International Trade (EC 315)

Exercise 0: Microeconomics Revision

This problem set is intended as a revision exercise of some key microeconomic
concepts. We will not be able to cover all of the material below in the classes and
will concentrate on the areas that you had most difculties with.
1. Consider a consumer with utility function u(x
1
, x
2
) = (x
1
)
1/2
(x
2
)
1/2
. The
consumer faces given prices p
1
and p
2
for goods 1 and 2, and her income
equals I. Find the consumers optimal choices of x
1
and x
2
as functions of
p
1
, p
2
and I. What is the intuition behind the rst-order conditions?
2. Redo question (1) with the following utility function u(x
1
, x
2
) = min[x
1
, x
2
],
where min[x
1
, x
2
] should be read as the minimum of x
1
and x
2
. (Useful
hint: the function min[x
1
, x
2
] is not differentiable.)
3. Consider a market where demand and supply are given, respectively, by
x
D
= 10 p and x
S
= 2 + p. What are the equilibrium price and quantity in
this market? Assume that consumers have to pay a tax of t = 2 per unit of
x that they consume. What is the new equilibrium price and quantity?
4. Consider a monopolist that faces a demand curve x = 100 p, and has
cost function c(x) = 2 +2x. Find the monopolists prot-maximizing choice
of x. Discuss the intuition behind the rst order condition. Compute the
monopolists prots.
1