Econ 11 Final Exam Solutions

March 20, 2016

Problem 1

Version 1
(a) For firm 1, C1 (Q) = 12 Q2 + 12 Q, then P = M C1 = Q +

1
2

implies S(P ) = P 12 .

S(P ) 0 gives P 12 .
Plug into the profit: 1 = P Q C1 (Q) = P (P 12 ) 21 (P 12 )2 12 (P 12 ) = 12 (P 12 )2
will never be negative.
Therefore S1 (P ) = P 21 , when P 12 , and firm will not operate when P < 21 .

For firm 2, C2 (Q) = 13 Q3 + 32 , then P = M C2 = Q2 implies S(P ) = P .

S(P ) 0 gives P 0.

3
3
Plug into the profit: 2 = P Q C2 (Q) = P P 13 P 2 23 = 32 (P 2 1) 0 implies
P 1.

Therefore S2 (P ) = P , when P 1, and firm will not operate when P < 1.

(b) The market supply function is

P + P 2, P 1
S(P ) = P 21 ,
1 > P 21

1
0,
2 > P 0
(c) See below for the joint market supply. You should sketch the third part as a concave
curve.

P
P
Version 2

Version 1

4
1
0.5

1
0.5

1.5

1.5

3.5

Version 2
(a) For firm 1, C1 (Q) = Q2 + Q, then P = M C1 = 2Q + 1 implies S(P ) = 12 P 12 .
S(P ) 0 gives P 1.
Plug into the profit: 1 = P QC1 (Q) = P ( 12 P 12 )( 12 P 12 )2 ( 12 P 21 ) = ( 12 P 12 )2
will never be negative.
Therefore S1 (P ) = 12 P 21 , when P 1, and firm will not operate when P < 1.

2
For firm 2, C2 (Q) = 13 Q3 + 16
,
then
P
=
M
C
=
Q
implies
S(P
)
=
P.
2
3
S(P ) 0 gives P 0.

3
3
Plug into the profit: 2 = P Q C2 (Q) = P P 13 P 2 16
= 23 (P 2 8) 0 implies
3
P 4.

Therefore S2 (P ) = P , when P 4, and firm will not operate when P < 4.

(b) The market supply function is

1
1

P + 2P 2, P 4
S(P ) = 12 P 12 ,
4>P 1

0,
1>P 0

Problem 2

Version 1.
(a) The firm chooses K and L to
min pK K + pL L s.t. F (K, L) = K /3 L /3 = Q
1

RT S =
L = Q.

FK
FL

L
2K

pK
pL

2
4

impliesK = L. Plug into the constraint, then get K = Q and

Therefore CLR (Q) = 2K + 4L = 2Q + 4Q = 6Q.

(b) When Q = 2000, we have K = L = Q = 2000.
= 2000, then the firm chooses L to
(c) Short run capital is fixed at K
+ pL L s.t. F (K, L) = K
1/3 L2/3 = Q
min pK K
3/2

The optimal solution is just given by the constraint, L = QK =

3
3
+ 4L = 4000 + 4 Q /2 = 4000 + Q/2 .
Therefore CSR (Q) = 2K
2000

/2
Q
.
2000

5 5

Version 2.
(a) The firm chooses K and L to
min pK K + pL L s.t. F (K, L) = K /4 L /4 = Q
1

L
= ppKL = 31 impliesK = L. Plug into the constraint, then get K = Q and
RT S = FFKL = 3K
L = Q.
Therefore CLR (Q) = K + 3L = Q + 3Q = 4Q.
(b) When Q = 1000, we have K = L = Q = 1000.
= 1000, then the firm chooses L to
(c) Short run capital is fixed at K

+ pL L s.t. F (K, L) = K
1/4 L3/4 = Q
min pK K
4/3

The optimal solution is just given by the constraint, L = QK =

3
3
+ 3L = 1000 + 3 Q /2 = 1000 + 3Q /2 .
Therefore CSR (Q) = K
1000

/3
Q
.
1000

10

Problem 3

Version 1.
The market demand and supply are given byD(P ) = 4 P 2 and S(P ) = 3P .
(a) D(P ) = S(P ) implies 4 P 2 = 3P . Then P = 1 or 4. We only take the positive
value, then the equilibrium price is P =
1. The equilibrium quantity is Q = 3.
(b) Demand curve has the equation P = 4 Q, then
Z 3 p
3
2
5
CS =
( 4 Q 1)dQ = (4 Q) 2 Q |3Q=0 =
3
3
0
The producer surplus is P S =
(c) See below for the graph.

1
2

1 3 = 23 .
2

Version 1
Demand
Supply
CS

P = 1
PS
Q = 3
3

4 Q

Version 2.
The market demand and supply are given byD(P ) = 9 P 2 and S(P ) = 8P .
(a) D(P ) = S(P ) implies 9 P 2 = 8P . Then P = 1 or 9. We only take the positive
value, then the equilibrium price is P =
1. The equilibrium quantity is Q = 8.
(b) Demand curve has the equation P = 9 Q, then
Z 8 p
3
2
28
( 9 Q 1)dQ = (9 Q) 2 Q |8Q=0 =
CS =
3
3
0
The producer surplus is P S =
(c) See below for the graph.
3 P

1
2

1 8 = 4.

Demand

Version 2

CS

Supply

P =1

PS
Q = 8 9 Q

Problem 4

Version 1
Part (a)
If there is an interior solution for Consumer 1, then
1/3x2/3 y 2/3
= 1/py .
2/3x1/3 y 1/3
y = 2x/py .
From the budget constraint,
x1 (py ) = 100 and y1 (py ) = 200/py .
For any positive py , y1 is positive, so the above solution is Consumer 1s optimal choice.
If there is an interior solution for consumer 2, then
1
= 1/py .
100/ y
y = 10000/p2y .
4

The expenditure on good y equals 10000/py . Since I2 = 800, I2 10000/py if py 12.5;

I2 < 10000/py otherwise. Hence,
( 10000
If py 12.5
p2y
y2 (py ) = 800
otherwise
py
From the budget constraint,
x2 (py ) =

(
800

10000
py

otherwise

Therefore, the market demand of good y is

( 10000+200py
y(py ) =

If py 12.5

p2y
1000
py

If py 12.5
otherwise

Part (b)
See Figure 1.

Figure 1: Demand Function of Good Y

Part (c)
(i) When py = 1,
y,py =

1000
py
(
)
|p =1 = 1.
py py 1000/py y
5

(i) When py = 20,

y,py =

10000 + 200py
py
12
(
)
|py =20 = .
2
2
py
py
(10000 + 200py )/py
7

Version 2
If there is an interior solution for Consumer 1, then
1/4x3/4 y 3/4
= 1/py .
3/4x1/4 y 1/4
y = 3x/py .
From the budget constraint,
x1 (py ) = 100 and y1 (py ) = 300/py .
For any positive py , y1 is positive, so the above solution is Consumer 1s optimal choice.
If there is an interior solution for consumer 2, then
1
= 1/py .
20/ y
y = 400/p2y .
The expenditure on good y equals 400/py . Since I2 = 300, I2 400/py if py 4/3;
I2 < 400/py otherwise. Hence,
( 400
If py 4/3
p2y
y2 (py ) = 300
otherwise
py
From the budget constraint,
x2 (py ) =

(
300

400
py

otherwise

Therefore, the market demand of good y is

( 400+300py
y(py ) =

If py 4/3

p2y
600
py

If py 4/3
otherwise

Part (b)
See Figure 2.
Part (c)

Figure 2: Demand Function of Good Y

(i) When py = 1,
y,py =

600 py
(
)
|p =1 = 1.
py py 600 y

(i) When py = 20,

y,py =

400 + 300py
py
(
)
|p =20 = 17/16.
2
py
py
(400 + 300py )/p2y y

Problem 5

Version 1
Part (a)
The firms problem is
max (4400 4Q)Q Q2 400Q
Q

Hence,
QM = 400 and P M = 2800,
Profit = 800000.
Part (b)

The producer surplus equals the firms profit, that is 800000. The consumer surplus equals
Z 400
(4400 4Q 2800)dQ = 320000.
0

Version 2
Part (a)
The firms problem is
max (1400 2Q)Q Q2 200Q
Q

Hence,
QM = 200 and P M = 1000,
Profit = 120000.
Part (b)
The producer surplus equals the firms profit, that is 120000. The consumer surplus equals
Z 200
(1400 2Q 1000)dQ = 40000.
0

Problem 6

Version 1
Part (a)
If there is an interior solution to the consumers problem, then
px
3/x4
=
4
3/y
py
y=(

px 1/4
) x.
py

From budget constraint,

x(px , py , I) =

I
I
and y(px , py , I) =
.
3/4
px [1 + (py /px ) ]
py [1 + (px /py )3/4 ]

Part (b)
When px = py = 1, then
x(1, 1, I) =

I
I
and y(1, 1, I) = .
2
2

Hence the indirect utility function is

V (I) =

16
I3

Part (c)
For any positive utility level u, by (b)
16
I3

u =
Hence, the expenditure function is

E(
u) = (

16 1/3
)
u

Version 2
Part (a)
If there is an interior solution to the consumers problem, then
2/x2
px
=
2
1/y
py
px 1/2
y=(
) x.
2py
From budget constraint,
x(px , py , I) =

I
I
and y(px , py , I) =
.
1/2
px + (px py /2)
py + (2px py )1/2

Part (b)
When px = 1 and py = 2, then
x(1, 2, I) =

I
I
and y(1, 2, I) = .
2
4

Hence the indirect utility function is

V (I) =

8
I

Part (c)
For any positive utility level u, by (b)
u =

8
I

Hence, the expenditure function is

E(
u) =
9

8
u

Problem 7

We are given the following utility function.

u(x, y) = x1/2 + y 1/2
To make this problem simplest to solve first I will derive the Marshallian and Hicksian
demands. Using MRS:
1/2x1/2
px
=
1/2
1/2y
py
y = (px /py )2 x
From the budget constraint
I = px x + py y = px x + p2x p1
y x
So we can derive the following Marshallian demands:
x(px , py , I) =

I
px + p2x p1
y

y(px , py , I) =

I
py + p2y p1
x

The indirect utility function is given by:

I 1/2
I 1/2
p
+
=
V (px , py , I) = p
I
px + p2x p1
py + p2y p1
y
x

p1
p1
p 1x 1 + p 1y 1
px + py
px + py

The Hicksian demands can be found via the expenditure function

E(px , py , u) =

u2


1
p1
x + py

Substituting for I in the Marshallian demand we get

1
u2 / p1
u2 p2y
u2
x + py
c
x (px , py , u) =
=

=
1 2
px + p2x p1
(px + py )2
p2x p1
y
x + py
y c (px , py , u) =

7.1
7.1.1

u2 p2x
(px + py )2

Part a
Version 1

Prices in Nov are px = 2, py = 1 and income is I = 100.

100
50
=
2+4
3
100
200
y(2, 1, 100) =
=
1 + 1/2
3
x(2, 1, 100) =

10

!
=

q
1
I p1
x + py

7.1.2

Version 2

Prices in Nov are px = 0.5, py = 1 and income is I = 81.

81
= 108
0.5 + 0.52

x(0.5, 1, 81) =

81
= 27
1 + 1/0.5

y(0.5, 1, 81) =

7.2
7.2.1

Part b
Version 1

u

50 200
,
3 3

or alternatively
V (2, 1, 100) =
7.2.2


=

100 1/2 + 1 = 10 1.5 = 5 6

Version 2
u (108, 27) =

or alternatively
V (0.5, 1, 100) =

7.3
7.3.1

50 + 200

108 +

27

81 1/0.5 + 1 = 9 3

Part c
Version 1

Prices in Dec are px = 2, py = 0.5 and income is I = 100.

x(2, 0.5, 100) =
y(2, 0.5, 81) =
7.3.2

100
= 10
2+8

100
= 160
0.5 + 0.52 21

Version 2

Prices in Dec are px = 0.5, py = 0.25 and income is I = 81.

x(0.5, 0.25, 81) =
y(0.5, 0.25, 81) =

81
= 54
0.5 + 0.52 4

81
= 216
0.25 + 0.252 2

11

7.4
7.4.1

Part d
Version 1

First lets solve for the compensated demands

 (5 6 0.5)2
x 2, 0.5, 5 6 =
=6
(2 + 0.5)2

 (56 2)2

y c 2, 0.5, 5 6 =
= 96
(2 + 0.5)2
c

Income Effect:



x(2, 0.5, 100) xc 2, 0.5, 5 6 = 10 6 = 4


y(2, 0.5, 100) y c 2, 0.5, 5 6 = 160 96 = 64

Substitution Effect:

50
32
x 2, 0.5, 5 6 x(2, 1, 100) = 6
=
3
3



88
200
=
y c 2, 0.5, 5 6 y(2, 1, 100) = 96
3
3
c

7.4.2

Version 2

First lets solve for the compensated demands

 (9 3 0.25)2
x 0.5, 0.25, 9 3 =
= 27
(0.5 + 0.25)2



(9 3 0.5)2
c
y 0.5, 0.25, 9 3 =
= 108
(0.5 + 0.25)2
c

Income Effect:


x(0.5, 0.5, 81) x 0.5, 0.25, 9 3 = 54 27 = 27


y(0.5, 0.5, 81) y c 0.5, 0.25, 9 3 = 216 108 = 108
c

Substitution Effect:


xc 0.5, 0.25, 9 3 x(0.5, 1, 81) = 27 108 = 81


y c 0.5, 0.25, 9 3 y(0.5, 1, 81) = 108 27 = 81

12

Problem 8

Lets start by finding the Hicksian demand functions.

L = px + qy + (u x

y)

FOC
p=

q=
2 y
Thus we have
p
2q

2

xc (p, q, u) = u

p
2q

y (p, q, u) =
and
This only holds if u

p
.
2q

Otherwise we have a corner solution

xc (p, q, u) = 0

and
y c (p, q, u) = u2
This gives us our expenditure function:


 2

p
p
+ q 2q
= pu
p u 2q
E(p, q, u) =
qu2 ,

8.1
8.1.1

Part a
Version 1
1
2
y(1, 1/2, 1) = 1

E(1, 1/2, 1) =

x(1, 1/2, 1) = 0
8.1.2

Version 2
E(2, 1/2, 2) = 2
y(2, 1/2, 2) = 4
x(2, 1/2, 2) = 0

13

p2
,
4q

if u >

p
2q

otherwise

8.2
8.2.1

Part b
Version 1
15
2
y(1, 1/2, 8) = 1

E(1, 1/2, 8) =

x(1, 1/2, 8) = 7
8.2.2

Version 2
E(2, 1/2, 8) = 14
y(2, 1/2, 8) = 4
x(2, 1/2, 8) = 6

8.3
8.3.1

8.3.2

Part c
Version 1
(
u 1,
E(1, 1/2, u) = u2 2
,
2

if u > 1
otherwise

(
2u 2,
E(2, 1/2, u) = u2
,
2

if u > 2
otherwise

Version 2

14

9
9.1

Bonus Problem
Price Discrimination

Write demand generically as

Q = A BP
The profits in each country are given by where A and B vary by country
(Q, P ) = (P 10)Q = (P 10)(A BP ) = (A + 10B)P BP 2 10A
FOC yield:
A + 10B
2B
A + 10B
A 10B
Q = A
=
2
2
P =

9.1.1

Version 1

Part 1 and 2
Brazil
QB = 1560 4PB
1560 + 10 4
= 200
P =
24
1560 10 4
Q =
= 760
2
Canada
QC = 90 PC
90 + 10
= 50
P =
2
90 10
Q =
= 40
2
Part 3
Profits are then:
B = (200 10) 760 = 144, 400
C = (50 10) 40 = 1, 600
= B + C = 146, 000
Part 4
Consumer surplus is:
CSB = (1560/4 200) 760/2 = 72, 200
CSC = (90 50) 40/2 = 800

15

9.1.2

Version 2

Part 1 and 2
Brazil
QB = 780 2PB
780 + 10 2
= 200
P =
22
780 10 2
Q =
= 380
2
Canada
QC = 45 0.5PC
45 + 10 0.5
= 50
P =
2 0.5
45 10 0.5
Q =
= 20
2
Part 3
Profits are then:
B = (200 10) 380 = 72, 200
C = (50 10) 20 = 800
= B + C = 73, 000
Part 4
Consumer surplus is:
CSB = (780/2 200) 380/2 = 36, 100
CSC = (45/0.5 50) 20/2 = 400

9.2

Single Price

Now let QB = B1 B2 P and QC = C1 C2 P be the demand functions in Brazil and Canada.

Each country has a respective cut off price after which they will refuse to buy. We will call
this PB and PC , respectively.
PB = B1 /B2 > PC = C1 /C2
Now we can find the market demand function

B1 + C1 (B2 + C2 )P, 0 < P PC

Q = B1 + B2 P,
PC < P PB

0,
otherwise
To find the optimal price we have to solve two maximization problems. First we must solve
max (P 10) (B1 + C1 (B2 + C2 )P )

0<P PC

16

= max (B1 + C1 + 10B2 + 10C2 )P (B2 + C2 )P 2 10 (B1 + C1 )

0<P PC

P1 =

B1 + C1 + 10B2 + 10C2
2(B2 + C2 )

For this to be a feasible solution we also must check whether P1 [0, PC ). If so then
Q1 = B1 + C1 (B2 + C2 )P1
(P1 , Q1 ) = (P1 10) Q1
Second we have to solve
max (P 10) (B1 B2 P ) =

PC <P PB

max (B1 + 10B2 )P B2 P 2 10B1

PC <P PB

P2 =

B1 + 10B2
2B2

For this to be a feasible solution we also must check whether P2 [PC , PB ). If so then
Q2 = B1 B2 P2
(P2 , Q2 ) = (P2 10) Q2
Finally we compare (P1 , Q1 ) versus (P2 , Q2 ). The price with the highest profit determines whether we sell to the whole market or only one side.
9.2.1

Version 1

Part 1-3
Market Demand

1650 5P, 0 < P 90

Q = 1560 4P, 90 < P 390

0,
otherwise

Profit Maximization 1:
max (P 10) (1650 5P )

0<P 90

1650 + 50
= 170
/ (0, 90]
25
Thus we have a corner solution of P1 = 90.
P1 =

Q1 = 1650 5 P1 = 1200
(P1 , Q1 ) = (90 10)(1200) = 96, 000
Profit Maximization 2:
max (P 10) (1560 4P )

90<P 390

P2 =

1560 + 40
= 200 (90, 390]
24
17

 Q2 = 1560 4 P2 = 760
(P2 , Q2 ) = (200 10) 760 = 144, 400 > 96, 000
Thus the firm prefers to only sell in Brazil at a price of 200 and quantity 760.
Part 4
Consumer surplus is:
CSB = (1560/4 200) 760/2 = 72, 200
CSC = 0
9.2.2

Version 2

Part 1-3
Market Demand

825 2.5P, 0 < P 90

Q = 780 2P,
90 < P 390

0,
otherwise

Profit Maximization 1:
max (P 10) (825 2.5P )

0<P 90

825 + 25
= 170
/ (0, 90]
2 2.5
Thus we have a corner solution of P1 = 90.
P1 =

Q1 = 825 2.5 P1 = 600

(P1 , Q1 ) = (90 10)(600) = 48, 000
Profit Maximization 2:
max (P 10) (780 2P )

90<P 390

780 + 20
= 200 (90, 390]
22
Q2 = 780 2 P2 = 380

P2 =

(P2 , Q2 ) = (200 10) 380 = 72, 200 > 48, 000

Thus the firm prefers to only sell in Brazil at a price of 200 and quantity 380.
Part 4
Consumer surplus is:
CSB = (780/2 200) 380/2 = 36, 100
CSC = 0

18