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    Regular Exam Jan - Sols

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    Ermita Yusida
    The document provides an exam for an advanced microeconomics course, with 5 questions covering topics like production functions, duopoly models, asymmetric information in insurance markets, and preference reversals. Students are instructed to answer 2 of the first 3 questions and at least 1 from the last 2 questions. The questions require analyzing production technologies, solving profit maximization problems, and discussing concepts like pooling equilibriums, signaling, screening, and potential explanations for preference reversals and choice disparities.

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    Regular Exam Jan - Sols

    Uploaded by

    Ermita Yusida
    208 views3 pages
    The document provides an exam for an advanced microeconomics course, with 5 questions covering topics like production functions, duopoly models, asymmetric information in insurance markets, and preference reversals. Students are instructed to answer 2 of the first 3 questions and at least 1 from the last 2 questions. The questions require analyzing production technologies, solving profit maximization problems, and discussing concepts like pooling equilibriums, signaling, screening, and potential explanations for preference reversals and choice disparities.

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    Regular exam Jan_sols

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    The document provides an exam for an advanced microeconomics course, with 5 questions covering topics like production functions, duopoly models, asymmetric information in insurance markets, and preference reversals. Students are instructed to answer 2 of the first 3 questions and at least 1 from the last 2 questions. The questions require analyzing production technologies, solving profit maximization problems, and discussing concepts like pooling equilibriums, signaling, screening, and potential explanations for preference reversals and choice disparities.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    208 views3 pages

    Regular Exam Jan - Sols

    Uploaded by

    Ermita Yusida
    The document provides an exam for an advanced microeconomics course, with 5 questions covering topics like production functions, duopoly models, asymmetric information in insurance markets, and preference reversals. Students are instructed to answer 2 of the first 3 questions and at least 1 from the last 2 questions. The questions require analyzing production technologies, solving profit maximization problems, and discussing concepts like pooling equilibriums, signaling, screening, and potential explanations for preference reversals and choice disparities.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    Advanced Microeconomics 7th of February of 2019

    Doutoramento in Economics Duration: 90 minutes

    Regular Exam
    Answer 2 questions; at least one from 1 and 2; at least 1 from 4 and 5.

    Question 1 (10 marks)

    a) (7 marks) Consider a production function of the form y = αx1 + βx2, with α > 0 and β > 0.
    i. Carefully sketch the isoquant map for this technology.
    A: Straight lines with slope –α/ β.

    ii. Calculate the cost function and conditional input demands.


    A: Solve the cost minimization problem for the perfect substitutes case. At the solution, we have x1* = y/α and
    x2*=0 when w1/α < w2/β; x1* = 0 and x2*= y/β when w1/α > w2/β; and x1* =k and x2*= y/β - αk/β for 0 ≤ k ≤ y/α.
    The cost function is c(y,w1,w2)= min{ w1/α, w2/β}y.

    b) (3 marks) Let y = f (x1, x2) be a constant returns-to-scale production function. Show that if the average
    product of x1 is rising, the marginal product of x2 is negative.

    A: The average product of x1 (AP1) is rising if and only if the derivative of AP1 with respect to x1 is positive. If we
    compute the derivative of AP1 and check when it is greater than 0, we obtain f1 > f/ x1, where f1 is the derivative
    of f with respect to x1. Now, constant returns to scale implies f = f1 x1 + f2 x2. Then, f2 x2= f-f1 x1 < f - f = 0. Thus, f2
    x2 <0, which implies f2 < 0 as x2 > 0.

    Question 2 (10 marks)

    Consider a homogeneous product duopoly. Each firm produces its output using only labour as an input into
    production. Firm 1 has the production function q1 = 3L1,
where q1 denotes firm 1’s output, and L1 denotes firm
    1’s labour input. Similarly, firm 2’s production function is q2 = 2L2. Labour costs w = 4 per unit, and market
    (inverse) demand for the product is P = 42 − Q, where P is price and Q = q1 + q2.

    a) (3 marks) Write down each firm’s profit as a function of L1 and L2.


    b) (5 marks) Suppose that firm 1 chooses L1 first, and then firm 2 chooses L2 after observing L1. What labour
    inputs will be chosen by the two firms?
    c) (2 marks) Would firm 1 prefer L1 and L2 to be chosen “simultaneously”? Explain.

    Solutions:
    a) P1(L1, L2) = (42 - 3L1 -2L2) 3L1 - 4L1 and P2(L1, L2) = (42 - 3L1 -2L2) 2L2 - 4L2

    b) Let us solve the game by backwards induction. Solving firm 2’s profit maximization problem, i.e. choosing L2
    to maximize P2(L1, L2), the first order condition is 84 -6L1*-8L2* – 4 = 0 óL2* = 10 – (3/4) L1*. Substituting L2*
    into 1’s profit function, we have: P1(L1) = [42 - 3L1 -2(10 – (3/4) L1)] 3L1 - 4L1 óP1(L1) = [22 – (3/2) L1)] 3L1 - 4L1.
    The first order condition of 1’s profit maximization problem is 66 – 9 L1* – 4 = 0 ó L1*=62/9. Therefore, L2* =
    10 – (3/4)(62/9) = 10 – 31/6 = 29/6. So, Q* = 3*62/9 + 2*29/6 = 91/3 and P* = 35/3.

    Then, maximum profit for firm 1 is P1(L1*, L2*) = (35/3)*62/3 – 4*62/9 = 31*62/9 = 1922/3.
    Advanced Microeconomics 7th of February of 2019
    Doutoramento in Economics Duration: 90 minutes

    c) When firms solve their profit maximization problems simultaneously, the first-order condition of firm 1 is
    L1* = 61/9 –L2*/3 and of firm 2 is L2* = 10 – (3/4) L1*. Solving the system of equations, we obtain L1*=124/27
    and L2*=59/9. It follows that Q* = 242/9 and P*=136/9. Then, P1(L1*, L2*) = (136/9)*124/9 – 4*124/27 =
    124/81, which is lower than the profit in the sequential version.

    In general, the first mover always prefers (weakly) the sequential game. In fact, it can always reproduce the
    simultaneous move solution by choosing, in the sequential game, just as it would in its simultaneous version.
    (In this case, firm 1 could choose L1=124/27 in the sequential version, which would lead firm 2 to choose
    L2*=59/9, and thus firm 1 would obtain the same profit as in the simultaneous move game.)

    Question 3 (10 marks)

    Discuss the existence of a pooling equilibrium in an insurance market with asymmetric information, namely how
    this is affected by signalling and screening.

    Question 4 (10 marks)

    Can there be a common explanation for preference reversal and matching-choice disparity? Discuss.
    Advanced Microeconomics 7th of February of 2019
    Doutoramento in Economics Duration: 90 minutes

    ser mitigados?

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