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Unformatted text preview: UNIVERSITY OF TORONTO .
Faculty of Art and Science August Examinations 2008 * EC0200Y1Y Duration: 2 hours
Total Points: 100 points
Examination Aid: Only Regular Calculators. Instructions: 0 This test consists of 6 questions in 14 pages, singlesided, including the cover page.
0 Answers must be organized, legible, brief, and to the point, otherwise you may lose points.
0 You need to write the answers only in provided space for each question. Last Name: First Name: Student Number: Circle Your Section: L0101 (TR 1:004:00) L5101 (TR 5:008:00) Question 1. [20 points] Paul and Steven both like to play hockey and video games in their spare time. Let xh denote the number
of hours spent playing hockey; xv denotes the hours spent playing videogames, Both have 10 hours per
day to spend on these leisure activities. Their utility functions are given by: uPa"l(xh, xv) = min{2xh;3xv} uSteven (xh, xv) = 2xh + 3xv a. In a well labelled diagram, depict Paul and Steven’s budget line and one representative
indifference curve for each of them (please draw hours spent playing hockey on the xaxis). b. What is the optimal time allocation for Paul? For Steven? Explain using the terminology
developed in class. 0. Their mother dislikes them playing video games and prefers them playing hockey. In order to
discourage them from playing videogames, for every hour of gaming, she makes them do 1
hour of housework. Assume that doing housework is neither a good, nor a bad for them.
(Note that each of Steven and Paul still only has 10 hours per day to spend on videogames,
hockey and housework.) i. Draw the resulting new budget line into the same diagram.
ii. Does this change your answer to part b? Explain.
iii. Is there a substitution effect for Paul? For Steven? Explain. 2 outof l4 3 out of 14 4 outof 14 Question 2. [15 points] Explain Whether the following statements are true or false. All points are for the explanation. a. A farmer lives on a ﬂat plain next to a river. In addition to the farm, which is wOrth F, the
farmer owns ﬁnancial assets worth A. The river bursts its banks and ﬂoods the plain with
probability P, destroying the farm. If the farmer is risk averse, then the willingness to pay for
ﬂood insurance is increasing in F and decreasing in A. b. Consider a consumer consuming x and y and he is currently maximizing his utility, and his
indifference curves are smooth and convex. If the price of x increases and the price of y
decreases and the consumer's level of utility is unchanged, it means he consumes the same
bundle as before the price change. c. Consider a consumer facing an intertemporal consumption decision (i.e. she is deciding how
much to save or to borrow in the current period). If at the current level of interest rate she is a saver, an increase in the interest rate may cause
her to start being a borrower if the income effect is sufﬁciently strong. 5 outof l4 6 out of 14 Question 3. [15 points] Consider a ﬁrm with 2 different production plants that have the following production functions Y1: ZJ—K— Y2 (L) : 2J1: The rental rate of capital is equal to two (r=2) and the wage rate is equal to eight (w=8). ‘
a. How should the ﬁrm divide the production of 60 units of output (y=60) between the two
plants?
b. Does your answer to part a. change if there were ﬁxed cost to start up either plant that can be
eliminated by having yi=0? Explain. No calculation required. 7 outof 14 8 outof 14 Question 4. [20 points]
A private golf club attracts two types of golfers: serious and casual. Suppose there are 10 serious and 100 casual golfers in the club market. Each serious golfer has demand curve, Qs = 350  10F and each
casual golfer has demand curve Qc = 100 — 10P, where Q is number of rounds played per year, and P is
price per round. Suppose the marginal and average cost of playing golf is $5 per round. a. Suppose this club decides to charge serious and casual golfers a common uniform price for playing a round of golf. Calculate this price, and the club proﬁt. b. Suppose this club decides to charge serious and casual golfers different prices for a round of
golf. Calculate these prices, and total proﬁt. c. If the club decides to charge golfers a single membership fee to join the club and a single
“usage” price for playing a round of golf. Calculate the membership fee and the price for a
round of golf. What will the total proﬁt be? (1. If the club can negotiate the price of a round of golf with each player, how many serious and
casual players will golf? What will the proﬁt be? Show all calculations clearly. 9 outof 14 10 out of 14 11 out of 14 Question 5. [Total 15 points]
In a poker game, John and Jane sometimes play straightforward, and at other times blufﬁng. The
payoffs from a oneshot simultaneous game between John and Jane are: —
_ Strai1htforward Blufﬁn 1
Straihtforward 20, 20 10, 10 a. What is the pure strategy Nash equilibrium?
b. What is the mixed strategy Nash equilibrium? Show your calculations, and clearly state the John
and Jane’s strategies. 12 out of 14 Question 6. [15 points] There are only two coffee shops close to Uofl‘ Sydney Smith Building, called P and W. Market
demand for coffee in this area is given by P = 100 — 4Q. Marginal cost function for P: MCp = 10 + 2Qp Marginal cost function for W: MCw = 4 + 8Qw a. How much coffee does each coffee shop sell, if they form a Cournot Duopoly. What would be
the price of coffee? b. How much coffee would they sell under the Stackelberg equilibrium, where P is the leader?
What will be the price of coffee under this equilibrium? 13 out of 14 14 out of 14 ...
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 Spring '10
 CarlosSerrano
 Microeconomics

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