ECON1210 Introductory Microeconomics

University of Hong Kong

Final Examination
Date: December 11, 2023, 14:30-16:30 (+ 15 minutes of grace period)

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1. My university ID number is [ Answer01 ].

2. Uncle Fong bought a ticket to a football game at $225 and a ticket to a concert at $395. He gave
as gifts to Jack the football game ticket and Darcy the concert ticket. Both events will be held at
the same time. The football ticket is REFUNDABLE but the concert ticket is NONREFUNDABLE.
Darcy finds the football game to be interesting and offers to directly swap tickets with Jack. Suppose
that Jack values the game at $325 and the concert at $375. We would predict that [ Answer02 ].
A) Jack will swap the ticket with Darcy
B) Jack will not swap the ticket with Darcy
C) Jack is indifferent between swapping or not

3. Elsa and Anna form a two-person economy in Arendelle. Suppose Anna has the comparative advantage
in producing ice. The following graph shows the two-person economy’s production possibilities, where
the slope of AB is -0.6 and the slope of BC is -1.8. Suppose the world price of ice and the world
price of water are the same (i.e., x dollars per ton of ice and x dollars per ton of water, x>0), and
Arendelle decides to open up to the world market and trade. Arendelle is such a small nation that its
behavior will not affect the world market prices. And, Elsa and Anna would like to jointly consume
the water and ice in the ratio of 8.8 tons of water per ton of ice. Elsa should produce [ Answer03A
]. Anna should produce [ Answer03B ].
A) Ice only
B) Water only
C) both Ice and Water
D) it depends on the monetary price (i.e., x)
E) undetermined even if we know the monetary price (i.e., x)

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Please refer to the background information below to answer the following two questions.
Consider the market of social media product produced by foreign suppliers. There are two groups of foreign
suppliers, A and B, for a social media product with the following individual supply relations respectively:

Supply A: P = 72 + 1.6Q
Supply B: P = 49 + 3Q

The corresponding market demand is

P = 129 − 2.8Q

where P is price per unit of the social media product (in dollars), Q is quantity of social media product in
thousand units.
4. We can compute that without government intervention, the market equilibrium price is [ Answer04A
] dollars per unit, and the market equilibrium quantity is [ Answer04B ] thousand units.
5. Suppose for national security reason, the central planner completely bans the consumption of the
social media product produced by foreign suppliers. We will expect a welfare loss of [ Answer05 ]
thousand dollars when compared to the market without intervention.

Please refer to the background information below to answer the following two questions.
At the initial equilibrium, the price of oil is 66 dollars per barrel and the quantity is 10000 barrels per day.
The price elasticity of demand for oil is −0.3 and the price elasticity of supply is 0.71. Because of a recent
oil discovery, quantity supplied is expected to increase by 200 barrels per day at any given price.
6. Given this information, we predict that the equilibrium price will [ Answer06A ] (A. increase, B.
decrease) by [ Answer06B ]%.
7. In addition, we predict that the equilibrium quantity will [ Answer07A ] (A. increase, B. decrease)
by [ Answer07B ]%.

8. Suppose the Financial Secretary of Utopia wants our help designing a per-pack tax to discourage
smoking. Given a price P measured in Utopian dollars per pack and Q is number of cigarette packs,
the demand and supply for cigarette (packs per year) are given by the equations:

Demand: Q = 45000 − 250P

Supply: Q = 1000P − 22000

Before the tax, the equilibrium price is P = 53.6 dollars per pack and the equilibrium quantity is
Q = 31600 packs. Suppose the aim is to reduce cigarette consumption by 7900 packs. We should
suggest a per-pack tax of [ Answer08 ] dollars.

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 9. Evaluate whether the following statements are True or False.
A) The demand curve ln Q = -3 ln P + 0.4 is everywhere more price elastic than the demand curve
ln Q = -2 ln P + 0.4. (Note: "ln x" means "natural logarithm of x".)
[ Answer09A ] (T. True, F. False)
B) If the price elasticity of demand for good X is -1, then a percentage drop in price will lead to an
approximately equal percentage increase in quantity demanded.
[ Answer09B ] (T. True, F. False)
C) Driver Jerry says, “I’d like to purchase 10 gallons of gas no matter what price is.” We infer that
Jerry’s price elasticity of demand for gas is -1.
[ Answer09C ] (T. True, F. False)

Please refer to the background information below to answer the following two questions.
Suppose a per-unit subsidy is introduced on a product which is characterized by linear downward-sloping
demand curve and linear upward-sloping supply curve. The subsidy raises the consumer surplus by $8252
and raises the producer surplus by $3955. The deadweight loss is $2057.
10. The government subsidy expenditure is $[ Answer10 ] at the equilibrium.
11. Suppose we also know that the subsidy rate is $29 per unit. We can conclude that the subsidy raises
the quantity transacted from [ Answer11A ] units to [ Answer11B ] units.

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Please refer to the background information below to answer the following five questions.
In AwesomeLand, the market demand (by firms) and supply (by workers) curves of labor hours are given
by the following equations (W is wage in terms of dollars per labor hour and N is quantity of labor hours
in terms of million hours per year).

Demand: N = 20 − 0.17W
Supply: N = 0.20W − 1.93

Initially, AwesomeLand is a closed economy and there is no foreign labor.

12. Given the information, we conclude that the unregulated market equilibrium wage is [ Answer12A
] dollars per hour, and equilibrium labor hours are [ Answer12B ] million hours per year.
13. At unregulated market equilibrium, economic surplus accrued to firms is [ Answer13A ] million
dollars per year, and economic surplus accrued to workers is [ Answer13B ] million dollars per year.
Total economic surplus in the labor market is [ Answer13C ] million dollars per year.
14. AwesomeLand is considering a labor import agreement with BudgieLand for a year. Under the labor
import agreement, BudgieLand is expected to supply 3 million labor hours to AwesomeLand at any
wage for the year. Consequently, we expect the new market equilibrium wage to be [ Answer14A ]
dollars per hour, and equilibrium labor hours to be [ Answer14B ] million hours per year.
15. At this new equilibrium, we would expect an economic surplus to the local firms (AwesomeLand’s firms)
of [ Answer15A ] million dollars per year, an economic surplus to the local workers (AwesomeLand’s
workers) of [ Answer15B ] million dollars per year, and hence a total economic surplus to the local
firms and workers of [ Answer15C ] million dollars per year.
16. The local firms as a group will be willing to spend up to [ Answer16A ] million dollars to lobby the
government [ Answer16B ] (A. against, B. for) the labor import agreement with BudgieLand.

17. Suppose the supply curve of widgets is given by the function Q = a + bP . Suppose after an increase
in demand, the price of widgets increases by 6% and the quantity increases by 8%. Given this
information, we conclude [ Answer17 ].
A) ab > 0
B) ab < 0
C) ab = 0
D) not enough information to say anything about the value of ab

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Please refer to the background information below to answer the following six questions.
Suppose the demand and supply of firearms in Utopia are given as follows:

Demand: P = 930 − 642Q

Supply: P = 780 + 3Q

in which Q is the quantity of firearms in million units and P is the price per each firearm in Utopian dollars.
18. The equilibrium price is [ Answer18A ] Utopian dollars and the equilibrium quantity is [ Answer18B
] million units.
19. Suppose the government purchases 10 million units of firearms back from the market regardless of
firearm prices. After the government enters the market, on the new demand curve, when the price is
855 Utopian dollars, the total quantity demanded is [ Answer19 ] million units of firearms.
20. Suppose the government wants to use such buyback program to reduce the quantity of firearms in
the community to zero. The government will need to buy at least [ Answer20A ] million units of
firearms from the market and spend at least [ Answer20B ] million dollars.
21. Suppose the government wants to use taxation to reduce the quantity of firearms in the community
to zero. The government will need to impose a tax of at least [ Answer21 ] dollars per unit.
22. Suppose the government wants to use price floor to reduce the quantity of firearms in the community
to zero. The government will need to implement a price floor of [ Answer22A ] (A. at most; B. at
least) [ Answer22B ] dollars per unit.
23. Knowing that the government is determined to reduce the quantity of firearms in the community to
zero through either buyback, taxation, or price floor policy, the firearms suppliers are actively thinking
of lobbying the government for a policy they favor. The firearms suppliers as a group are willing to
spend up to [ Answer23 ] million dollars to lobby the government to adopt the policy they favor.

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Please refer to the background information below to answer the following five questions.
The market demand and supply of guided tours in Utopia are described by the following equations:

Demand: P = 845 − 0.3Q dollars per hour of guided tour

Supply: P = 0.2Q + 265 dollars per hour of guided tour

Because of the congestion associated with the tourists, for each hour of guided tour provided, an external
cost of 210 dollars is generated. On the other hand, because of the positive spillover effect to the economy,
the marginal external benefit is 0.1Q + 210 dollars when Q hours of guided tour are consumed.
24. From the information, the unregulated market equilibrium price is [ Answer24A ] dollars per hour
of guided tour and equilibrium quantity is [ Answer24B ] hours of guided tour.
25. The total economic welfare to the society at the market equilibrium quantity of guided tours is [
Answer25 ] dollars.
26. The socially efficient quantity of guided tours is [ Answer26 ] hours.
27. Without any government intervention, the welfare loss to the society will be [ Answer27 ] dollars
when compared to the socially efficient outcome.
28. In order to induce the market to produce at the socially efficient quantity, it is optimal for the
government to impose a [ Answer28A ] ( A. tax; B. subsidy; C. price ceiling; D. price floor ) of [
Answer28B ] dollars per hour of guided tour.

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Please refer to the background information below to answer the following five questions.
Eddy and Sarah share an apartment. Eddy likes to play the violin but he is only a beginner. The sound that
Eddy makes with his violin really annoys Sarah. Eddy’s marginal value of each hour of practice measured
in dollars is M B = 12 − 6.5Q, where Q is number of hours. Suppose Eddy’s practice imposes an increasing
marginal cost on Sarah measured in dollars is M EC = 1.5Q. Assume that Q can be varied continuously,
and there are no other costs or benefits.
29. Suppose negotiation between Eddy and Sarah is impossible. If Eddy has the right to practise as much
as he wants, we would expect Eddy to practise playing violin for [ Answer29A ] hours eventually.
In such case, the economic surplus accrued to Eddy will be [ Answer29B ] dollars.
30. Suppose negotiation costs are negligible now. If Eddy has the right to practise as much as he wants,
we would expect Eddy to practise playing violin for [ Answer30 ] hours eventually.
31. In such case, the economic surplus accrued to Eddy (taking compensation from Sarah into account if
any) will be larger than [ Answer31A ] dollars and smaller than [ Answer31B ] dollars.
32. Continue to suppose negotiation costs are negligible. If Sarah has the right for a quiet environment,
we would expect Eddy to practise playing violin for [ Answer32 ] hours eventually.
33. In such case, the economic surplus (taking compensation from Eddy into account if any) accrued to
Sarah will be larger than [ Answer33A ] dollars and smaller than [ Answer33B ] dollars.

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Please refer to the background information below to answer the following four questions.
Two powerplants, X and Y, have access to seven different production processes to supply electricity to
Utopia, each one of which has a different cost (in dollars) and gives off a different amount of pollution (in
tons).

Process (Daily Smoke) Cost to Firm X Cost to Firm Y

A (6 tons) 345 65
B (5 tons) 475 190
C (4 tons) 725 545
D (3 tons) 1010 1125
E (2 tons) 1480 1730
F (1 ton) 2100 2460
G (0 ton) 2860 3205

34. If pollution is unregulated, and negotiation between the firms and their victims is impossible, Firm
X will choose process [ Answer34A ] and Firm Y will choose process [ Answer34B ]. The total
amount of smoke emission will be [ Answer34C ] ton(s) per day.
35. Treating smoke emission as a good and the firms as potential buyers of the good, we may draw the
demand curve for smoke emission. On this demand curve, the marginal willingness to pay for the 4-th
ton of smoke emission is [ Answer35 ] dollars.
(Note: While an ordinary person may not treat smoke emission as a good, a firm might. The reason
is that a larger smoke emission is associated with a production process of a lower cost.)
36. Suppose the government levies a tax of 592 dollars per ton of smoke emission. Firm X will choose
process [ Answer36A ] and Firm Y will choose process [ Answer36B ]. The total amount of smoke
emission will be [ Answer36C ] ton(s) per day.
37. Suppose that the government issues 7 pollution permits, each of which grants the holder the permission
to emit 1 ton of smoke per day, and allocates all permits to Firm Y. If negotiation costs are negligible
between the powerplants, in the end, Firm X will choose process [ Answer37A ] and Firm Y will
choose process [ Answer37B ].

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Please refer to the background information below to answer the following four questions.
There is a common grassland in a wealthy village. The residents of the village would like to make use of the
grassland by investing in steers, which is the only investment opportunity available. The profit generated
by each steer depends on the number of steers that share the grassland. In particular, if n steers share the
grassland, each of them will generate a profit of 25.5 − 5n dollars. Assume that the number of steers can
only take integers. Further assume there are 100 residents in the village, and each resident can only invest
in one steer.
38. If the residents make their decisions individually, [ Answer38 ] steers will be sent to the grassland.
39. The socially optimal number of steers sent to the grassland is [ Answer39 ].
40. The village government is considering to impose a tax on each steer sent to the grassland. In order to
induce the socially optimal outcome, the tax should be at least [ Answer40A ] dollars and at most [
Answer40B ] dollars per steer sent to the grassland.
41. The marginal external cost incurred by the Q-th steer, in which Q is the socially optimal number of
steers, is [ Answer41 ] dollars.

42. There are 1000 citizens in Utopia. They are considering how much area of country parks to be
retained in the city. Half of the citizens are each willing to pay 200 dollars to retain each additional
hectare of country park. Three-eighths of the citizens are each willing to pay 850 dollars to retain
each additional hectare of country park. The remaining one-eighth of the citizens are each willing to
pay 2700 dollars to retain each additional hectare of country park. The marginal cost of retaining
each additional hectare of country park is 10000 + 20700Q dollars, where Q is the number of hectares
of country park in Utopia (assumed to be perfectly divisible). The socially efficient area of country
parks to be retained in Utopia is [ Answer42 ] hectares.

43. Evaluate whether the following statements are True or False?

A) Consider the case of common resources. The government can solve the tragedy of the commons
by considering the usual tools that help control negative externality, such as taxation and issuing
permits.
[ Answer43A ] (T. True, F. False)
B) Consider the case of public goods. The free-rider and bargaining problems would lead to
under-provision of the public goods relative to the socially efficient level.
[ Answer43B ] (T. True, F. False)
C) Consider the case of monopoly. One reason why the government issues patents to monopolist
firms is to give additional incentives to these firms to conduct research and development.
[ Answer43C ] (T. True, F. False)

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Please refer to the background information below to answer the following five questions.
Consider a perfectly competitive industry where all the firms (including the potential entrants) are identical.
Suppose their product is perfectly divisible. Regardless of how many firms are in the industry, for each
individual firm, when q units are produced, its marginal cost is

M C(q) = q

and the corresponding total variable cost is

T V C(q) = 0.5q 2

The demand curve in the market is

Q = 8000 − 80P

The market is currently in a long-run equilibrium, and the equilibrium price is $40 per unit.
44. Using the information, we conclude that there are [ Answer44 ] firms currently in the market.
45. Suppose the fixed cost of each individual firm depends on the number of firms in the market. For
example, the rent for the factory space is higher when there are more firms. When there are n firms
in the market, the fixed cost of an individual firm is of the form

F C(n) = C × (n/100).

Using the information above, we conclude that C is equal to [ Answer45 ] .

46. Using the information above, we conclude that the industry is
A) a constant cost industry
B) an increasing cost industry
C) a decreasing cost industry
[ Answer46 ]
47. Suppose after a change in demand, the industry reaches the long-run equilibrium again. There are
now 250 firms in the industry. Using the information above, in this equilibrium, each firm produces [
Answer47 ] units.
48. In this new long-run equilibrium, the equilibrium price is $[ Answer48 ] per unit.

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Please refer to the background information below to answer the following two questions.
The market for orange juice is perfectly competitive. Alfred’s juice factory is one of many perfectly
competitive firms. Assume that the only variable input required for production is workers. The following
table shows the relationship between the number of workers hired and the total output (bottles of orange
juice produced per day).

# of workers Total output (bottles)

1 98
2 186
3 267
4 335
5 392
6 446
7 484
8 516
9 537
10 548

Alfred pays a fixed cost of rental of $348 per day, and to each worker a wage of $75 per day. The price of
orange juice is $2.28 per bottle.
49. Given such information, in the short run, Alfred should hire [ Answer49A ] workers, and thus
produce [ Answer49B ] bottles of orange juice per day.
50. Consequently, in the short run, Alfred will make a daily profit of $[ Answer50 ].

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Please refer to the background information below to answer the following three questions.
Suppose the hotel industry is a perfectly competitive constant cost industry. All hotels are identical (having
the same production costs and producing the same product). Both the number of hotels and the quantity of
hotel service are assumed to be perfectly divisible. A typical hotel has the following total cost and marginal
cost functions of hotel service:

Total Cost: T C = 80q 2 + 290q + 4260 dollars

Marginal Cost: M C = 160q + 290 dollars

where q is quantity of hotel service (in units) produced by a typical hotel. The market demand curve for
hotel services is (P is price per unit of hotel service in dollars, and Q is market quantity of hotel service):

P = 11750 − 16.4Q dollars

The hotel industry is at the long-run equilibrium.

51. A typical hotel will shut-down and produce zero quantity in the short run if the price is lower than [
Answer51A ] dollars. A typical hotel will exit from the industry in the long run if the price is lower
than [ Answer51B ] dollars.
52. At the long-run equilibrium, the price is [ Answer52A ] dollars per unit of hotel service. Each
hotel produces [ Answer52B ] units of services.
53. At the long-run equilibrium, there are [ Answer53 ] hotels in the market.

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Please refer to the background information below to answer the following four questions.
The market demand for fashion brand Micro’s shirts is given by the following equation:

Demand: Q = 200 − 2.4P thousand shirts

where P is price per shirt in dollars.

54. Suppose Micro adopts the hunger marketing strategy in selling their shirts: The price per shirt is set
at 16.667 dollars and at the same time the quantity is set to create a shortage. Under this marketing
strategy, if Micro decides to offer 80 thousand shirts, there will be a shortage of [ Answer54 ]
thousand shirts.
55. Continue with the previous question. Suppose Micro issues 80 thousand coupons, and the holder of
each coupon has the right to purchase one shirt at the regulated price of 16.667 dollars. If Micro
distributes all coupons to the general public for free, and allows the coupons to be traded, assuming
the market for coupons is competitive, the equilibrium price of the coupon will be [ Answer55 ]
dollars per coupon.
56. Suppose, predicting that there will be a nontrivial market value of the coupons, the CMO considers
secretly selling the coupons and keeping the proceeds to herself. To avoid getting caught by the
company, the CMO hires a middle person (John) to handle the transactions, for a commission fee of
16.667 dollars per coupon. She will then advise the company to issue certain amount of coupons and
then hand over all the issued coupons to John. John will then sell the coupons at a fixed price. To
maximize what she can secretly pocket, the CMO should advise the company to issue [ Answer56A
] thousand coupons and let John sell the coupons at [ Answer56B ] dollars per coupon.
57. Continue with the previous question. Suppose the middle person John is a shrewd judge of human
nature and would be able to practice perfect price discrimination in selling the coupons. Suppose
the commission to John remains 16.667 per coupon. The CMO should advise the company to issue
[ Answer57A ] thousand coupons and she herself will secretly pocket [ Answer57B ] thousand
dollars.

Please refer to the background information below to answer the following three questions.
A monopolist faces a demand curve of P = 200 − 0.5Q and has a constant marginal cost of $4 and a fixed
cost $C. Assume that Q is perfectly divisible.
58. In the short run, to maximize profit, the monopolist produces [ Answer58A ] units and charges [
Answer58B ] dollars.
59. If the government imposes a price ceiling at $47, in the short run, the monopolist will produce
[ Answer59A ] units. The deadweight loss [ Answer59B ] (A. increases; B. decreases) by [
Answer59C ] dollars compared to an unregulated market.
60. At this price ceiling, the monopolist will not exit the market in the long run if the fixed cost (C) is [
Answer60A ] (A. more; B. less) than [ Answer60B ] dollars.

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61. A pizza express shop is deciding how best to sell the pizza and soft drinks. The shop owner can either
sell the pizza and soft drinks separately, or bundle them as one combo that contains both subjects.
There are two potential buyers in the market and their willingness to pay (in $) for the content are
summarized in the table below.

Pizza Soft drinks

Birdie 20 42
Ronald 14 26

Suppose, for both pizza and soft drinks, the marginal cost of supplying an additional unit is constant
at $6, and the fixed cost is $7. When the two items are sold as a combo, the shop owner will incur
an additional packaging cost of $0.5 per combo. The shop owner should sell the the two items [
Answer61A ] (A. as a combo; B. separately), and at most make a profit of $[ Answer61B ].

END

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