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exam_micro1_2006 - Microeconomics 1 Master 1 APE Exam...

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Microeconomics 1, Master 1 APE Exam Michaelmas Term 2006-2007 Brie°y answer the following questions: 1. Prove that a Giffen good is necessarily an inferior good. 2. What is the link between a °rm’s supply and its marginal cost? (Draw a graph) 3. State Hotelling’s lemma. Exercise 1 Forecasters predict there is a 50% probability that the upcoming growing season will be a drought. As- sume Ted is an expected utility maximizer with a Bernoulli function u ( x ) = ln ( x ) : Ted’s initial wealth is equal to zero. Ted initially has the choice between two crops (Potatoes/Strawberry) yielding the following payoffs (in euros): Normal Rain Drought Potatoes 5000 40000 Strawberry 20000 12000 There are constant returns to scale in (the payoffs of) each production. 1. If Ted can only plant one crop, which crop should he plant? 2. Ted can choose any combination of Potatoes and Strawberry crops. Which crop mix should he choose? 3. Assume Ted decides to plant half of his land with each crop. He is offered Strawberry insurance.
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