Microeconomics Exam and Solutions

Microeconomics Final Exam- 1st Period

Maria Do Carmo Seabra Clara Costa Duarte João Miguel Silva Nuno Sobreira Doruk Iris Date: 10/01/2011 Duration: 2h30

IMPORTANT ANNOUNCEMENTS 1. Calculators are not allowed, nor any other electronic device. 2. There will be no individual clarifying questions during the exam. 3. Any interpretation doubt should be clearly identified on the exam sheet.

Honor Commitment I declare on my honor that I will not use nor contribute, directly or indirectly, to the use of any fraudulent method on the realization of this test. Signature: ____________________________________________

Good luck!

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Group I (6) 1- Define a Giffen good. What must be true about a Giffen Good? Explain why this is so using either algebra or graphics. A Giffen good has an increasing demand function: when prices increase the quantity demanded increases as well. A Giffen good is an inferior good ( dx/dM 0

2- Producing good X always requires the use of two inputs. If the prices of inputs are equal is it always optimal to use these inputs in equal amounts? Explain. No. The optimal choice of inputs requires that MRST= price ratio. Depending on the producer technology in some particular cases that may occur ( Ex: Y=KL) but in general it will not. (Ex: ( Ex: Y=K0.3L0.7)

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3- What is a “prisoner’s dilemma”? Is the Cournot -Nash equilibrium a “ prisoner’s dilemma”? Explain. A “prisoner’s dilemma” occurs in a simultaneous game where the equilibrium of dominant strategies is not the best solution for both players ( Pareto Efficient). In a Cournot game competing firms choose the best individual quantity taking into account the other firm’s choice. In the Cournot-Nash equilibrium each firm is maximizing profits taking into account the other firm’s choice and vice-versa. The Cournot -Nash equilibrium...