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Unformatted text preview: EXAMINATIONS – 2009 TRIMESTER 1 ECON 201 MICROECONOMICS Time allowed: THREE HOURS Instructions: This is a closed book exam Answer ANY FIVE of the eight questions below Each problem is worth 20 marks You can use nonprogrammable calculators Please show your working ECON 201 Continued. . . Question 1: Consumer choice [20 marks] Rachel spends her income, Y , on Rock Concerts ( R ) and Sunglasses ( S ). Their prices are p R and p S . Rachel’s preferences are given by the CobbDouglas utility function: U ( R,S ) = R . 1 S . 1 . (a) Write out the Lagrangian for Rachel’s utilitymaximization problem. (b) Use the Lagrangian to derive Rachel’s optimal bundle ( R * ,S * ) which maximizes her utility. (c) For a given utility level, U , find Rachel’s compensated demands for Rock Concerts and Sunglasses. You can use any method you want. (d) Use the compensated demands from part (c) to derive Rachel’s expenditure function E ( p R ,p S ,U ). Question 2: Short run versus long run costs [20 marks] A firm produces output according to the following production function: q = f ( L,K ) = L 1 / 3 K 2 / 3 . The cost of labour w is 27 per hour and the rental cost of capital r is 2 per hour. (a) With the given prices, compute the costminimizing capitaltolabour ratio ( K/L ). (b) Suppose the firm wishes to produce 72 units of output. How much capital and how much labour does the firm employ? What is the longrun total cost of producing 72 units of output? (c) The firm suddenly decides to double the quantity of output but only has a day to complete the order. Therefore, in that time, the amount of capital is fixed at the level you found in part (b). The firm is free to adjust labour hours. How much will it cost to produce 144 units of output? (d) How much would it cost to produce 144 units of output if the firm could also vary capital? Is this cost higher or lower than the cost you found in part (c)? Explain. Question 3: Perfect competition [20 marks] Consider a competitive firm whose shortrun cost function is C ( q ) = 5 + 5 q + 5 q 2 . However, all costs are nonsunk . The firm faces a market price of p for its output....
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This note was uploaded on 05/24/2011 for the course ECON 201 taught by Professor Paulclacott during the Fall '10 term at Victoria Wellington.
 Fall '10
 PaulClacott
 Microeconomics

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