No.

of Printed Pages : 12 MEC-001

MASTER OF ARTS (ECONOMICS)
Term-End Examination
06062
June, 2014

MEC-001 : MICROECONOMIC ANALYSIS

Time : 3 hours Maximum Marks : 100

Note : Answer questions from each section as directed.

SECTION I

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

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

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

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
 kig.t.141.-001
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x, 2014

qui

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3#0w-

JR-41 3-6?; 514W 4 qiijoif efo

'TT+T I
siPT *-ef iow * 3W ef47- 2 x 20=40

1. -klft 3T 1T 4 ao 3 (xi, x2, x3) * at{

x2 4T1 x3 * TA aii*w tb-Fq

ED2 = 3P2 + 2 P3 =1,

P1 P1
ED3 = 4 P2 2 P3
P1 Al

(•) T4-*-1* Th- eq Pl, P2 4 40

:FFq t I
1

ate-ki Nt4)41 74* zrR

ED2 = ED3 = 0, EDl t 41;4-4 t I

MEC-001 7 P.T.O.
2. 3T:41T 4 t -EA t 7Ac* - wr 31-4T T11-4as
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MEC-001 8
 iciTTT II
t7PT 4A7ef
- qr erwcr / 5x 12=60

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31-1e4 4'c1-1 : U(y) = Ar377 t 13t
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MPL = 400 — 0.5L t 3T1K WI. At 3764
L = 50 + W, W qikl -g:40tUri t I
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MEC-001 9 P.T.O.
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2
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PA = 3 Pem

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MEC-001 10
 . () H4-1 ci (go 1 (to) Rift AT WaR
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MEC-001 11 P.T.O.
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MEC-001 12 6,000