EC201_specimen_exam_paper_2010

# EC201_specimen_exam_paper_2010 - EC201 Microeconomic...

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EC201 Microeconomic Principles I Specimen Examination Paper 2010 Instructions to candidates Time allowed: 3 hours. The paper is divided into TWO sections. Candidates should answer EIGHT short questions from Section A and THREE long questions from Section B. Section A has a weight of 48% (a 6% weight for each question). Section B has a weight of 52% (an 18% weight for each question, giving candidates two bonus points). Candidates are advised not to spend a disproportionate amount of time on any one question. Calculators are NOT allowed in this examination.

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SECTION A: Answer eight questions (6 marks each) 1. The government wishes to increase households’ current consumption. Assume for simplicity that the only tax a household pays is a sales tax and that the interest rate on money is zero. The government is considering either a temporary cut in sales tax lasting one year or a temporary increase in the rate of child benefit by £500 a year lasting one year. (a) (2 marks) Show the effect of the temporary sales tax change on the consumer’s budget constraint in a diagram with consumption this year and consumption next year on the axes. (b) (4 marks) If the sales tax is reduced the household pays £500 a year less tax. The household has children. Which policy would the household prefer, the temporary tax cut or the temporary increase in child benefit? Which policy would result in the largest increase in current consumption? 2. (a) (3 marks) Explain the difference between a consumer’s compensated and uncompensated demand. What variables does compensated demand depend on? What variables does uncompensated demand depend on? (b) (3 marks) The consumer has a utility function min( ½ x 1 , ¼ x 2 ) . Show the indifference curves in a diagram. Find the consumer’s compensated demand for goods 1 and 2. 3. (a) (2 marks) How would you explain the meaning of consumer surplus to someone who is not an economist and does not know about demand curves? (b) (2 marks) A consumer uses her mobile phone only for making voice calls. She has a pay-as-you-go tariff paying a price p per minute for voice calls with no monthly charge. Her monthly demand for calls is q = 102 – 2p . Show her consumer surplus in a diagram and write down a formula for consumer surplus. (c) (2 marks) The phone company is a monopoly. Suppose the only tariff the company offers the consumer has a monthly payment F that does not depend on the number of calls and a charge per minute for calls p . If p =1 what is the highest level of F a consumer is willing to pay rather than do without a mobile phone?
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