LUBS2140

Intermediate Microeconomics

Semester Two 2023/2024

Section A - Answer all questions

200 words per question

Question 1

A Government minister wants to know what the microeconomic foundation is for payments to individuals to maintain utility due to an increase in price of a good. Write a policy brief of a maximum of 200-words to explain to the minister. (10 marks)

Question 2

Table 1 shows measures of the percentage change in the price for electricity (column 1), the final consumption of electricity (column 2), and the mean income (adjusted for inflation) (column 3) in the UK between 2013 and 2022.

Table 1: Electricity Prices, Consumption and Income in the UK.

Source: OfS (2024)

You are working as an economist for the National Grid company, and they need to predict what will happen to electricity consumption in 2023. The percentage change in electricity RPI is expected to be 13.7% in 2023. Your manager has asked you to:

(a) Suggest a demand function to use in the modelling of future consumption and explain why this is appropriate based on Table 1;

(b) Suggest other data that would be useful in making the prediction. (10 marks)

Question 3

You are working as an economic consultant and investigating the intertemporal consumption choice of clothes. Your colleague suggests using the utility function:

u = min(C1, C2),

where C1 is the consumption of clothes today and C2 is the consumption of clothes tomorrow. Do you agree with your colleagues suggestions? Explain and if relevant suggest an alternative. (10 marks)

Question 4

On the 4th April 2024, the BBC published a podcast on “How can Temu sell stuff so cheaply whilst spending millions on ads?” . The producers of the podcast have asked you to write an article of a maximum of 200 words on this question from the perspective of a microeconomist. You should assume that Temu is a profit-maximising firm in a perfectly competitive industry. [Note: There is no need to listen to this podcast] (10 marks)

Section B - Answer two questions

600 words per question

Question 5

You are an economist working for the Government Economic Service (GES) . You have been asked to investigate the determinants of demand for electricity.

(a) Your manager tells you that individuals tend to spend 10% of their income on food.

(i) Suggest a two-good utility function if E  is the amount of electricity consumed and G  is the amount of other goods. (4 marks)

(ii) Explain and justify the use of this utility function. (6 marks)

(b) Use the Lagrangian method to find the Marshallian demand functions for E and G. (10 marks)

(c) The GES want you to write a report of up to 200 words on the key determinants of electricity. You should consider:

(i) The determinants based on the theoretical model in (b)

(ii) Any missing determinants and recommendations on how to improve the theoretical model in (b). (10 marks)

Total: 30 marks

Question 6

Brook has no job and no wealth. However, they know that they will inherit £50,000 in the future. Brook has no awareness of the concepts of interest rates or inflation, but they know they can borrow or lend money. Brook needs to decide how much they will consume today, c1 and in the future, c2 .

(a) Sketch the budget line that Brook believes they will face. Ensure that you mark the endowment point. (4 marks)

(b) Write the budget equation that Brook believes they will face. (3 marks)

(c) Given that Brook has the utility function:

u = 10c1 + 9c2 .

Is Brook planning to be a saver of a borrower? (10 marks)

(d) Brook does a short course on economics and finds out about interest rates. They discover that their inheritance has a 20% interest rate. Sketch the change in Brook’s budget line. Does Brook change their decision about being a saver or a borrower? (5 marks)

(e) Explain to Brook why their plans are unrealistic. (8 marks)

Total: 30 marks

Question 7

Scottish Rower are a firm that provide a small amount of gas to the UK gas market. They aim to produce 30 terawatts per hour using the following production function:

q = M0.7 K 0.3 ,

where q is their output of gas to final consumers, M  is the amount of wholesale gas and K is the amount of capital.

(a) The price of gas has recently increased from £150 terawatts per hour to £300 terawatts per hour. The rental rate has remained at £50.

Use the Lagrangian method to find out the impact that the change in price has on the amounts of wholesale gas and capital that the firm uses. (12 marks)

(b) Explain the intuition behind the result in (a). Explain the barriers to Scottish Rower being able to make this change. (6 marks)

(c) The UK Government are worried about the cost of gas to consumers. Scottish Rower have the follow short-run total cost function:

TC = 100 + 40q + 0.2q0.2

If costs are non-sunk then what would Scottish Rower do if the UK Government imposed a price cap of £40 per terawatt hour? (6 marks)

(d) What could the UK Government do to decrease Scottish Rower’s costs and the price to consumers? You can use the information in (a) and (b) to answer this question. (6 marks)

Total: 30 marks