MCQ/PS re-do

Question 1

3 (+ extra notes)

Last year the number of cinema tickets I bought was higher than the number of concerts I attended. This year both prices, of cinema tickets and of concerts, have risen by exactly 10%, and I received a bonus of 10% to my income. Why will I consume at same pt?

Answer 1

• Last year: p1x1 + p2x2 = m
• This year: 1.1p1x2 + 1.1p2x2 = 1.1m
• Cancels out, so eqn’s equivalent

(When both increase constantly and compensated equivalently, same consumption)

Question 2

Does job risk affect labour supply or demand?

Answer 2

supply

Question 3

1

When can we not conclude for a labour supply increase whether income or sub effect was bigger?

Answer 3

if leisure was inferior, then income effect would reinforce sub effect (so don’t know which is bigger)

Question 4

3

Why does increase in productivity increase labour demand

Answer 4

• Labour demand computed by downward-sloping MVPL
• MVPL = MPL x p
• increased productivity increases MPL, increases MVPL (shift to right)

Question 5

7

There is a kinked budget line (for labour supply), where worker consumes at kink. Wage increases but only for labour-hours after kink. Will consumer reoptimise?

Answer 5

• Yes
• Sub effect = greater labour supply
• All the options of more leisure lead to the same income as before the change
• Consumer previously preferred kink, so still prefers that
• Working after kink provides greater income now
• New budget line goes above the OG IDC
• So Labour supply increases

Question 6

1

What do we mean by e.g. leisure becomes relatively cheaper?

Answer 6

Opportunity cost of leisure (value of labour relative to leisure) decreases

Question 7

1

Describe the intertemporal budget constraint

Answer 7

a straight line joining the two points that correspond to consuming all in period one and consuming all in period two above

Question 8

For these 2 income streams, compute the sustainability condition:

Cheat: 5, -5, -5, -5, …
Collude: 0 infinitely

Answer 8

Question 9

2

When will there be TB but no BB discrimination?

not learn from behaviour, but before game played

Answer 9

• hx=hy
• cx ≠ cy

h = carry drug, not hit rate

Question 10

2

When will there be BB but no TB discrimination?

not learn from behaviour, but before game played

Answer 10

• hx≠hy
• cx=cy

h = carry drug, not hit rate

Question 11

2

When will there be BB and TB discrimination?

not learn from behaviour, but before game played

Answer 11

• hx≠hy
• cx≠cy

h = carry drug, not hit rate

Question 12

2

Do hit rates reveal preferences about the police? What about search rates?

Answer 12

• Search rates - no
• Hit rates - yes

Question 13

1

If police do not engage in taste-based discrimination, then hit rates should
be (…) between different demographics

Answer 13

equalised

Question 14

2

Can police have different search rates when they do not engage in TB?

Answer 14

• Yes
• search rates do not reveal preferences of police

Question 15

3

Explain why there is only one PNSE at (U,L)

Answer 15

• Eliminate D and R as strictly dominated
• U strictly dominates M for row player
• Column player knows row player will choose U, so chooses L

Question 16

1 + photo

Draw a labelled diagram for an interest rate decrease for a borrower

Answer 16

always better off

Question 17

1 + photo

Draw a labelled diagram for an interest rate increase for a borrower (when doesn’t switch to saver)

Answer 17

worse off

Question 18

1 + photo

Draw a labelled diagram for an interest rate increase for a borrower (when swtiches to save)

Answer 18

better off

Question 19

5

How do we solve an MNSE?

Answer 19

1. State there is MNSE and why (if required)
2. Conjecture that A calls with p, B calls with q
3. State A knows B calls with q (and inverse)
4. Best respond in simultaneous where indifferent between…
5. Compute

Question 20

2

What does non-satiation mean?

Answer 20

• holding everything else fixed, having more of any good is always better
• If you compare two bundles and one has at least as much of every good and more of at least one, the consumer prefers that bundle

Question 21

2

What does convexity mean?

Answer 21

• Convex preferences mean that (mixtures) of bundles are preferred to extremes
• If a consumer is indifferent between bundle A and bundle B, then any weighted average (mix) of A and B is at least as good as A or B.

Question 22

2

Let’s suppose following a price change (interest rate change, wage change, goods change, etc), the same optimal consumption bundle is available for the same utility. What effects will we have?

Answer 22

• We have sub effect
• But no income effect (as purchasing power remains unchanged)

Question 23

What symbols do we use for strict preference

Answer 23

≻

Question 24

What symbols do we use for weak preference

Answer 24

≽

Question 25

# 4 What symbols should we use when writing primitives

Answer 25

* {} * N = * Ai = * ≽ or ≻

Question 26

# 2 How do we compute first-price discrimination profit

Answer 26

* Draw p = MC horizontal line to form triangle * Calculate area under graph

Question 27

# 1 We have been given an optimal consumption bundle, how we calculate the utility from it?

Answer 27

Sub into utility function

Question 28

We have been given 2 optimal consumption bundles at 2 shops, how do we work out which one the consumer prefers?

Answer 28

Sub into Utility function and see what is larger

Question 29

# 2 What are 2 things I need to remember for W5 problems?

Answer 29

* Reoptimise if satisfies standard assumptions * Budget line pivots around endowment pt if interest rate changes

Question 30

What is decision utility

Answer 30

the consumer’s perceived utility at the time of decision-making in a hot state.

Question 31

What is experience utility

Answer 31

Experience utility is the actual utility from consuming the good and how the consumer thinks about this decision in a cold state.

Question 32

How should we write preferences for a firm?

Answer 32

‘Given any profile of actions (q1,q2) each firm’s preferences are represented by their profits... (profit function)'

Question 33

# 1 When will there not be an MNSE?

Answer 33

If both players have strictly dominant actions

Question 34

# 2 - key in a mixed-strategy equilibrium, each side chooses a strategy...

Answer 34

* that makes the other side just indifferent * otherwise the other side would switch to a pure action.

Question 35

In which utility functions can we use MRS conditions?

Answer 35

CB and QL only

Question 36

How do we solve perfect sub optimal consumption pt?

Answer 36

graph

Question 37

# 2 How do we solve perfect complements optimal consumption pt?

Answer 37

satisfies: * (1) budget all spent - non-satiation * (2) fixed ratio satisfied

Question 38

When there are no PCM, your optimal plan...

Answer 38

depends on your preferences

Question 39

# 2 For an IR increase, why might a borrower become better off? Similarily, for an IR decrease, why might a saver become better off?

Answer 39

* IR increase/decrease large enough to make them switch * Potentially on higher IDC as consequence

Question 40

# 2 What do you need to write for a maxmisation problem?

Answer 40

* maximise U or profit function * Subject to these constraints... (e.g. budget, time, non-negativity)

Question 41

# 3 Why does an increase in k compute to increase in labour demand

Answer 41

* Raises MPL and MVPL * so can get higher marginal output for 1 additional unit of labour than before for same wage cost * so optimal to hire more labour

Question 42

Do QL functions give convexity in preferences?

Answer 42

yes!!!

Question 43

# 2 When will there be zero profits in Bertrand comp? When will there be negative profits?

Answer 43

* No fixed costs - zero profits * Fixed costs - negative profits

Question 44

What does SPE stand for?

Answer 44

Subgame **Perfect** Equilibrium

Question 45

Tell me something about v(x1) + x2

Answer 45

Demand for x₂ depends only on its price, not income (no income effect for x₂!)

Question 46

What do I need to say for ambiguous effect

Answer 46

Net effect depends on which effect dominates