ECON2113 L1&L2 Microeconomics, 2017 Fall Final Exam

Instructor : Wooyoung Lim Date: Dec. 11 (Monday) 12:30pm-3:30pm

Declaration of Academic Integrity

I confirm that I have answered the questions using only materials specifically approved
for use in this examination, that all the answers are my own work, and that I have not
received any assistance during the examination.

Name: Student ID: Signature:

1. (40pts) The following is a part of an article in “The Sports Economics”, October 2010.

Enjoying his best run of pitching in more than two years, the always-controversial Car-
los Zambrano (Chicago Cubs’ Pitcher) said after winning his ninth game of the season
Wednesday that he will retire when his contract ends after the 2012 season. Zambrano
said:

“This will be my last contract. I won’t be playing anymore. I don’t want to play anymore.
Life is short. Sometimes you miss things with your family, like very important people, like
my daughter. Sometimes you miss things in life because of baseball that you shouldn’t
miss. I want to be there any moment for my daughter and my family. Baseball takes a
lot of time away from us.”

....Besides, who can criticize a man for wanting to spend more time with his family after
his contract runs out especially one as wealthy as Carlos Zambrano?

Zambrano’s decision in the above article can be explained by the “backward-bending labor supply
curve.”

a. (20pts) By using the budget line, indifference curves, and consumers’ optimal consumption
behavior, graphically demonstrate Zambrano’s backward-bending labor supply curve.

b. (20pts) Explain the backward-bending labor supply curve in terms of price effect. In particular,
explain what happens to income effect, substitution effect and their relative size as the income
of Zambrano increases.

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2. (80pts) Consider two roommates, Mr. LAM and Mr. NG, who share a dorm room. On Dec. 11,
after the ECON2113 final exam, as Mr. LAM has no more exam to take in the semester, he is
thinking to organize a party in his room. The marginal private cost of having a party is equivalent
to HKD (60 + 10x) where x is the number of hours of the party. Mr. LAM can enjoy the marginal
private benefit equivalent to HKD (200 − 25x) from the party. Suppose that his roommate Mr. NG
has one more exam to take next day. There are two places Mr. NG can study - his dorm room and
a library. Even if his exam performance does not depend on whether he studies in his room or in
the library, Mr. NG prefers to study in his room due to the marginal cost of staying in the library,
which is equivalent to HKD 35x. Assume that Mr. NG cannot study in his room if Mr. LAM has
a party and vice versa. In the discussion, ignore any benefit and cost of other party attendees.

a. (20pts) Discuss if Adam Smith’s invisible hand works in their room.

b. (30pts) Suppose that Ms. SONG, the Residence Master of the hall, declares that Mr. LAM
has a right to have a party after the exam. According to the Coase Theorem, is it possible to
achieve a socially efficient outcome? Explain why or why not.

c. (30pts) Suppose that Ms. SONG declares that Mr. NG has a right to study in his room.
According to the Coase Theorem, is it possible to achieve a socially efficient outcome? Explain
why or why not.

3. (80pts) Suppose that there are three roommates who have to decide whether or not to acquire a TV
that costs $300. Person A is willing to pay $130 to have the TV present, while person B is willing
to pay $120 and person C is willing to pay $60. The willingness-to-pay is one’s private information.

a. (40pts) Provide a Groves-Clarke mechanism to achieve an efficient outcome. Especially, explain

who the pivotal person(s) is and calculate the tax for the pivotal person(s).

b. (40pts) Given the Groves-Clarke mechanism you provide above, explain why each person has
no incentive to misreport their willingness-to-pay.

Please hand in this exam paper together with your exam book. Thanks!