ECON-UA 11
Microeconomic Analysis
Fall 2018
Exam
Problem 1
(a) Give some quick examples of where Hicksian demand is used in consumer theory.
(b) Prove that the Hicksian demand curve for a good is weakly decreasing in the price of that good.
Problem 2
Consider a monopolist who cannot price discriminate. She has total cost function C(q) = q2 .
(a) Solve for her optimal choice of q, and then for the socially optimal level. Show graphically the deadweight loss associated with the monopolization of this industry.
(b) If a government regulator requires that the monopolist produce at the socially optimal level, will a lump sum subsidy be required to keep the monopolist in the industry? Explain.
Problem 3
(a) Distinguish between moral hazard and adverse selection in the insurance industry, and briely say how an insurance company responds to each.
(b) Give some examples of adverse selection outside of the insurance industry.
Problem 4
(a) Deine a Nash equilibrium of a game in normal form. (You don’t need to explain what a normal form game is.)
(b) Give an example of a game with three Nash equilibria x, y and z, such that x Pareto dominates y and y Pareto dominates z. Hint: We saw such a game in class, with exactly three Nash equilibria. But it might be easier to make up one with more Nash equilibria than just x, y and z.
(c) Briely mention some way in which mixed strategy Nash equilibrium might be criticized, and how it might be defended.