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ECON 4010: Advanced Microeconomic Theory Final Exam answers. Fall 2009 SECTION A 1. Not necessarily. Exception: corner solutions. 2. False. Indirect utility function is homogenous of degree zero. If prices and income double, the budget constraint and utility remains the same. 3. False. For inferior goods it is the other way round. 4. False. As wealth increases, marginal utility of potential loss from the gamble falls but so does the marginal utility of winning the gamble. So the net result is indeterminate. 5. True if non-credible threat or sub-game-imperfect equilibrium is ruled out. Example battle of sexes. If the wife moves first, boxing/boxing is not a sub-game perfect equilibrium. 6. False. Marginal products for linearly homogenous functions are inversely related to the relative amount of the factor used. 7. True. The Shepard’s lemma is used to derive the conditional factor demand functions, which allows us to find the relationship between inputs and output. Example: C = 2(wv) 1/2 q. Taking the partial derivatives wrt w & v gives the conditional factor demands: L = (v/w) 1/2 q, K = (v/w) -1/2 q. Thus, L/q = q/K or q = (KL) 1/2 . 8.

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