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EC9570: Microeconomics
Instructions
This is an OPEN BOOK examination.
Time allowed: 2 hours
Answer ALL questions from Section A and any TWO questions from Section B.
Section A is worth 30 marks and Section B is worth 70 marks
EC9570
Page 2 of 4
SECTION A
Answer ALL of the following questions:
Q1. A lottery ℓ draws a prize from the interval [0,1] with equal probability (i.e. ̃~[0,1]). Give
an example of a lottery ℓ′ which first order stochastically dominates ℓ. Which kind of decision maker
would always prefer ℓ′ over ℓ? (10 marks)
Q2. Suppose that two agents have preferences satisfying completeness, transitivity and continuity
but not monotonicity. Is every Walrasian equilibrium a Pareto optimum in this case? (10 marks)
Q3. Evaluate the following statement: “Signals must be costly to convey information”. (10 marks)
SECTION B
Answer any TWO of the following questions:
Q4. Andrew goes to the supermarket and buys a new loaf of bread. When he gets home he
remembers that there is still 1/4 of a loaf of bread from four days ago.
He eats 1/4 of a loaf per day and prefers newer bread to older bread. If indicates bread of age
then (0) > (1) > (2) > ⋯ > (8) = 0.
Suppose we model Andrew as a utility maximiser and that he discounts future utility at rate > 0
per period.
(a) Which axioms does Andrew have to satisfy to be modelled using the utility function above?
(5 marks)
(b) Write down Andrew’s discounted stream of utility if he finishes the old bread first and then
eats the new bread. (5 marks)
(c) Write down Andrew’s discounted stream of utility if he eats the new bread first and then
eats the old bread. (5 marks)
(d) Is one consumption plan always better than the other? Explain your findings. (10 marks)
(e) Can it ever be optimal to throw the old bread away? (5 marks)
(f) Explain whether this is a ‘normative’ or ‘descriptive’ model. (5 marks)