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Department of Economics, HKUST Department of Economics, HKUST

ECON 198 ECON 198
MICROECONOMIC THEORY I MICROECONOMIC THEORY I


Semester: Spring 2005 Semester: Spring 2005
Prof. S. F. Leung Prof. S. F. Leung






Final Examination Final Examination
May 26, 2005 May 26, 2005
4:30 pm C 7:30 pm 4:30 pm C 7:30 pm



This is a closed book examination. You have 180 minutes to complete the exam. Write coherently, lucidly, and legibly. Always explain your answerThis is a closed book examination. You have 180 minutes to complete the exam. Write coherently, lucidly, and legibly. Always explain your answer. The maximum score for this exam is 180 points. Points are marked next to the questions and may be served as a rough guide to how much time you should allocate on each question. Points will be deducted for irrelevant materials. Use mathematics and/or diagrams wherever appropriate to support your answer.




























1. (15)



Indicate whether each of the following statements is TRUE, FALSE, or UNCERTAIN, and explain your answer. Use mathematics and/or diagrams to support your answer.


(a) If good X is a net substitute for good Y, then good X is also a gross substitute for good Y.



(b) A firm forecasts that the average income of its customers will drop 5% next year. To keep sales at the same level, the firm should reduce the price of its product by 5%.



(c) If the idiom a bird in hand is worth two in the bush is true, then human beings are risk averse.






2. (5)



In an attempt to induce citizens to conserve energy, the government considers enacting regulations requiring that all air conditioners be more efficient in their use of electricity. Some economists caution the government that people may use more electricity after the regulations are enacted. Why?





3. (15)



The Consumer Price Index (CPI) measures the changes over time in the price level of consumer goods and services generally purchased by households. The year-on-year rate of change in the CPI is widely used as an indicator of the inflation affecting consumers. The expenditure weights of the CPI series currently in use are based on the household expenditure patterns obtained from the Household Expenditure Survey (HES) conducted during October 1999 to September 2000. The Census and Statistics Department conducts a new round of HES once every five years to update the expenditure pattern used in the computation of the CPI.

(a) (10) Economists argue that there is a substitution bias in the CPI. What is substitution bias?



(b) (5) How can the substitution bias be reduced? Why?









4. (10)



To help the unemployed, some legislators and unionists suggest that the government should set up a publicly funded unemployment insurance system in Hong Kong. Workers