available. 2. The productivity of unskilled labor is less likely to increase, it might account for the relatively low pay rise of the low-income workers. In addition, according to the concept of COLA adjustment, there is no need to match the inflation rate to preserve the standard of living due to substitution bias. The CPI adjustment of the salary might overcompensate the low-income workers. 3. (a) False. Counter example: 0 , , , = + + I x p x p x e e e y x If 5 . 0 , = x p x e and 1 , = y p x e 5 . 1 , = => I x e (b) False. It depends on the person’s degree of risk aversion and the payoffs of each option. A risk-neutral person will take the favorable gamble. Or more generally, a person will quit certainty for uncertainty as long as ) ( ) ( gamble not U gamble EU > (c) True. 1 (d) Uncertain.
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Moral Hazard is the effect of insurance coverage on individuals’ decisions to undertake activities that may change the likelihood or sizes of losses. If the demand curve is vertical or there is perfect information, the moral hazard problem is avoided. (e)
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198s2008.final.key - Department of Economics HKUST ECON 198...

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