Mec-001 Eng PDF

No.
of Printed Pages : 6 MEC-001
MASTER OF ARTS (ECONOMICS)

Term-End Examination
June, 2017 09621
MEC-001 : MICROECONOMIC ANALYSIS
Time 3 hours Maximum Marks 100
Note : Attempt questions from each section as per instructions

given under each section.
SECTION - A
Answer any two questions from this section.

2x20=40
1. Assume there are 2 firms in an industry : Firm 1,
and 2. Assume firm 1 is the leader. The market
demand for their product is given by P = 30 — Q
with Q = Q i + Q2 and marginal cost MC =12.
Find the Stackelberg solution of the model. How
is this solution different from Cournot model ?
2. Consider the Pareto efficiency conditions for the

provision of a public good. Show that if the sum
of the marginal rates of substitution adds up to
more than the marginal cost, then more of the
public goods and less of private goods should be
produced.
MEC-001 1 P.T.O.
3. Consider an economy with 2 persons and 2 goods.
The utility functions of the 2 persons are
2
UA =XiA X2 ; UB =(X13 Xil23 + 5) and the initial
endowments are given to be
WA = (6, 2) and WB = (2, 6)
(a) Draw Edgeworth Box and show the initial
endowment of the economy.
(b) Find the set of Pareto efficient allocations
and show your result on the Edgeworth box.
(c) Find the competitive equilibrium of this
economy.
4. A consumer's preference over a single good x and
other goods y is represented by a utility function
u(x, y) = log x + y.
If the price of x = P and that of y = 1 and income
M>1
(a) Derive the Marshallian demand for x and
y.
(b) Derive indirect utility function.
(c) Use Slutsky equation to decompose the effect
of own price change on the demand for x
into an income and substitution effect.
SECTION - B
Answer any five questions from this section. 5x12=60
5. Discuss the approaches adopted by Pareto and
Pigou for analysing the problem of welfare
economics.
6. A consumer's utility function from consumption
in two-period horizon is U = X1X2. 6. The income
stream is given as y 1 =1000 and y2 = 648 (where
1 and 2 stands for 'today' and 'next year'
respectively). If the market rate of interest is 8%
per annum, find the values for consumption in
two periods which maximises his utility.
MEC-001 2
7. Explain how Shephard's Lemma can be used to
derive production function from the cost function.
8. Write short notes on (any 3) :

(a) CES production function
(b) Hotelling's Lemma
(c) Merit goods
(d) Consumer's surplus
9. Differentiate between (any two) :

(a) Collusive and non-collusive oligopoly
(b) Monopoly and Monopsony
(c) Adverse selection and Moral Hazard
10. Consider a lottery with 3 possible outcourse

100 will be received with probability 0.1
50 will be received with probability 0.2
10 will be received with probability 0.7.
(a) What is the expected revenue of the
lottery ?
(b) What would a risk neutral person pay to
play the lottery ?
11. Take a consumer with 2 period horizon. Her

utility function is U= x 1x2 and actual income
y1 =10,000 and expected income y 2 = 5250. If the
interest rate is known to be 5% per annum, find
the optimum consumption expenditure of the
consumer.
MEC-001 3
No. of Printed Pages : 16 I mEc -001
June, 2018
MEC 001 : MICROECONOMIC ANALYSIS

-
Time : 3 hours Maximum Marks : 100
Note : Attempt questions from each section as per

instructions given.
SECTION A
Answer any two questions from this section. 2x20=40
1. A pure exchange economy has n consumers and

two goods. The aggregate excess demand
functions for good 1 and good 2, defined for all
strictly positive price vectors p = ( p1, p2) are
givenby
i + 3p2
Zi (P) = p
2p 1
+ 3,2B ,
Z2 (p) =
2p'
where A and B are real numbers. Assume that

these excess demand functions are derived from
each consumer, maximizing the utility function
subject to the budget constraint p.x i p.wi.
MEC 001
- 1 P.T.O.
(a) Find all values of A and B that are
consistent with the aggregate excess
demand functions being derived from
utility maximisation subject to a budget
constraint.
(b) Normalizing the prices such that

(p 1 p2 1) and using your answer from
(a), find the competitive equilibrium price
vector.
2. (a) What solution would you like to offer to

solve the problem of asymmetric
information ?
_
(b) An owner o f a restaurant plans to employ a
manager. The manager can exert high
effort or low effort in running the
restaurant. Putting high effort costs
2 due to the reduction of his utility. This
effort is unobservable to the owner. The
manager could get utility 10 from his
outside option.
The restaurant can be profitable or

unprofitable and this is observable to the
owner. If the manager puts in high effort,
MEC-001 2
then the restaurant is profitable with
probability 0.8 and unprofitable with
probability 0.2.
If the manager puts in low effort, then the

restaurant is profitable with probability 0.4
and unprofitable with probability 0.6.
Consider a contract that pays the manager

w when the restaurant is profitable and
w otherwise. Putting high effort by the
manager yields an expected utility greater
than 10. By putting in high effort he gets
w with probability 0.8 when the
restaurant is profitable, but w u with
probability 0.2 otherwise. The contract is
written such that the manager prefers high
effort over low effort.
(i) Write the participation constraint and

incentive constraint of high effort.
(ii) Solve the profit maximisation problem

of the owner.
(iii) Work out the values of optimal

contract and comment on this
contracting scheme.
MEC-001 3 P.T.O.
3. Suppose that the market demand is described by
P = 120 — (Q + q), where Q = output of the
incumbent, q = output of the potential entrant,
and P = market price.
The incumbent's cost function is given by
TC (Q) = 60 Q while the cost function of the
entrant is given by TC (Q) = 60 q + 80.
(a) If the entrant observes the incumbent

producing Q units of output and expects
this level to be maintained, what is the
equation for the entrant's residual demand
curve ?
(b) If the entrant maximises profits by using

the residual demand in (a) above, what
output will the entrant produce ?
(c) How much would the incumbent have to

produce to keep the entrant out of the
market ?
4. (a) Why would you agree that the two

fundamental welfare theorems are
important in welfare economics ?
(b) What is a social welfare function ? Why is

Bergson-Samuelson social welfare function
considered as an important contribution ?
Explain.
MEC-001
SECTION B
Answer any Ave questions from this section. 5x12=60
5. Consider the following game :
Player B
Rock Paper Scissors
Rock 0, 0 —1, 1 1, —1
Player A Paper 1, —1 0, 0 — 1, 1
Scissors 1, —1 1, —1 0, 0
Is there any pure strategy Nash equilibrium in

this game ? Check whether there is any mixed
strategy Nash equilibrium.
6. John is considering whether to buy insurance.

His utility is given by (I) = I 1/2 where I is his
yearly income equal to 25,000. However, there
is a 5% chance that he will fall sick, which will
cost him 5,000.
(a) What is the expected utility of not buying

any insurance ?
MEC-001 5. P.T.O.
(b) What is the premium to be fixed that
allows the insurance company to exactly
break even in this case ?
(c) What is the expected utility associated with

insuring only half of the loss ?
7. You are an expected utility maximiser with a
logarithmic utility function. Your initial wealth

is W0 . You can invest X of this in an asset that
will return to you either double the investment
amount or half of the invested amount with equal

probabilities. The rest, W 0 — X is kept as cash
with certainty. Find the algebraic expression for

your optimal choice of X as a function of W 0.
Show that the elasticity of your optimal choice of

X with respect to your initial wealth W 0 = 1.
8. Discuss Williamson's framework that identifies
interrelated levels of institutional analysis in the

theory of firm. Why would you agree with the
analysis ? Pick up the elements of Williamson's

model to support your answer.
MEC-001 6
9. On the island of Andaman there are two lakes
and 20 fishing hooks. Each hook can fish on
either lake and keep the average catch on a
particular lake. On lake X, the total number of
2
fish caught is given by F x = 10 lX — 1 , where
2
/x is the number of people fishing on the lake. For
lake Y, the relationship is FY = 5 l y. What will be
the number of fish caught on this island ?
10. Consider an economy with 2 goods and

100 consumers with the same indirect utility
,2
function, v (P 1, P2, y) = . Of the total
4 P1 P2
consumers, 20 each have an income of 100 and
remaining 80, each have 50. Normalising
P1= 1,
(a) Show that the aggregate demand for good 2

is Q d = 3000 .
P2
(b) Suppose the industry for good 2 is perfectly

competitive with 20 firms. Let q be a firm's
'output. A firm's cost function is C(q) = 3q 2 .
(i) Derive the output supply function and

profit function.
(ii) Derive the equilibrium price of p 2.
MEC-001 7 P.T.O.
11. The utility maximisation problem of a consumer
is given as
max__ = min (x14 _1/4 )

A P x2 1 "1'2
subject to xip i + x2p2 y, for consumption of two

goods.
(a) Find the Marshallian demand functions

x 1 and x2.
(b) Write the indirect utility function.
MEC-001 8

No. of Printed Pages : 12 MEC-001
MASTER OF ARTS
(Economics)
December, 2011
MEC-001 : MICRO ECONOMIC ANALYSIS

given under each section .
SECTION A -
Answer any two questions from this section. 2x20 =40

1. An economy comprises two consumers, 1 and 2,
with two consumption goods bi-cycles (b) and
wheat (w). Both consumers have the same utility
function (b, w) = bw. Bi-cycles and wheat are
produced by two firms which use only labour
according to the production functions.
CD b = \r/T
, and w = 0.5 \F t,
Both firms are owned by consumer 1, and
CD
Cr.) consumer 2 owns 200 units of labour.
(a) Find the production possibility frontier for
this economy.
(b) Find the competitive equilibrium.
(c) Find competitive equilibrium if every
consumer owns 100 units of labour and
owns one firm.

MEC 001
- 1 P.T.O.
(d) Find the pareto efficient allocations for this
economy.
2. A consumer's preferences over a single good x and

other goods y is represented by the utility function
p. (x, y) = log (x) + y. If the price of x= p and price
of y =1, and income m > 1,
(a) Derive the Marshallian demand for
x and y.
(b) Derive the indirect utility function.
(c) Use the Slutsky equation to decompose the
effect of an own price change on the
demand • for x into an income and
substitution effect.
3. You are asked to solve a public good problem with

2 agents. Agent i has utility function a,
log (g1 + g2 ) + x, where g, is the amount of the
public good contributed by agent i and
xi = amount of private consumption of agent i.
The budget constraint of agent i is x, + gi = wi
i. wher,istnaldowmefgt
Assuming wi > ai for each agent,
(a) compute the Pareto — optimal level of public
good provision for this economy.
(b) Describe the voluntary contribution
equilibria for different values of a 1 and a2.
MEC-001 2
4. Consider the market for used cars. There are 100
cars for sale, half of them are bad while the others
are good. The owner of a bad car is willing to sell
it for any price above 400 but the owner of a
good car is only willing to sell it for at least
1000. The bad cars are worth 600 to buyers,
and some are worth 1200 to them.
(a) At a Pareto efficient allocation which car
will be sold ?
(b) If buyers cannot observe the quality of the
car for sale, how much would they be
willing to pay for a car ?
(c) Which cars will be sold in equilibrium in this
market ?
(d) Suppose that the fraction g of the cars in
the market are good. If buyer still cannot
observe the quality, how large must g be for
cars to be sold in equilibrium ?

MEC-001 3 P.T.O.
SECTION - B
Answer any four questions from this section. 4x10=40
5. (a) Distinguish between pure strategy Nash
equilibrium and mixed strategy equilibrium.
When would you use mixed strategy
equilibrium ?
(b) Find all the Nash equilibrium of the
following game :
Player 2
Left Right
Player 1
Up (5, 4) (1, 3)
Down (4, 1) (2 , 2)
6. Assume that there are four firms supplying a

homogenous product. They have identical cost
'functions given by C (Q) = 40 Q. If the demand
curve for the industry is given by
= 100 — Q,
find the equilibrium industry output if the
producers are cournot competitors. What would
be the resultant market price ? What are the
profits of each firm ?
7. Rita faces the choice problem between two

gambles. In gamble one, she wins 200 if a coin
comes up head and loses 100 if the coin comes up
tail. In gamble two, she wins 20, 000 if coin comes
up head and loses 10,000 if coin comes tail.
Assuming her initial wealth w is 10,000 find :
MEC-001 4
(a) if a risk neutral Rita would accept either,
both or neither of the gambles.
•(b) What would be her decision on the gambles
given her utility function U = ?
(c) Compare and explain your results in
(a) and (b).
8. Discuss the approaches adopted by Pigou and

Pareto for analysing the problem of welfare
economics.
9. Why is there a social cost to monopoly power ?

Suppose a Production Process gives rise to
negative externalities, would your answer on
social cost of monopoly change ? Explain.
10. The production function of firm is given as :

Q = K0.5 1,05.
Payment to labour (w) =1 and that of capital
services (R) =1. Assuming that the amount of
capital is fixed at k = io , derive the firms's short-
run average cost curve and explain its shape.

MEC-001 5 P.T.O.
SECTION - C
Answer all the questions from this section : 2x10=20
11. Write short notes on any two of the following :

(a) Envelope theorem
(b) Hidden information.
(c) Actuarially Fair Premium
12. Differentiate between (any two ) :

(a) Profit function and cost function.
(b) First and second welfare theorem
(c) ISO cost and ISO grant functions
MEC-001 6
MASTER OF ARTS
V)
(ECONOMICS)
r Term-End Examination
December, 2014

SECTION - A
Answer any two questions from this section :

2x20=40
1. Consider a pure exchange economy with 2 goods
(X and Y) and 2 consumers (A and B) having
utility functions :
Consumer A : uA = (xA)2 yA, who is endowed with
(2, 6) of the commodities;
Consumer B : uB = xByB , who is endowed with
(4, 2) of the commodities.
Compute the market equilibrium price and
quantity combinations of the consumers that will
result in efficient allocation of resources.
MEC-001 1 P.T.O.
2. Suppose there are two types of used cars : good
and bad. A good car if it is known to be good, is
worth Rs. 3000 to a buyer and Rs. 2500 to a seller.
You are told that the supply of cars in that market
is fixed and possible buyers are infinite. A bad
car, on the other hand, is worth Rs. 2000 to a
buyer and Rs. 1000 to the seller. There are as
twice many bad cars as good cars.
(a) What would be the prices of bad cars and
good cars, if there was perfect
information ?
(b) What would be the price of used car if
neither buyer nor seller knew whether a
particular car was good one or bad one and
all agents are risk neutral ?
(c) Assume buyers cannot tell if a car is good
or bad. Which would be the market price
for used cars and how many good cars
would be offered ?
(d) Consider that there are two good cars to
every bad car; but buyers cannot tell if a
car is good or bad. Which would be the
market price for used cars and how many
good cars would be offered ?
3. There are 2 firms in an industry facing market

demand : Q = 3200 — 1600P. Their costs functions
are as follows :
Firm 1 : TC1 (q1) = 0.25 q1 and
Firm 2 : TC2 (q2) = 0.5 q2. Solve for the cournot
output levels, market price and profit levels of the
firms.
4. Discuss the views of Pigou on the theory of social

welfare. Make a case to refute his arguments.
MEC-001 2
SECTION - B
Answer any five questions from this section :

5x12=60
,zr, 5. An industry with n = 100 identical firms faces the
10000
inverse demand curve P= and total cost
function :
2
TC (qi ) = 50 + (qi )
2
(a) Find the long run equilibrium, quantity and
the price of the industry.
(b) Suppose that the government imposes a
license fee of 15. Find the new long-run
equilibrium of the industry.
(c) Suppose that the government imposes a
per-unit tax of 4.50. Calculate the short run
equilibrium.
6. An industry is having one dominant firm with

zero production cost and 50 competitive firms,
(a,
each with cost function : TCi =[
\ --ii )2/2
/. The
market demand faced by the industry is

Q =1000 — 50P
(a) Calculate the price set by the dominant firm
(b) Calculate output levels of all firms
7. A consumer has the following utility function with

income (I) and market prices Px and Py :
u =10X°3 Y0.7. Using this,
(a) derive the indirect utility function
(b) derive the expenditure function.
MEC-001 3 P.T.O.
8. Suppose 10 people live on street and that each of
them is willing to pay Rs. 2 for each extra dustbin,
regardless of the number of dustbins provided. If
the cost of providing dustbins is given by C (x) = x2,
what is the pareto efficient number of dustbins to
provide ?
9. Consider the pay-off matrix of a game given

below :
Player 2
I 0
Player 1 A
1,1 3,3
N 2, 4 4, 2
(a) Find all the Nash equilibria of this game.

Which player(s), if any, would have a
dominant strategy ?
(b) Suppose that player 1 moves first by
choosing either A or N. players 2 observes
player l's action and then chooses I or, 0.
For every action combination, the player's
pay-offs are the same as in the above
pay-off matrix. Draw a tree of this new
game. How many strategies does player 1
have and what are they ? Find all the sub-
game perfect equilibria of this game.
10. If John's utility function over his utility function

is u(y) =- Y.
(a) What are his preferences towards risk, risk
averse, risk neutral or risk loving ? Give
reasons in support of your answer.
MEC-001 4
(b) John drives to work every day and has to
spend money to pass through the toll gate.
He thought of devising a way to evade
payment. However, he knows that there is
1
a — probability of being caught at the gate
4
in a given day if he cheats and the cost to be
incurred by him towards payment of fine is
Rs. 36. If his daily income is Rs. 100, what
is the maximum amount he will be willing
to pay for one day at the toll gate ?
11. Critically examine the arguments put forth by

Boumol in his model of alternative theory of firm.
MEC-001 5 P.T.O.
No. of Printed Pages : 12 I MEC -001

December, 2015
04-E_:100
NIEC-001 : MICROECONOMIC ANALYSIS

instructions given.
SECTION A
1. (a) Why is the first welfare theorem

considered to be useful ? Give reasons in
support of your answer.
(b) You are given two goods, product X, and
leisure L. Their prices are p and w.
Consumer's utility is U = X — L and X is
equal to , where t = employment level. If
production possibility curve is defined by
X = j(24 — t) ,
(i) Find the Pareto optimum and show

that it is competitive equilibrium
allocation.
MEC-001 1 P.T.O.
(ii) Find the labour supply at profit
maximisation level if consumer's
income is given as I = 24 w + 7E, where
it = profit.
(iii) What is labour market equilibrium

derived on the basis of above
information ?
2. (a) Discuss the market structure under which

Cournot model offers useful insights.
(b) Find the Cournot equilibrium if market
demand is
Q = 3200 — 1600 p, where
Q = Q 1 + Q2 and cost functions of two
firms 1 and 2 are TC 1(Q 1 ) = 0'25 Qi,
and TC2(Q2) = 0.5 Q2 .
3. (a) Why is the adverse selection likely to exist

in a market ? What mechanism would you
like to suggest for overcoming the
allocation problem ?
(b) In a used car market, quality of bad and
good cars are measured in monetary units.
Suppose price of used cars varies from
2,000 to 6,000 with uniform
probability distribution. Answer the
following :
(i) If a buyer thinks that both types of
cars are there in the market, what is
the maximum price she is willing to
pay ?
MEC-001 2
(ii) At the price of (i) above, what is the
quality of the cars in the market ?
(iii) Find the equilibrium in the market of

used cars you are given above.
(iv) Suppose now buyers value each car at

a price 20% higher than the owner. If
the selling prices for the owners are
same as before, what would be the
new equilibrium ?
4. (a) Why is Paretian Criterion considered

important in Welfare economics ?
(b) Making use of indifference curve tool,

analyse the Paretian Criterion.
(c) What impact would the compensating

payment have on Paretian Criterion ? Give
reasons to support your answer.
MEC-001 3 P.T.O.
SECTION B
5. A cartel comprises 10 firms, each with total cost
TC (qi ) = 200 + 2(qi)2 . If the market demand is
given as p = 140 — Q, solve for cartel's output
level, market price and profit.
6. Two room-mates, Tina and John have two goods

Pepsi and Music. Their utility functions are given
as
UT (PT, MT) = PT + MT and
2
M
UJ (PJ' MJ ) = PJ — [—J-
2 •
If each one is having 30 pepsies and 24 hours

music, find the Pareto optimality condition for
them.
7. (a) What is the efficiency condition for public

goods ?
MEC-001 4
(b) There are 2 goods, Fish (F) and Train (T),
representing private and public goods .
respectively. If n people in that economy
are having utility function, U i = (Fi)2 — T
and production possibility frontier is given
as F2 + 3T2 = 1800, what is Pareto optimal
provision of T ?
8. Given the following extensive form game,
(a) find the subgame perfect Nash equilibrium.
(b) write its normal form and solve for its Nash
equilibrium.
(c) compare the solutions obtained from

extensive and normal forms of the game
and state which of these offers better
solution.
P-1
(1, 2)
(2, 1)
MEC-001 5 P.T.O.
9. Utility from wealth for a person is given by
U = in (w), where U is the utility and w is the
level of wealth. The person has a prospect of good
income of 4000 with probability 0.4 and low
income of 1000 with probability of 0-6. How much
would she pay to insure against income
uncertainty ?
10. Use the utility function u (x 1 , x2) = x 1/2 y2

1/3
and the budget constraint m = p ixi + p2x2 to

calculate demand, indirect utility function,
Hicksian demand and expenditure function.
(a) Envelope Theorem
(b) Pooling Equilibrium
(c) Translog Production Function
MEC-001 6
06062
June, 2014

Note : Answer questions from each section as directed.
SECTION I
1. Suppose there are only three goods (x1, x2, x3) in

an economy and that excess demand functions
for x2 and x3 are given by
ED2 = 3 P2 + 2 P3 =1,
P1 P1
4P2 2 p3
ED = =2.
P1 P1
(a) Show that these functions are homogeneous
of degree zero in pi, P2 and N.
(b) Use Walras law to show that if
ED2 = ED3 = 0, then ED1 must be zero.
MEC-001 1 P.T.O.
2. Consider an industry with two firms. Each firm
has constant marginal cost C'(q) = 0. Let the
market inverse demand function be
P(Q) = 100 — Q, where Q = qi + q2.
(a) What is the Bertrand equilibrium level of

output ?
(b) If firm 1 acts as a leader and firm 2 as a
follower, what is each firm's output in the
Stackelberg equilibrium ?
3. Discuss the two principles of justice as
mentioned by Rawls. Do you think Rawls' theory
of justice is relevant for the third world
countries ? Using the two principles of Rawls,
justify your answer.
4. (a) Differentiate between hidden information
and hidden action. Suggest measures for
minimizing the consequences of such
problems.
(b) A market for used cars operates with sellers'
knowledge of exact quality of the product.
Buyers in that market can identify the
quality of the product only when they
purchase the goods. Two types of cars offered
for sale are good quality worth
2,00,000 and bad quality, worth
20,000. Participants of the market know
that half of the used cars are of good quality.
(i) Find the willingness of buyers to pay
for a car in the market. Comment if
that could be the equilibrium price.
(ii) Discuss how market failure occurs in
this market.
MEC-001 2
SECTION II
5. John's utility depends on his income. His utility

function is U(y) = . He has received a prize
that depends on the roll of a pair of dice. If he
rolls a 3, 4, 6 or 8, he will receive 400,
otherwise only 100.
(a) Find the expected payoff of the prize.
(b) What is the expected utility of the prize ?
(c) How much would you pay John to give up
the prize ?
(d) If John is offered an alternative prize of
169, which prize would he prefer ?
6. Suppose the marginal product of labour in a firm

is given by MPL = 400 — 0.5L and supply of
labour is L = 50 + W, where W is the wage.
(a) Find the market clearing real wage rate.
(b) Suppose the government imposes a
minimum wage of 40. Is there any
involuntary unemployment ?
(c) Suppose the government imposes a
minimum wage of 75. Is there any
involuntary unemployment ?
MEC-001 3 P.T.O.
7. A household lives for two periods, 0 and 1. It
begins its life with zero financial wealth, earns
Y0 = 100 in period 0 and income Y1 = 100 in
(1
period 1. If the interest rate is given to be – % ,
and the utility function of the household is
U(CO3 C1) = U(C0) + 0.75 U(C1), find the
consumption in period zero.
8. A honey farm is located next to an apple

orchard. Let the quantity of apples produced be
measured by A and the amount of honey by H.
The cost functions of two firms are given by
H2
CH (H) = — and
100
A2
CA (A) = H.
100
If the market prices of honey and apples are fixed
at PH = 2 and PA = 3,
(a) What is the equilibrium amount of honey

and the number of apples produced ?
(b) Suppose that the honey and apple firms

merged. What would be the
profit-maximizing production of apples and
honey ?
MEC-001 4
9. (a) Find all the Nash equilibria and
corresponding payoff of the following
game :
Player-Rosa
F B
Player-Hahn F 50, 50 80, 20
B 80, 20 50, 50
(b) There are two players P-1 and P-2. P-2 could
be either type T or type P. The payoff
matrices accordingly are
P-2, Type-T P-2, Type-P
X Y C D
P-1 X 0, 0 0, 1 P-1 C 4,4 0,5
Y 0, 0 4, 1 D 5, 0 2, 2
(i) Write in detailed normal form of the

game and find the Nash equilibria.
(ii) What is the subgame perfect
equilibrium of this game ?
10. Utility of wealth for a person living in My Fair
Garden is given by
U = ln(W), where U = utility and W = wealth.
This person has the prospect of good income and
bad income (T 4,000 with probability 0.4 and
1,000 with probability 0-6). How much
premium will this person pay to insure against
income uncertainty ?
MEC-001 5 P.T.O.
11. Write short notes on the following :
(a) Total Consumer's and Producer's Surplus
(b) Williamson's alternative theory of firm
(c) Shephard's lemma
(d) First Welfare Theorem
MEC-001 6

June, 2015
07836

instructions given.
SECTION A
Answer any two questions from this section. 2 x 20=40
1. Consider a small country with two individuals,
Anita and Babar, and two goods, corn (C) and
chicken (H). Anita and Babar have utility
functions given by
UA= 0.21n C + 0.8 in H,
B
U = 0.8 in C + 0.2 in H.
The economy as a whole is endowed with
100 units of corn and 50 units of chicken.
(a) Solve for the marginal rates of substitution
between corn and chicken for Anita and
Babar. Show the condition that represents
allocative efficiency in C and H.
(b) Derive Anita and Babar's demands for
C and H as a function of prices (P) and
income (I).
MEC-001 1 P.T.O.
(c) Assume that Anita has an endowment of C
equal to a and an endowment of H equal to
13. Solve for the equilibrium price ratio in
terms of a and 13.
(d) Suppose Anita has 80 units of corn and
10 units of chicken. Calculate the
quantities consumed by Anita and Babar in
equilibrium.
2. Suppose the quality of used cars runs from good,

worth 2,900 to sellers and 3,000 to buyers,
down to bad ones worth 1,900 to sellers and
2,000 to buyers. Between these two extremes
are cars of every quantity level, always worth
100 more to buyers than to sellers. Assume
that there are 1001 cars and there is just one car
per increase of 0.10 in quality, i.e., the first car
worth 1,900 to its owner and 2,000 to
buyers, a second worth 1,90010 to its owner
and 2,00010 to buyers and so on. Assume that
the market has inelastic supply and elastic
demand at every level of quality.
(a) At price p = 1,900, what is the number of
cars that would be offered for sale ?
(b) At price p, what is the value of buyers of
the average car being sold ? What happens
to demand, if p exceeds 2,100 ?
(c) What would be the equilibrium price in
such a car market ? How many cars will
change hands ?
MEC-001 2
3. There are two firms in an industry facing market
demand : Q = 3200 — 1600 P. Their costs are
given as follows :
Firm 1 : TC1 (q1) = 0.25 q1
Firm 2 : TC2 (q2) = 0.5 q2
If firm 1 is a leader and firm 2 a follower, solve

for Stackelberg output levels, market price and
profit levels of the firms.
4. What is the central contribution of Arrow to the

development of the theory of social welfare ? Do
you agree with his formulation of the theory ?
Give reasons in support of your answer.
MEC-001 3 P.T.O.
SECTION B
5. Suppose an industry with n = 100 identical firms
faces the inverse demand curve : P = 1000 and

2
50 + (q.1 )
total cost : TC(qi) = The Ministry of
2
Health declared the product of the industry to be
unhealthy. Consequently, its demand dropped to

6400
P= . Solve for short-run and long-run
equilibrium price — quantity combinations for the
industry.

(b) First Welfare Theorem
(c) Moral Hazard
7. If the consumer's utility function is given as

(x1/2 1/2 )2,
u(x1 , x2) = 1 + x2
(a) formulate the expenditure minimisation

problem.
(b) derive Hicksian demands for x11 and x2.
(c) derive the expenditure function.
MEC-001 4
8. There are N people living in a village engaged in
fishing (F) and public transport services (T). The
utility function of each of these people is given
as Ui = (fi)2 . T. If the production possibility
frontier is depicted by F2 + 3T2 = 1800, find the
Pareto-optimal provision of T.
9. Consider the sequential game being played
between two U.S. firms thinking about entering
the Indian market. Firm 1 has a headstart in
completing the legal process and moves first,
choosing whether to enter or not. Firm 2 moves
second and is deciding whether to enter or not.
The profit for each firm is shown in the game tree
below :
Firm 1
Enter Do not enter
Firm 2 F.
Enter Do not enter
Enter Do not enter
(1, —1) (6, 0) (2, 4) (2, 0)

(a) Find the subgame Perfect Nash
Equilibrium outcome of the game. List the
associated strategies of the two firms.
(b) How might firm 2 end up with a better
outcome i.e., another Nash Equilibrium ?
Why is this Nash Equilibrium not realistic
as the one in (a) ?
MEC-001 5 P.T.O.
10. Suppose you face the following lottery. You
earn 1 of 3 possible grades in the examination :
An "A", a "C" or an "F" with the probabilities
2
–— 2– 6 – —.
A 10 C 10 F 10
Assume that your current wealth is 400. If you
receive an "A", you gain 500. However, if you
get an "F", you lose 300. If you receive a "C",
you do not gain or lose anything.
If your utility function is given as u(w) = /(1);74 ,
where w = wealth,
(a) what is your expected utility after the
test ?
(b) what is the certainty equivalent level of
wealth in this test ?
11. Which key features of Williamson's model help in

better understanding of the behaviour of a firm ?
Give details to support your answer.
MEC-001 6
No. of Printed Pages : 8 I MEC-001 I
CD MASTER OF ARTS (ECONOMICS)

cr)
CO
CD June, 2016

-

SECTION - A
1. Consider a pure exchange economy with two
commodies (x, y) and total resources
(ex, ey ) = (5, 10). Consumers A and B have
identical preferences represented by the following
utility function :
ui(xi, yi) = (xi, yi) for i= (A, B). Suppose initial
endowments are ( e , e) (2, 1) for A and
(elx3 , = (3, 9) for B.

(a) Draw an Edgeworth box and indicate the
endowment point. Define the set of Pareto
efficient allocations and draw them in the
diagram.
(b) Compute the competitive equilibrium
(Walrasian) and show the allocation. State
if the equilibrium is efficient.
MEC-001 1 P.T.O.
2. (a) In what type of market structure the
Stackelberg model becomes operational ?
Justify your answer.
(b) Find the Stackelberg model equilibrium if
market demand is
Q = 3200 —1600p where
Q= Qi + Q2 and the cost functions of two
firms 1 (the leader) and 2 (the follower) are :
TC1 (Qi) =0.25 Q1 and
TC2(Q2) = 0.5 Q2.
3. The insurance market has two types of agents A

and B and both have initial wealth w =1, same
preference represented by utility function
u(x) = , where x is money. Agents A-type have
a probability of loss of 0.5 whereas the probability
of loss for type B agents is 0.2. If the insurance
companies can distinguish the types of agents but
the agents do not know their types,
(a) Compute the competitive equilibrium in this
market ;
(b) Compute the market equilibrium when the
government regulates it and directs the
companies to offer full insurance;
(c) Discuss the efficiency in each situation,
without and with regulation.
4. (a) State and explain two Pigovian conditions

in welfare analysis.
(b) Using Pigovian framework, discuss the
causes of divergence between private and
social costs and return.
(c) Relate the problems of Pigovian social
welfare to production of public goods and
suggest measures of solution.
MEC-001 2
SECTION - B
5. Determine the equilibrium output (Q), price (P)
and profit err) of a multi-plant monopoly firm with
Total cost function TC(fi) = 200 + 2(fi) 2 and market
demand faced is P =140 — Q. where Q = market
demand.
6. Suppose a honey farm is located next to an apple

orchard. Let the amount of apples produced be
measured by A and the amount of honey by H.
The cost functions of the two firms are given by :
H2 A2
CH = 100 and CA= 100 - H Both the
products are produced under competitive market
conditions in which prices charged are PH = 2
and PA = 3. Compute the equilibrium quantities
of honey and apples and profit earned by the
firms.
7. Identical consumers of a town consumes two

goods comprising a private good x i and a public
good F. Utility of each consumer i is given by :
F) = x, +Vf . If wi denotes the fixed income
of consumer i,
(a) What is the total amount of F supplied by a
single producer ?
(b) What is the socially optimal amount of F ?
(c) Suppose number of people in the town
increases. Explain if the socially optimal
quantity of F would increase or decrease.
MEC-001 3 P.T.O.
8. Given the following extensive form game :
• (a) Find the subgame perfect Nash equilibrium
(b) Write its normal form and solve for Nash
equilibrium
(c) Compare the solutions of the game obtained
in (a) and (b) above and state which of these
offers a better solution.
P—1
A
P—2 P—2
0 0
C D E
P—1
(3, 8) (8, 3) (5, 5)
G H
(2, 10) (1, 10)
9. (a) What is an actuarially fair game ?

(b) Consider a bet : if the next card drawn from
the deck is not heart, you get 0.40 ; if that
event does not occur you lose 1. If the
gamble is fair, you plan to join it. Examine
if it will be a fair bet. If not, what would
constitute a fair bait for this gamble.
10. Given the utility function : u(X, Y) = 5XY 2, = 2
and P = 8 with given income, I= 240, derive the
(a) Demand functions for X and Y.
(b) Indirect utility function.
(c) Expenditure function.
11. Write short notes any two on the following :
(a) Hotelling's Lemma
(b) Separating equilibrium
(c) Translog cost function
MEC-001 4
MASTER OF ARTS
(Economics)
June, 2011

Note : Answer the questions as directed.
SECTION - A
Answer any two questions from this section. 2)(20=40
1. (a) Why would you consider Pareto efficiency
conditions in multimarket equilibrium of an
economy ?
(b) Suppose that a pure exchange economy
consists of two consumers A and B and two
commodities 1 and 2. The endowments of
2
two goods are (0A = ((DA —10, (DA —10) and
N-
\
00 (1) B = 0113'---8, -B =4 ) •
CD If the utility functions are :

( p, 0.05 2 0.05
Up„ -n x and
( xA
1 ( 2 )0
\ 0.25 .75
UB= XB )
xB
Solve for the walrasian equilibrium in this

model.
MEC-001 1 P.T.O.
2. Let there be two firms (1 and 2) in an industry
with firm-1 as the leader. The market demand of
their product is given as P = 30 — Q with
Q = Ql + Q2 and marginal cost (MC) = 12. Find
the stackelberg solution of the model. How does
the solution compare with cournot model ?
3. (a) In the context of asymmetric information,

differentiate between the problems of
adverse selection and moral hazard.
(b) An employer plans to hire a worker for
producing an output and would like to sign
a contract with him. The value of the output
€)
Where e = effort exerted by the worker ;
E = chance factor.
Further, it is known that e =1 when worker
does the work and e = 0 when he shirks with
shirking (e = 0), the value of output
produced would be 100 with probability
1 3
4 and 60 with probability 4. On the other
—
hand, when he exerts efforts (e = 1), the

value of output produced would be 100 with
3
probability —
4 and 60 with probability 41 .
Assume that the employer is risk-neutral

and chooses to maximize his expected
MEC-001 2
profits. The worker is risk-averse and his
utility function is u = f , where
x = earning, i.,e, wage less of cost of efforts.
The cost of effort is given to be 10 when e 1
and 0 when e = 0. Let there be a negotiation
proposal that has provision to Pay w =SO if
y =100; and w = 70 if y = 60.
(i) If the employer plans to pay fixed-
wage, i.e, w is independent of y, what
level of effort will the worker choose
if he agrees to sign the contract ?
Which fixed-wage contract will the
employer choose ?
(ii) If the employer proposes to pay all
output to the worker, i.,e, w = y, will
the worker still shirk ? Will the
contract acceptable to the worker ?
Explain.
(iii) Comment on incentive compatible
constraint and participation constraint
of (a) and (b) above.
provision of a public good. Show that if the sum
of the marginal rates of substitution adds up to
public goods and less of the private good should
be produced.
MEC-001 3 P.T.O.
SECTION - B
5. Sunanda's utility depends on her income so that

u (y) y . She has received a prize that depends
on the roll of a pair of dice. If she rolls a 3, 4, 6 or
8, she will receive Rs. 400. Otherwise she receives
Rs. 100.
(a) What is the expected pay off of the prize ?
(b) What is her expected utility of the prize ?
(c) How much would you have to pay Sunanda

before the dice is rolled so that she gives up
the prize ?
(d) Sunanda is given the option of an

alternative prize of Rs. 169 without the
conditions of rolling the dice. Will she
accept this alternative ? Give reasons in
MEC-001 4
6. Consider the following game played by player•1
and player-2
3
Il
(a) How many sub gamesate there in this game ?

(b) Compute the sub game perfect equilibrium
of this game.
7. Take a consumer with two period time horizon.
His utility function is given as U=C t Cr The
income stream flowing to him during the

period 1 and period 2 is yi —800 and ii/2 =, 648. If
the market rate of interest is 8% per period,
determine his optimal consumption values in the
absence of permanent savings.
MEC-001 5 P.T.O.
1 2
8. Given the utility function u=x3 y3 , where x and
y are two goods and' p. and py denote their prices.
If M is the income of the consumer, derive the
expenditure function.
9. A revenue maximising monopolist requires a
profit of at least 334. Her demand and cost
functions are p =100 — 4q and c = 50 + 20q.
Determine her output level and price in the
ecluilibrium. Contrast these values with those that
would be achieved under profit maximising
objective.
10. Consider a profit function given by
Max N
= ey (13) Pi Use the envelope
theorem to show that input demand function is
yin= a 7(p) •
a Pi
11. The short run cost function of a firm is given as

C =0.03 q3 — 0.6q2 + 10 q +6. Find its short run
supply function.
(a) Public goods and merit goods
(b) Cobb-Douglas and CES production
functions
(c) Slutsky and Hicksian approaches to effect
of price change.
MEC-001 6
No. of Printed Pages : 8 I MEC-001
CI er? December, 2018

instructions given under each.
SECTION A
1. (a) Consider a duopoly market structure with

two symmetric firms with the following
inverse market demand functions and
identical cost functions :
P(q) = 130 — Q, where Q = q 1 + q2
Cost functions of eachfirm : TC 1 = TC2
= 10 qi, i = 1, 2.
Derive the equilibrium price and quantities
under Cournot competition, both at the
firm as well as industry level.
(b) How do firms in Bertrand model under
homogeneous product industry arrive at
equilibrium price ? In what way is this
model different from Cournot model ?
MEC-001 1 P.T.O.
2. A consumer's utility function is given as
U(x, y) = 2x + f3 , where x and y are two
consumption goods.
(a) Find his indirect utility function.
(b) Examine if Roy's law is satisfied by
consumer's demand function for y.
(c) Find the expenditure function e(p, u),
where price of x = 1 and price of y = p.
(d) Find the Hicksian demand function h y(p, u)
for commodity y, where price of x = 1 and
price of y = p.
3. There are 2 firms in an industry facing market

demand Q = 3200 — 1600 P. Their costs are
Firm 1 —> TC1(q1) = 0 ' 25 q1
0* 5 q2 Firm2—›TC(q)=
If firm 1 is the leader and firm 2 the follower,
solve for Stackelberg output levels, market price
and profit levels of the firms.

provision of public goods. Show that if the sum of
the marginal rates of substitution adds up to
public goods and less of the private goods should
be produced.
MEC-001 2
SECTION B
5. Suppose the probability of an accident is 3%. The

average cost imposed due to it is 1,00,000.
Assume that the average car driver has
preferences given by u(I) = -di .
(a) Assuming that this person earns 1,00,000
per year in income, calculate his expected
utility if he buys no insurance.
(b) Calculate the cost of this policy to the
insurance company.

Player 2
Rock Paper Scissors
Rock 0, 0 —1, 1 1; —1
Player 1 Paper 1, —1 0, 0 — 1, 1
Scissors 1, —1 1, —1 0, 0
Is there any pure strategy Nash equilibrium in

this game ? Find out the mixed strategy Nash
equilibrium.
7. The short-run cost function of a firm is given as

C = 0.03 q3 — 0.6 q2 + 10 q+ 6.
Find its short-run supply function.
NIEC-001 3 P.T.O.
8. Differentiate between
(a) Public goods and Merit goods
(b) Slutsky and Hicksian approaches to effect
of price change
9. Discuss the approaches adopted by Pareto and

Pigou for analysing the problem of welfare
economics.
10. The marginal productivity of labour in a firm is

given as MPL = A(400 — L).
(a) If A = 0.2 and real wage is 60, how many

labour will the firm want to hire ?
(b) Suppose we increase the wage to 75, how
many labour will now be hired ?
(c) If A increases to 0.5 and wage is _T 60, how
many labour will the firm now hire ?
Also interpret your results.
11. Write short notes on (any two) :
(b) Translog Production Function

(c) Pooling Equilibrium
MEC-001 4
MASTER OF ARTS
(ECONOMICS)
December, 2012

Note : Attempt questions from each section as directed.
SECTION - A
Answer any two of the following : 2x20=40
1. There are two persons (1 and 2) in an economy.
They consume two goods xi and x2 [where
i stands for commodities]. Their initial
endowments of the good i (i =1, 2) are wi and
w2. If you know that they have identical
preference, compute the equilibria of the
following :
0.6 0.4
MaX(X.ii ) (X)
Subject to P1 A + P2 x2 = P1 TV j. + P2 7,4
Where the endowments of the agents are given
as,
Agent 1 : wl = 7, w21 = 5
Agent 2 : w? . 3, w22 . 7
MEC-001 1
2. (a) How do firms under Bertrand model arrive
at the equilibrium price ? In what way is
this model different from that of
Cournot's ?
(b) The linear demand functions faced by two
firms are given as
= — b1 p1 + cp2
y2 = a2 + cp1 — b2p2
Show that quantities are always lower and
prices higher in Cournot competition than
in Bertrand competition.
3. (a) Discuss the problem arising due to hidden

action and hidden information.
(b) Consider a market where 100 persons want
to sell their used cars. There cars are of two
types, good and bad (in quality). It is known
that only half of the cars are of good quality.
The owner of a good wants to get at least
Rs. 1,00,000 while the owner of a bad car is
willing to sell it for Rs. 50,000. The buyers
are willing to pay a minimum Rs. 60,000
for bad cars and Rs. 1,10,000 for good cars.
In this market, however, only the owner
knows whether the car is of good or bad
quality. If the buyer is willing to pay the
expected value of a car, work out the
equilibrium outcomes in the market.
MEC-001 2
4. What problems would you encounter in making
social decisions if you want to implement the
following rule : an allocation X is socially preferred
to an allocation Y only if everyone prefers X to
Y?
To overcome the problems, what alternatives
would you advocate ? Discuss their features.
MEC-001 3 P.T.O.
SECTION - B
Answer any five questions from this section : 5x12=60
5. If the utility function of two goods x and y is given

as
U = xy2
(a) Derive the indirect utility function if ID, and
pay are prices of x and y and m is income.
(b) Use the information in (a) and derive the
expenditure function.
6. Do you agree with the view that public goods

cannot be provided efficiently ? Give reasons in
7. (a) Distinguish between pure strategy Nash

equilibrium and mixed strategy equilibrium.
When is a mixed strategy used ?
(b) Find all the Nash equilibria of the following
game :
Player 2
Left Right
Player 1
Up (5, 4) (1, 3)
Down (4, 1) (2, 2)
MEC-001 4
8. Assume that there are four firms supplying a
homogeneous product. They have identical cost
functions given by C(Q) = 40Q. If the demand
curve for the industry is given by
P = 100 — q,
find the equilibrium industry output if the
producers are Cournot competitors. What would
be the resultant market price ? What are the
profits of each firm ?
9. Veena faces the choice problem between two

gambles. In the first gamble, she wins 200 if a
coin comes up heads and loses 100 if the coin
comes up tails. In the second gamble, she wins
20,000 if the coin comes up heads and loses 10,000
if the coin comes up tails.
Assuming her initial wealth w is 10,000, find :
(a) If a risk-neutral Veena would accept either,
both or neither of the gambles.
(b) What would be her decision on the gambles
given her utility function U = ?
(c) Compare and explain your results in
(a) and (b).
10. Discuss the approaches adopted by Pigon and

Pareto for analysing the problems of welfare
economics.
MEC-001 5 P.T.O.
11. Why is there a social cost to monopoly power ?
Suppose a production process gives rise to
negative externalities, would your answer on the
social cost of monopoly change ? Explain.
MEC-001 6
Jo. of Printed Pages : 11 MEC-001
MASTER OF ARTS
(ECONOMICS)
0 Term-End Examination
December, 2013
'ime : 3 hours Maximum Marks : 100

SECTION - A
Answer any two questions from this section :

2x20=40
Consider the following pure exchange economy.
There are 2 consumers and 2 goods. Consumer 1
has an endowment of 7 units of good 1 and 3
units of good 2, (i.e, w1 = 7, 3), while consumer 2
has an endowment of 3 units of good 1 and 7
units, good 2 (w2 = 3, 7). The consumers utility
functions are given by : u1 = x11 + x12 and
u2 = minfx21, x22} where xil is consumption of
good 1 by consumer i.
(a) Find the set of pareto optimal allocations of
this economy.
(b) Find the walrasian equilibrium.
vIEC-001 1 P.T.O.
2. Consider an industry with two firms. Each firm
has a constant marginal cost c'(q) = O. Let the
market inverse demand function be
P(Q) =100 — Q where Q = q1 + q2
Find :
(a) The competitive equilibrium level of
industry output.
(b) Compute optimal choice of output in
cournof equilibrium.
3. How economists utilise the concepts of efficiency

and equity to analyse choice issues ? Briefly
explain equity-efficiency trade off.
4. (a) What do you mean by hidden

information ? Suggest measures to mitigate
the problem of hidden information.
(b) Suppose that the market has 100 people
who want to buy a used car and 100 who
want to sell one. Further suppose that 50 of
the used cars on sale are lemons (bad) and
50 are plums (good). While the buyers know
that the market is selling good and bad cars,
they do not know which 50% are lemons
and which are plums. The reservation price
of cars are as follows :
(i) Seller of a plum : Rs.2000
(ii) Seller of a lemon : Rs.1000
(iii) Buyer of a plum : Rs. 2400
(iv) Buyer of a lemon : Rs.1200
(A) If a buyer doesnot know the
difference between cars, how
much he will be willing to pay ?
(B) Describe the equilibrium of the
market and identify how does
adverse selection happen.
MEC-001 2
SECTION - B
5. The marginal productivity of labour in a firm is
given as MPL = A (400 — L).
(a) If A = 0.2 and the real wage is Rs60/- how
many labour will the firm want to hire ?
What reason will you give for that result ?
(b) Suppose the wage is increased to Rs.75.
How many labour will be hired ?
(c) Keeping the real wage at Rs.60, how many
labour will the firm hire if A rises to 0.5 ?
Interpret your result.
6. Suppose utility function of the consumer is given
as u(X1, X2) = X10.5 X20.5
X1 = consumption in period 1
X2 = consumption in period 2.
The consumer lives for two periods. In period 1
her income is Rs.1000 and in period 2 she has no
income. If the market rate of interest is 50%, find
the optimum consumption in each period.
7. Suppose a farmer is deciding to use fertilizer or
not. But there is uncertainty about the rain, which
will also help the crops. Suppose that farmer's
choice consists of two lotteries
1 1
Fertilizer = (50, — 10, 2)
2;
1 1
No Fertilizer = (30, 2 20, 2)
;
If the farmer is an expected utility maximiser and
has monotonic preference, what would he choose
if he were
(a) Risk lover
(b) Risk neutral and
(c) Risk averse ?
MEC-001 3 P.T.O.
8. (a) What is the meaning of inefficient provision
of public goods ? Explain how would you
relate this problem to market failure.
(b) Suppose that there are two goods fish (F)
and transport (T), one private and another
public. There are N people in the town who
use these and the utility function of the ith
person is given as tii = (fi)2T. If the
production possibility frontier is given as
F2 + 3T2 =1800, find the pareto-optimal
provision of T.
9. (a) Consider the matching pennies game : (4+8)
Plays 2
Heads Tails
Plays 1 Heads 1, —1 —1, 1
Tails —1, 1 1, —1
Find the Nash equilibrium of the game.

(b) Consider the following game :
1
L R
2
2.5 L' R'
(0,0)
(6,4) (5,4) (1,1)
(i) Describe the game in its normal form.

(ii) Describe all the subgame perfect
equilibrium of this game.
MEC-001 4
[0. The utility function is given as u = x1/3 y2/3 where
x and y are two goods. If the prices of x and y are
px and py,and m is the income of the consumer
(a) Derive the expenditure function
E(px , py , u)
(b) Given px = 2, pv = 3 and m = 200 with the
above utility function, find the utility
maximising bundle of x and y.
1.1. Write short notes on the following :

(a) Producer's surplus
(b) Boumol's alternative theory of firm
(c) Hotelling lemma
(d) Second welfare theorem
MEC-001 5 P.T.O.

December, 2016 0 1 0 2 1

-

SECTION - A
Answer any two questions from this section.
2x20=40
1. (a) How do firms in Bertrand Model under
homogenous product industry arrive at the
equilibrium price ? In what way is this
model different from Cournot's Model ?
(b) Linear demand functions faced by two firms
are :
y1 =-- al — bi pi + cp2 ; y2 = a2 + cpi — b2p2.
Show that quantities are always lower and
prices higher in Cournot competition
vis-a-vis Bertrand competition.
2. What do you understand by a social welfare

function ? What properties of social optima
would you consider necessary if such a function
exists ? Discuss these properties.
MEC-001 1 P.T.O.
3. Discuss the two principles of justice as mentioned
by Rawls. Do you think Rawls' theory of justice
is relevant for the third world countries ? Using
the two principles of Rawls, justify your answer.
4. A monopolist operates under two plants,

A and B. The marginal costs of the two plants
are given by 360-14x-2x 2 and 310-15x—x 2
x representing units of output produced by with
each plant. If the price of this product is given by
396 — 4x2, calculate the overall marginal cost and
determine profit maximising output in each plant.
SECTION - B
Attempt any five questions from this section.
5x12=60
5. Consider a 2 person, 2 commodity pure exchange
economy with :
_ p
1 (1 12 u 2 c12u 1 q22
q11 q21 q1 and q12 + q22 q2
Derive the contract curve as an implicit function
of q11 and q12. What conditions on the coefficients
a and 13 ensure the contract curve to be a straight
line ?
6. Write short notes on (any three) :

(a) Producer's surplus
(b) Hotelling's Lemma
(c) Second Welfare Theorem
(d) Baumol's alternative theory of firm
MEC-001 2
7. A perfectly discriminating monopolist faces a
linear demand fn : P=100 — 4q. Her total cost is
a linear function of her output and is given as
C = 50 + 20q. Determine the equilibrium level of
output and profit for the monopolist. Compare
these equilibrium values with those if the
monopolist was not in a position to practice
discrimination.
8. Suppose the consumer's preferences are given by
the utility function u(x i , x2 ) = (xiP + x2 ) P .

Find the ordinary demand function and indirect
utility function.

(a) Homogenous and homothetic production
functions
(b) Pooling and separating equilibria
(c) Basing point price and limit price.
10. The pay off matrix of strategies adopted in run
and hide game between a hunter and a prey is
given as :
Prey Run Hide

Hunte
Run (60, 20) (0, 0)
Hide (0, 0) (20, 60)
Find the mixed strategy Nash equilibrium of the
game.
11. Explain how Shephard's Lemma can be used to

derive the production function from the cost
function.
MEC-001 3
MASTER OF ARTS
(Economics)
June, 2012

given under each section .
SECTION - A
Answer any two questions form this section. 2x20=40
1. Consider a world with two agents, A and B. There
are two goods 1 and 2 . The utility functions of
A and B are given as U A = X.?" XA2 and
UB = XB1 XB2• Their initial endowments are
WA =(1,2) and WB =(2,1)
(a) Draw the Edgeworth Box for the agents
considering their initial endowments and
commodity consumptions.
Lr.)
p (b) Find the contract curve through your
Lc) Edgework Box.
CD
(c) Find the demand functions of A and B for
prices Pi,P2 and incomes mA of A and mB
of B.
(d) Find the competitive equilibrium price P*
and equilibrium allocation
()CAP A2,X*B1, X*B2) of this economy.
MEC-001 1 P.T.O.
2. A monopoly insurance company provides
accident insurance to two types of customers; low
risk and high risk, for whom the probability of an
accident is 0.25 and 0.5. There are customers in
the groups of low and high risks in equal number.
Without insurance, each customer's wealth is 16
if there is no accident but zero if there is an
accident. Customers utility function of wealth is
given as u(w) = . The insurance company
cannot identify the type of customer's when they
apply for insurance contract. The company plans
to offer two contracts; First, a payout of 8 in case
there is an accident and requires the customer to
pay a premimum of 7. Second, .a payout of 16 in
case an accident happens but requires customers
to pay a premiiim of 10.
(a) Determine for the low risk and high risk
customers which if any, of these contract
they will buy.
(b) Calculate the insurance company's expected
profit if it offers these contracts. comment
how does the company would like to screen
its customers with these contracts.
3. (a) What do you mean by a pure public good ?

(b) There are only two individuals A and B in
an economy. Their respective marginal
valuation curves for a public good, x, are
given by MVA = 100 — 2x and MVB = 25 — x.
The marginal cost of providing the public
good is given by MC =100 + 2x. Find the
socially efficient quality of public goods.
MEC-001 2
4. A consumer's utility function is given as
U(x, y) = In (x +2y — -Y±

2)
Where x and y are two goods of consumption.

(a) Find the indirect utility function of the
consumer.
(b) Examine if Roy's law is satisfied by the
consumer's demand function for y .
(c) Find the expenditure function of the
consumer e(p,u) where price of x =1 and
price of y=p.
(d) Find the Hickrian demand function
by (p,u) for commodity y, where the price
of x is 1 and the price of y is p .
MEC-001 3 P.T.O.
SECTION - B
5. Answer any four questions from this section. 4x10=40
(a) How would you differentiate a static game
from that of a dynamic game ?
(b) Suppose the following game is played for a
infinite number of periods. If the players
are discounting the future at the rates of 8A
and 6B respectively, find the conditions
under which they sustain the outcome (2,2)
in every period.
Player B
Low High
Player A Low (1, 1) (4, 0)
High (0, 4) (2, 2)
6. Sita expects her future earnings to be worth

Rs 100. If she falls ill, her expected future earning
will be Rs 25, There is a belief that she may fall ill
2
with probability of -
3 while the probability of
remaining in good health is 3. Let her utility
function be given as u(y)= y Suppose that an
insuranne company offers to fully insure sita

against loss of earnings caused by illness against
an actuarially fair premimum.
MEC-001 4
(a) Will Sita accept the insurance Explain
(b) What is the maximum amount that Sita
would pay for the insurance ?
7. Suppose that two identical firms produce bal.:

bearings. Their total costs are given by
CJi and C2 = 30 Q7 where Qi =out put_ of firni
fori =1, 2. The inverse demand curve is given
by P =150 —Q where Q= Q7. Find the
Courn.ot equilibrium quantities, price and profits
of the firms.
8. Why would you prefer Pareto's approach t

welfare analysis over that of Pigou ? EI.aboraie
your view points.
9. (a) Explain how and in what circumstances

markets would lead to a Pareto efficient
allocation of resources ?
(b) Why does the existence of public goods
make it impossible or unlikely that markets
would lead to a Pareto-efficient allocation
of resources ? -
10. Why would you say Boumol's model of sales

maximisation is. an alternative theory of firm ?
Which features of his model may be considered
to support your view points ? Explain your
answer.
MEC-001 5 P.T.O.
SECTION - C
Answer all the questions from this section. 2x10=20

(a) Public goods
(b) Rawl's theory of justice
(c) VNM utility function

(a) Moral hazard and Adverse selection
(b) Shepherd's lemma and Hotelling's lemma
(c) First and third degrees of price
discrimination.
MEC-001 6
MASTER OF ARTS
(ECONOMICS)
0 Term-End Examination
3 June, 2013

SECTION - A
Answer any two questions from this section : 2x20=40
1. A consumer's preferences over a single good x,

and all other goods y is represented by the utility
function u(x, y) = ln(x) + y. If the price of x is p,
that of y is 1 and income is m,
(a) Derive the Marshallian demand for x

and y.
(b) Derive the indirect utility function.
(c) Use the Slutsky equation to decompose the

effect of an own-price change in the
demand for x into income and substitution
effects.
MEC-001 1 P.T.O.
2. (a) Consider the Edgeworth box that describes
a two-person, two-commodity exchange
scenario. Explain how both parties enter
into trade starting from the initial
endowment position.
(b) There are two agents (A and B) with utility
functions given as
LTA = xax1—
1 2
a U B = xr31x1-13
2
for goods x1, x2. The initial endowments of

these goods for the agents are wA = (1, 1)
and wB = (1, 1). Compute the market
clearing prices.
3. (a) Describe the role of reaction functions in

Cournot's model of duopoly.
(b) Two firms producing a homogenous
product, face the demand and cost functions
given by :
P =100 — 0.5 (x, + x2)
=5xi and
C2 = 0.5 x22
Derive the reaction functions of the firms
and obtain the Cournot solution for the
market.
4. What do you understand by a social welfare

function ? What properties of social optima
would you consider necessary if such a function
exists ? Discuss these properties.
N4EC-001 2
SECTION - B
5. A consumer's utility function from consumption

in two-period horizon is u = C1 C20.6 this income
stream is given as y1 =1000 and y2 = 648 (Here 1
and 2 stand for 'today' and 'next year'). if the
market rate of interest is 8% per annum, find the
values for consumption in two periods which
maximises his utility.
6. Arvind's utility function is given as u(w) = \FA, ,

where w = wealth, this present wealth is
Rs. 40,000. He earns no other income. There is a
0.5 probability that he will need a surgical
operation in connection with a health problem.
In case the surgery is done, it will cost Rs. 20,000.
He is thinking of going in for a health insurance
policy which costs Rs. 10,000.
(a) Find his expected wealth with and without

insurance.
(b) Show how much he would be willing to pay

for buying the insurance.
7. What is the theory of the Second - Best ? Prove

that theorem with the help of a diagram.
MEC-001 3 P.T.O.
8. Let the optimal incentive plan be given as
s(q) = wq +k
where s(q) =incentive scheme
q= output, w = wage
and k is a constant.
A worker can produce q units of output at a cost
2
of c(q) = — and he can achieve a utility level
2
working elsewhere. What is the optimal

wage-labour incentive scheme s*(q) for this
worker ?
1
(2, 6)
T
2 2
R
(0,1) (3, 2) ( - 1, 3) (1, 5)
(a) Can backward induction be applied in this

game to find a solution ?
(b) How many subgames are there in this

game ?
MEC-001 4
10. A perfectly discriminating monopolist faces a
linear demand curve :
p = 100 - 4q
Her total cost is a linear function of her output
level and given as C =50 + 20q. Determine the
equilibrium level of output and profit of this
monopolist. Compare these values with those of
the situation in which the monopolist were not in
a position to discriminate.
11. Consider the production function

y=f (x 1, x2) = x1" x 21- a. Obtain the input
demand functions x1 (p, w1, w2, a), x2 (p, Ivy w2,
a) ; the profit function 7 (p, w1, w2, a) and the
supply function y (p, w1, w2, a). Here y is output,
x1, x2 are the inputs ; p is output price ; w1, w2
are the input prices, Tr is profit.
MEC-001 5 P.T.O.
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MEC-001 7 P.T.O.

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of Printed Pages : 6 MEC-001

MASTER OF ARTS (ECONOMICS)

Time 3 hours Maximum Marks 100

Note : Attempt questions from each section as per instructions

Answer any two questions from this section.

2. Consider the Pareto efficiency conditions for the

8. Write short notes on (any 3) :

9. Differentiate between (any two) :

10. Consider a lottery with 3 possible outcourse

11. Take a consumer with 2 period horizon. Her

MEC 001 : MICROECONOMIC ANALYSIS

Time : 3 hours Maximum Marks : 100

Note : Attempt questions from each section as per

1. A pure exchange economy has n consumers and

where A and B are real numbers. Assume that

(b) Normalizing the prices such that

2. (a) What solution would you like to offer to

The restaurant can be profitable or

If the manager puts in low effort, then the

Consider a contract that pays the manager

(i) Write the participation constraint and

(ii) Solve the profit maximisation problem

(iii) Work out the values of optimal

(a) If the entrant observes the incumbent

(b) If the entrant maximises profits by using

(c) How much would the incumbent have to

4. (a) Why would you agree that the two

(b) What is a social welfare function ? Why is

Answer any Ave questions from this section. 5x12=60

5. Consider the following game :

Rock Paper Scissors

Is there any pure strategy Nash equilibrium in

6. John is considering whether to buy insurance.

cost him 5,000.

(a) What is the expected utility of not buying

(c) What is the expected utility associated with

7. You are an expected utility maximiser with a

logarithmic utility function. Your initial wealth

will return to you either double the investment

amount or half of the invested amount with equal

with certainty. Find the algebraic expression for

Show that the elasticity of your optimal choice of

8. Discuss Williamson's framework that identifies

interrelated levels of institutional analysis in the

analysis ? Pick up the elements of Williamson's

10. Consider an economy with 2 goods and

(a) Show that the aggregate demand for good 2

(b) Suppose the industry for good 2 is perfectly

(i) Derive the output supply function and

(ii) Derive the equilibrium price of p 2.

max__ = min (x14 _1/4 )

subject to xip i + x2p2 y, for consumption of two

(a) Find the Marshallian demand functions

(b) Write the indirect utility function.

MEC-001 : MICRO ECONOMIC ANALYSIS

Answer any two questions from this section. 2x20 =40

2. A consumer's preferences over a single good x and

3. You are asked to solve a public good problem with

6. Assume that there are four firms supplying a

7. Rita faces the choice problem between two

8. Discuss the approaches adopted by Pigou and

9. Why is there a social cost to monopoly power ?