Alain Jousten January 2014 Advanced Microeconomics : Exam 1. True/false/uncertain (12) (read the questions well and EXPLAIN your answers. Most of the credit is awarded for the explanation) - All goods cannot be inferior goods. (3 points, approximately 5 lines) - A Pareto optimum necessarily lies on the contract curve. (3 points, approximately 5 lines) - The long-run cost curve is always located above the short-run cost curve. (3 points, approximately 5 lines) - For a power utility function, the coefficient of relative risk aversion and the coefficient of absolute risk aversion are the same. (3 points, max 10 lines) - 2. DEFINITION (3) - First welfare theorem. (3) 3. Consider an exchange economy with two consumers (subscripts 1 and 2) and two goods (x and y). The preferences are represented by : Total resources of the economy x = 6, y = 6 U 1 = 2 x 1 + y 1 U 2 = x 2 1. Determine the set of Pareto optima and represent them in an Edgeworth box. 2. If initial endowments are distributed such that the first consumer owns 2 and 4 units of the first and second goods, while the second consumer owns 4 and 2: What would be the competitive equilibrium, prices and quantities? What are the net demands exchanged on the market? (5 points)

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Alain Jousten January 2014

Advanced Microeconomics : Exam 1. True/false/uncertain (12) (read the questions well and EXPLAIN your answers. Most of

the credit is awarded for the explanation) - All goods cannot be inferior goods. (3 points, approximately 5 lines) - A Pareto optimum necessarily lies on the contract curve. (3 points, approximately 5 lines)

- The long-run cost curve is always located above the short-run cost curve. (3 points,

approximately 5 lines) - For a power utility function, the coefficient of relative risk aversion and the coefficient of

absolute risk aversion are the same. (3 points, max 10 lines) - 2. DEFINITION (3) - First welfare theorem. (3) 3. Consider an exchange economy with two consumers (subscripts 1 and 2) and two goods (x and y). The preferences are represented by : Total resources of the economy x = 6, y = 6 U1 = 2 x1 + y1 U2 = x2

1. Determine the set of Pareto optima and represent them in an Edgeworth box.

2. If initial endowments are distributed such that the first consumer owns 2 and 4 units of the first and second goods, while the second consumer owns 4 and 2: What would be the competitive equilibrium, prices and quantities? What are the net demands exchanged on the market? (5 points)