(2) It was found that many chose 1 in previous experiments. Are they being irrational? (8%)

2. With R1 lottery, the chances to earn 4000 and 10 are 80% and 20% respectively. With S1 lottery, you definitely will receive 3000. When people choose between R1 and S1, the majority choose S1. With R2 lottery, the chances to earn 4000 and 10 are 20% and 80% respectively. With S2 lottery, the chances to earn 3000 and 10 are 25% and 75% respectively. When people choose between R2 and S2, the majority choose R2. (1) Use the expected utility theory to show that people are being inconsistent. (9%)

(2) Can other models explain their choices better? (8%)

3. Answer the following questions: (1) What is the relationship between average costs and marginal costs? (3%)

(2) Why are the profits in a perfect competitive market usually zero? (3%)

(3) What are the individual firms' supply curves and the industry supply curve in a perfect competitive market? (3%)

(4) In the short run, a firm in the perfect competitive market should always leave the market as long as profits are negative. Do you agree the above statement? (7%)

4. The Trump administration has recently signed a tax overhaul bill into law. The tax law is estimated to reduce the government's revenue by 1.5 trillion over the next decade, which would be the largest tax cut for Americans since 1986. (1) Use the IS-LM framework to explain the impact of the tax cut on the interest rate and income in the short run. (5%)

(2) Based on the Ricardian equivalence proposition, how would the tax cut affect the consumer's welfare and their intertemporal consumption choices in the long run? Set up a two-period consumption-saving model to explain the idea. (10%)

(3) What are some of the arguments against the Ricardian equivalence proposition? In each of your arguments, explain its implications for consumers. (5%)

5. The Phillips curve (1) Describe the relationship examined by economist A. W. Phillips (1958), known as the Phillips curve. (5%)

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