Problem set

Microeconomic theory – I
1.
a. For utility function U ( x , y ) =( x−a )0.4 y 0.6, find the walrasian demand function,
indirect utility function, Hicksian demand function and expenditure function. (8)
b. Find ∂ y /∂ a and provide the brief interpretation. (2)
−1 ∂ hi ∂ xi ∂ xi
2. With the help of utility function U ( x 1 , x 2 )=( x−1
1 + x2 )
−1
,show that = − .x .
∂ pj ∂ pj ∂w j
(10)
3. The utility function is U ( x 1 , x 2 )=min ⁡{ x 1+3 x 2 ,3 x 1 + x 2 }
a. Draw the indifference curve for U ( x 1 , x 2 )=10 . (3)
b. Find the demand function x ( p , w) and e ( p , u). (7)
4. There are 4 firms competing in oligopoly model. The inverse demand function is
P=200−Q . All firms have identical cost function given by c ( q i) =4 qi . Firms choose
their quantities simultaneously.
a. Find the strategy/action profile where aggregate quantity supplied is equal to the
monopoly quantity. You can assume symmetry. (3)
b. Show that strategy profile in (a) is not an equilibrium. (3)
c. Find the Nash equilibrium. (4)
5. Two firms are facing the demand Q=10−P. Each firm has a cost function given by
constant unit cost 2. Firms are competing on prices.
a. Write down the profit function of firm i. (3)
b. Draw the best response functions of the firms. (4)
c. Find and explain the Nash equilibrium. (3)
6.
a. For utility function U ( x , y ) =( x−a )0.4 y 0.6, find the walrasian demand function,
indirect utility function, Hicksian demand function and expenditure function. (8)
b. Find ∂ y /∂ a and provide the brief interpretation.

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 −1 ∂ hi ∂ xi ∂ xi
7. With the help of utility function U ( x 1 , x 2 )=( x−1
1 + x2 )
−1
,show that = − .x .
∂ pj ∂ pj ∂w j
(10)
8. The utility function is U ( x 1 , x 2 )=min ⁡{ x 1+3 x 2 ,3 x 1 + x 2 }
a. Draw the indifference curve for U ( x 1 , x 2 )=10 . (3)
b. Find the demand function x ( p , w) and e ( p , u). (7)
9. There are 4 firms competing in oligopoly model. The inverse demand function is
P=200−Q . All firms have identical cost function given by c ( q i) =4 qi . Firms choose
their quantities simultaneously.
a. Find the strategy/action profile where aggregate quantity supplied is equal to the
monopoly quantity. You can assume symmetry. (3)
b. Show that strategy profile in (a) is not an equilibrium. (3)
c. Find the Nash equilibrium. (4)
10. Two firms are facing the demand Q=10−P. Each firm has a cost function given by
constant unit cost 2. Firms are competing on prices.
a. Write down the profit function of firm i. (3)
b. Draw the best response functions of the firms. (4)
c. Find and explain the Nash equilibrium. (3)
11. Answer the following questions.
a. Illustrate the best response function and Nash equilibrium, mathematically as well
as with the help of a diagram for following Bertrand competition:

There are two firms with marginal costs 10 and 20 respectively. The demand function is
Q=100−2 P. (8)

b. Consider the game called ‘penalty shoot-out’. There are two players: goalkeeper
and kicker. Players have three actions each: Right, Centre and Left. Goalkeeper
gets 1 point and kickers gets -1 point if actions chosen by both the players are
same. Otherwise, kicker gets 1 point and goalkeeper gets -1. What is the pure
strategy NE of the game? (4)
c. Let’s find the mixed strategy NE of the game. Let p1 and p2 be the probabilities of
choosing right and center respectively by player 1. Similar probabilities for player

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 2 are q 1 and q 2. What are the expected payoffs for each of the player? (4) What
is the mixed-strategy NE? (4) (Hint: take first derivative of each player’s payoff
with respect to both the probabilities.)
12. Find expenditure function and Hicksian demand function when consumer is trying to
0.2 0.3
minimize the expenditure to achieve utility u ≥ ( x1 −1 ) ( x 2−2 ) where x 1 and x 2 are
commodities.
13. Consider the following utility function:
0.5
U ( x 1 , x 2 )=2 x 1+ x 2
a. What is the dead-weight loss when tax of 0.1 per unit of good 2 is imposed at price
vector (10,10)and w=100? (8)
b. Illustrate the same with the help of a diagram. (2)

14. There are two firms in the industry and they face industry demand curve Q=120−P.
Both firms have marginal cost of production equal to 10.
a. Find the Nash Equilibrium when firms behave as Cournot competitor. (3)
b. Suppose firm 1 is a leader and firm 2 is a follower as in Stackleberg model. Find the
equilibrium of the model. (4)
c. Illustrate your answers in (a) and (b) with the help of a diagram. (3)
15. There are two opponents who are playing a game called ‘Pride’. Each of the opponents
will be riding a horse towards a common point from opposite directions. Each of them
will be have a choice to ‘continue’ or ‘shame’ when they will be close to this common
point. Payoff of choosing ‘shame’ is worth loss of million rupees irrespective of what
your opponent does. Death is sure if opponents collide and that is loss worth w million.
Win is when you are alive by choosing ‘continue’ and that is worth 2 million.
a. Find the pure strategy Nash Equilibrium. Provide intuitive interpretation of your
answer. (4)
b. Show that mix strategy equilibrium is (continue, continue) when w <1. (6)

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16. Consider following Stackleberg duopoly. Firm costs are c 1=10 q 1 and c 2=q 22. Both firms
know each other’s cost and market demand. Inverse demand function is p=100−(q1 +q 2)
.
a. Calculate the market price and each firm’s profit when each of the firm will be leader
in the game. (6)
b. What will be the market equilibrium and market price? (4)
17. Find Walrsian demand function and indirect utility function when consumer with utility
0.3 0.4 0.3
function ( x 1−2 ) ( x 2−8 ) ( x 3−5 ) tries to maximize the utility.
18. Find Hicksian demand function and expenditure function when consumer with utility
function x 1+ x0.5 0.5
2 x3 .

19. Calculate the deadweight loss (with CV measure) when consumer with utility function
0.4 0.6
x 1 x 2 and wealth 200 faces the tax of 2 per unit of 2 nd good when prices are 20 and 8
respectively.
20. Calculate the deadweight loss (with EV measure) when consumer with utility function
0.25 0.75
x1 x2 and wealth 1000 gets subsidy of 2 per unit for good 1. Prices are (10,10)
21. production function is y=Min {4 x 1 , x 2 ,5 x 3 }.
a. Find the conditional factor demand function and cost function. (6)
b. Verify the properties of cost function. (4)
22. Production function is y=20 x 0.3 0.5
1 x2 .

a. Find the conditional factor demand function and cost function. (6)
b. Verify the properties of cost function. (4)
23. 3 identical firms are competing over quantity. Cost function C i ( qi )=8 qi where q i is the
quantity supplied by i th firm. Market demand is given by P=1200−2 Q where
Q=q1 +q 2+ q3.
a. Show that each firm supplying 1/3rd of monopoly output is not the Nash
equilibrium. (4)
b. Find the equilibrium quantity and price. (6)
24. 2 firms are competing over prices in market where market demand is Q=100−P where
P is market price. Marginal cost of first firm is 20 while that of second firm is 25.

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 a. What are the best response functions of the firms? Draw the diagram
corroborating your answer. (6)
b. Show that monopoly price is not the Nash equilibrium. (2)
c. What is the equilibrium of this price game? Indicate the same on the diagram. (2)
25. Market demand is given by Q=1000−4 P. It is a competitive market where all the
2
supplying firms have identical technology. Their cost function is c ( q i) =10+10 q i . Find
out the equilibrium price and equilibrium number of firms.
26. Market demand is given by Q=100−2 P.
a. Calculate the deadweight loss under the monopoly. (6)
b. Illustrate your answer with the help of a diagram. (4)

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