1. (8%) Which of the following statements is (are) not correct?
(A) The demand curve of a normal good must be downward sloping.
(B) The Engel curve of a neutral good must be upward sloping.
(C) The demand curve of a Veblen good must be downward sloping.
(D) The Engel curve of an inferior good must be upward sloping.
(E) A Giffen good must be an inferior good.

2. (8%) Mary, a utility-maximizing consumer, chooses between x and y with the utility function $u(x, y) = \sqrt{x} + y$. Her income is 10. The price of x is 3 and the price of y is 2. Which of the following statements is (are) correct? (A) Her optimal consumption for \( x \) is \( \frac{1}{9} \). (B) \( x \) for her is a neutral good. (C) Her optimal consumption for \( y \) is \( \frac{29}{6} \). (D) \( y \) for her is a normal good. (E) Her optimal consumption basket could be a corner solution given any price of \( x \) and \( y \).

3. (8%) [Continuation of 2.] Suppose the price of y increases from 2 to 5 and the price of x remains at the same level. Under the Hicksian definition, which of the following statements is (are) correct? (A) The substitution effect on her consumption of \( y \) is \( \frac{-1}{2} \). (B) The substitution effect on her consumption of \( x \) must be negative. (C) The income effect on her consumption of \( y \) is \( \frac{-31}{12} \). (D) The income effect on her consumption of \( x \) must be negative. (E) None of the above.

4. (8%) Consider a firm with a production function $q = L^{\frac{1}{2}}K^{\frac{1}{3}}$, where L is labor input and K is capital input. Suppose the firm aims to produce 10 units. The wage rate is w and the interest rate is 1. Which of the following statements is (are) correct? (A) The production function exhibits decreasing returns to scale. (B) The elasticity of substitution for this production function is \( \frac{2}{3} \). (C) When the firm's cost is minimized, the labor demand function is \( L^{*} = (15 / w)^{2 / 3} \). (D) Diseconomies of scale occur during the production process. (E) None of the above.

5. (8%) Suppose Taiwan's rice market is perfectly competitive. A typical farmer's short-run total cost function is $TC = 0.1q^3 + 10q^2 + 400q + 520,$ where 520 is the sunk cost. Since Taiwan's fertile lands are limited, new farmers entering the rice market have to cultivate on infertile lands, increasing the total cost of a typical farmer. Assume that there is no technological progress of rice production in the long run. Which of the following statements is (are) correct? (A) The average fixed cost curve is strictly decreasing as \( q \) increases. (B) The average variable cost curve is strictly decreasing as \( q \) increases. (C) If a typical farmer cultivates, the marginal cost curve is strictly increasing as \( q \) increases. (D) In the short run, the shutdown price for a typical firm is 50. (E) The long-run supply curve for Taiwan's rice market is upward sloping.

6. (10%) Consider a closed economy with two individuals (Mary and Charles) and two goods (x, y). Mary's utility function is $u_m = x_m + 2y_m$, where $(x_m, y_m) = (\frac{3}{4}, \frac{1}{4})$. Charles's utility function is $u_c = \min\{x_c, y_c\}$, where $(x_c, y_c) = (\frac{1}{4}, \frac{3}{4})$. Mary and Charles can only exchange (including as a gift) between x and y. Which of the following statements is (are) correct? (A) Mary sees \( x \) and \( y \) as perfect complements. (B) For Charles, giving out \( x \) to Mary could be a Pareto improvement. (C) The contract curve for this economy is \( x_{m} = y_{m} \), where \( \frac{1}{4} \leq x_{m} \leq \frac{7}{12} \). (D) There is only one possible competitive equilibrium for this economy. (E) None of the above.

7. (10%) Apple is a monopoly in two markets. The inverse demand curve for the first market is p = 100 - 2q and is p = 55 - q for the second. Suppose that Apple cannot discriminate markets by price and has to set the same price across two markets. Further, assume that Apple's cost function is Which of the following statements is (are) correct? (A) Apple will sell its goods in only one market. (B) Apple will sell its goods in both markets. (C) Apple will set the price at \( p = 40 \). (D) Apple will set the price at \( p = 55 \). (E) None of the above.

8. (8%) There are two types of drivers: "Cautious", who has a probability of 1/3 of having an accident,while the other, "Reckless", has a probability of 2/3 of having an accident. Each driver has a wealth level of 100 dollars as an endowment and will lose all his endowments if an accident occurs. Suppose each driver's utility function is where w denotes the wealth level. u(w) = ln w,A risk-neutral insurance company offers insurance. However, it cannot tell drivers' types before selling the insurance. It then offers the following two policies in the hope that each type can voluntarily purchase the right kind of insurance appropriately:●Policy I: the insurance company will cover 20 dollars of loss if the insured buys 10 dollars amount of insurance.●Policy II: the insurance company will cover 35 dollars of loss if the insured buys 70 dollars amount ofinsurance.Which of the following statements is (are) correct?(A) Every type of driver will purchase insurance. (B) The insurance firm will run a deficit in profit. (C) Cautious type will purchase Policy I. (D) Reckless type will purchase Policy II. (E) None of the above.

9. (8%) Firms A, B, and C consider investments in research. Let $g_A$, $g_B$, and $g_C$ represent the amounts of research invested by A, B, and C, respectively. Given the investment $g_A$, $g_B$, and $g_C$, firm A's profit is \[ \pi_A = 5 \ln(g_A + g_B + 1) - g_A; \] Firm B's is \[ \pi_B = 5 \ln(g_A + g_B + g_C + 1) - g_B; \] Firm C's is \[ \pi_C = 5 \ln(g_B + g_C + 1) - g_C. \] The social welfare is defined to be $\pi_A + \pi_B + \pi_C$. Which of the following statements is (are) correct? (A) There is no Nash equilibrium. (B) There are multiple Nash equilibria. (C) There is a Nash equilibrium, which is socially optimal. (D) All Nash equilibria are socially optimal. (E) None of the above.

10.(8%) Tea makers A and B engage in a Cournot competition, facing an inverse demand curve p = 18 – 2q.Suppose that A's cost function is 2qA and B's cost function is qB, where qa is the quantity produced by A, and qB is the quantity produced by B.Which of the following statements is (are) correct? (A) The producers' surplus for A is larger than that for B. (B) The producers' surplus for B is larger than that for A. (C) The consumers' surplus is larger than $50. (D) The consumers' surplus is smaller than $50. (E) The social surplus is maximized in the equilibrium.

11. (8%) [Continuation of 10.] Now, suppose the government acquires tea maker A. The government-owned enterprise will care about its own producer's surplus and the totality of consumers' surplus in the market. Tea maker B remains a private firm, and therefore, it maximizes its producer's surplus only. Which of the following statements is (are) correct if B and the government-owned A engage in the Cournot competition? (A) The equilibrium price is above $5. (B) The equilibrium price is below $5. (C) The consumers' surplus is larger than $50. (D) The consumers' surplus is smaller than $50. (E) The social surplus is maximized in the equilibrium.

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