SEMESTER i 4

12271401
Unique Paper Code: MÍcroeconomics-II
Poper : Intermediate
Econ0mics II Year
2022 Course: B.A. (Hons.)

Maximum Marks : 75
Duration :3 ours
Attemptany five questions.
marks.
All questions carry equal
SECTIONA
consume
consumers A and B what
there are two functions
Q. 1. (a) Suppose econouy. Their utility
pureexchange endowments
2goods X and Y in aU,=X,Y,, respectively. iftheinitial
are U,=2X,+ Y And [(X, =
10)!
2, Y, 10) (X, s 8, Y = Edgeworth bex.
of the geods are
the initial endown eni point in an
(i)Plot
consumption contract eurve and plot it.
(ii) Derive the equiliribum allocation andpricaratio.
competitive allocation is fair or not.
(ifi) Findthe cquilibrium (9.5)
if the competitive
(iv) Verify

Sol. (i) W, (X, = 2, Y, = 10)

W, (X = 8, Y, = 10)
X,=2+8= l0
Total suppiy of X=X, + 10+ 10 = 20
, =
Totai supply of Y=Y;+ 6: 7
10

20 2
19 3
18
5
17
16
15
14 8
13

11
10
3

16
17
18
19
20

3 4 5 8 7 8 9 10
o0. 1 2

(549)
S50
AMAR: B.A. (Hons.) Economics II Year 551
(ii) (Semester-4] CC-8: Intermediates Microeconomics-II
[2022]
U,=2X, +Y; U, =X Y
Y,= 2X =2x6.5 = 13
MRS$y =2; MRSy = and Y= 20 - 13 =7
Therefore, for pareto optimality 2
Therefore, competitive equilibrium price ratio = p..
MRSAY =MRSY
and competitive equilibrium quantities
X,=3.5 Y=7
2=
X=6.5 Y,= 13
Y, = 2X, (iv) U,=2 (3.5) + 7 = 14
equation for consumption contract curve. U,=6.5 (13) = 84.5
Utility from swapped bundle
U, =2x 6.5 + 13 = 26
Consumption
contract curve U, =3.5 x 7=24.5
Hence, 'A envies 'B
8
Therefore its not fairallocatiorn.
B (6) Ahousingdeveloper wants to build houses, ona pieceof land the
located next to an airpert. However, the noise pollution from .
B, planesthat land at theairport reduces the vaiue of housesand hence that
B, the profits of the developer. If X denotes the number of planes
fly per day andYbe the number of houses the developer builds. The
10 profit functiong of thc airport and the developer are as follows :
(iü) Competitive equilibrium equation , 56X-Xi

Px
MRS$Y MRSy = Py ) Ar n0 nargains can be struck between the airport and the
Now, equilibriun price ratio of A
developer andeach can decide its own levèl of activity, how many
the
planes (X*) will fly. to maximise fhe profits of the airport? Find
maximum profits?
MRSAY =2:x (i) Given that X planes fly, how many houses will be built to
maximise profits of the developer? Find the maximum profits of the
Let P, = 1then P, =2 house developer.
Now, value of initial endowment (ii) Suppose that a local ordinance makes it illegal to land planes
For A =
M, =2x 2+ 1x 10 = 14 at the airport because they inpose an externality on the develeper.
For B ind theoptimum number of houses built and the profGts made by
M, =2 x 84 1x 10 = 26 the developer under such a rule.
Demand for X by B MB 26
= 6.5
(iv)Suppose thero is no ban on planes landing at the airport, If a
2Px 4 single firm buys the developer's land and the airport, hoTw many
planes will be flown, and houses built to maximiso joint profits? (9)
X=0- 6.5 3.5 Sol. =56X-X²
 (2022] S53
$52 AMAR:B.A. (Hons.) Economics IIYear (Semester-4) CC-8 : Intermediates Microeconomics-II
...(1)
2X + Y=56
dnA =56-2X = 0
dn
= 70-2Y- X=0
or 2X = 56 and
..(2)
56 or X+2Y=70
or X= =28
2 from (1) and (2)
and t =56 x 28 (28)² 2X + Y=56] × 1
= 1568-784 X+ 2Y =70] x2
I, =784 2X+Y =56
(iü) I =70Y y?-XY 2X + 4Y =140
or Tp=70Y -Y-28Y 3Y 84
Tp =42Y-2 84
Y=
3
dnp = 422Y =0
dy Y=28
Or Y=21 and X=14
T=70Y- y²-XY Q. 2. (a) The output of commodities X and Y, asafunction of
=70 x 21- (21)² 28 x 21 homogeneous inputs (L andK) is expressed in terms of the following
production functions :
=1470- 441 588.
= 14701029
Ip= 441 where L is labour-hours and K is capital-hours devoted in
(uu) In case it is ilegalto landplanes at the airport thenX= 0. hereforé production of X and Y. Initial endowment of labour and capital (in
7,=70Y-y²- (a)Y mundrcds of hOurs) are as follows :
=70Y- y? (L, 50, K; = 50); (L, 50, K, 50)
()Fìnd the equation of the production contract curve for.the
dro =70 2Y=0 commoditics X and Y.
dy (ii)Find the market equilibrium allocation of L and K used in
Y=35 production of Xandy and the equilibrium price ratio (P,/P).
T, =70 >x 35 - (35)2 (ii) At the equilibrium level of production, find the ratio KL
= 2450- 1225 (factor intensity) used in the production of X and Y.
=1225 (iv) It is given that' the production possibility frontier (PPF)
(iv)In the case joint profit maximization takes place corresponding
above
to thoproductìon contract curve derived in part (i)
exhibits increasing rate of product transformation (RPTzy).
Le., the PPF is strictly concave to the origin. Identify the possible
7=56X-X+ 7OY - Y? XY Bource of incrensing RPT, (3 +6 +2 +2 12)
dn
dY 56 2X-Y= 0 Sol,
X= 2/Lx, K7
Or
SS4
AMAR: B.A. (Hons.) Economics II Year Microeconomics-II (2022] 555
[Semester-1) CC-8: Intermediates
L, = 25r+25
MRTSDK =Lx
and K 1

Y- 4.L. K3 21y
Kó
MRTSLK =2Ly Ly = r.Ky
2
P,.L, + r.Ky = 50 +50r
L + Ly= 100
L,= 100 L,
Or
r.Ky +r.Ky =50 +50r
2
K+ K,= 100
Or
Ky = 100- K 2
(50 + 50r]
For production possibility curve
MRTSLK MRTS0K 100 100
0r K, 3r 3
Kx Ky
Lx 2Ly Now, 25r + 25 +
50
+
50r
= 100
3 3
Kx 100 - Kx
2(100- Ly) 75r + 75 + 50 + 50r
Lx Or
3
= 100
Or
200K-2K,Ly = 100L, - K,. L, -125r + 125 =300
Or
200K, -100L, 2K,. L, +KL, =0 Or

Or 125r =300 -125

200K- 100L - Kyy=0
Equation of PPC. 175
(it)LetP, = W = l and P, =r Or

50 + 50r = C
r125
r=l.4

Kx Therefore, P, = 1, P= 1.4
Ly 25
Or
Ly =r.k7
and K,= 25 t 8 = 42.86
P,.Ly +r.K, =50 + 50r 100 100
r. K,+r,K, = 50 + 50r K,= 3r 3 = 57.14
2r. K, =50 + 5Or
L,=25r +25 = 60
26
K7÷ + 25
5050r =40
[25 + 26
(iii)
Kx 42.86
Lx 60
 557
Microecorsonica-II [2022]
AMAR: B.A. (Hons.) Economics II Year (Semester-4] CC-8: Interncdiates
betweern A and
good (G) andgne private good (Y)
(6) onepublictwo
and Ky 57.14
B. Conpare the conditiong.
Ly ,;n = 10
Sol.(i) Indívidual demand curve P, = 10 -
40
private goods is ootained through
(iv)Since both 'X and 'Y are produced under constant returns to scale Market demarnd curve when X is
and two inputs are homogenous only reason why the production possibility horizontal sunmation that is
frontier is convave is differing input intensifies invoived in prodution as 10
shown beloyw.
+2, t ... +Qo=Q =(10- P)x 10 =100 10Px
i=1
Kx Ky
Ly Ly Therefore, market demand curve is 0,, =100 - i0P, or P; 10-0.1 0,
(5)Moral hazard and adverse selection nre problems ofimperfect P, 4
information in insurance markets. Distinguish between them with
reference to the problems faced by companies offering health 10
insurance policies. Also, in the same context, suggest a way of
mitigating the problem of (i) moral hazard and (ii) adverse selection.
(5)
Sol. (i) Adverse selection is the problem of hidden information. It occurs
when one side of the market has more accurate and differcnt information
than other. 100

For example : Insurance companies selling health insurance cannot public gocd is obtained through
easily distinguish between high and low risk groups that is smokers and (ii) Market demand curve when X is a
the verical summation that is
Lon-somkers. Therefore, set an average price for policies low risk groups
withdrew resulting in an adverse selection of individualwho buy insurance. P, =[10- 0.1 Q]x 19 = 100 -Q,
(iü) Moral hazards is the problem of hidden actions. It occurs P,= 100-Q,
when one
side of the market has the incentive to change its behaviour after an
agreement has been made.
For example :Those with comprehensive health insurance become tax
towards making healthy choice, may fall sick more often. 100
Q.3. (a) An individual's inverse demand function for commodity
X is yiven by :F,= 10 -- where the per unit narket price P,
captures his marginal willingness ta pay for commodity X. Assume
there are 10 individualswith the same demand curve.
(E) Find the plot the murket dermand curve ofor Xifit is a private 100
goods. (iii) Efficiency condition for private goods.
(ii) Find and plot market demand curve for X if it is a public
good. lf the marginal cost of providing the public goodX is? 19, find MRSY = MRSXY = Px
the efficient quantity of public good provided. Py
(iii) State the condition for Pareto efficient allocation of: EIfciency condition for public and private goods.
(a) two private goods (X and Y) between two indíviduals (A and
B), and
i=1
MRSGY =MC, where 'G is a public good.
 AMAR :B.A. (Hons.) Microeconomics-II (2022] 559
Private good are Economics II Year (Scmester-4) CC-8: Intermediates
of A, B
though they can everygood must value the good equally at the
consume different levels of private good.
Public good are goods each marginal (i) Define a 'fair allocation.
and Crespresent-an 'fair'
Does the initial endowment
allocation? Explain.
C result
but must consume the person can value the public good competitive trading between A, B and
(4.5+ 2=6.5)
(i1)Will perfectly
(6)In a market two
same level of public good. differently. in a 'fair' allocation ? Explain. equitable and paeto
allocation ifit is
of high qualty (H) and 'types' of slcepingmattresses are sold- those Sol. An allocation is said tobe 'fair'
those of low qualtity (L). Buyers
informnation on quality are
unless they nave
with iimited
unable to identify one type from
efficient.
Initial endowment with A, B and C is (4,
10) is equitable.
Was purchascone and
used it for some time. If another YB 10 2.3
perfectly identifiable,
for an H type and buyers would be willing to pay ? quality YA-10 =2.5 and MRSy= XB
? 18,000 for an 25,000 4
of asymmetric Ltypes of mattress. In the
presence MRSAY XA =

4
price. information, buyers are willing to pay an
which Manufacturers can also offer product average
of mattresses 1
is rclatively warranty,
cheaper for the H type and MRSY = 2/Xc = 0.25
offering product warranty entiais net costs
a
to H type and manufacturers.
of ?5,000 andSupposc
9,000
4

Ltype
warranty itself does notmanufacturers
enchance respectively. The product Hence, MRSY = MRSRy MRSSY
singal of quality.qualityof mattress produced.
It is merely used a the
(i) Wili offering a Therefore, the allocation is not paseto efficient.
separating equilibriumwarranty serve as an effective singal for
in the market for Thus, endowment allocation is not fair
allocation 'C" will be
(ii) If the proportion of mattresses? Explain. (iü) Perfectly competitive trading will result in fair
with equitable
H-type willing to exchange Xfor Y from 'A' and 'B. Since they begin
(0 << 1), what values of 77 achievemattresses
a pooling
in the market is n,
allocation, competitive trading will take them to an allocation to paseto
-SoL. Efective singal for equilibriüm?
separating equilibrium requires (a) P-P>G
(9)
efficient allocation.
and (6) P;-P,<C,
(6) Aperfectly competitive market exists for wheat. The inverse
Py-P, =7000 > Cy = 5000; P - P, = 7000 <C, = demand is P =200 Q vhere P is the price of wheat and Q is the total
Therefore, signal is equitable. 9000 quantity of wheat. The priyate total cost for the undregulated market
(iE)For peoling equilibrium, it must not be is C 50 + 80Q + 0.5Q*. The production of wheat creates an
worth while for
to offer a warranty 'n' for
pooling equilibrium must satisfy theH-type sellers extrenaility where the totai externai cost is EC - 0.5Q.
P, -C, <P=nP, +(1- n).P, conditions (1) Solve for the undregulated competitive equilibrium of wheat
LHS P,-C,=25000-- 5000 = 20,000 and the sÏcially optimal level of wheat.
RHS = 25000 + 18000(1l -n) (i) Darive the Pigouvian tax (per unit of output of wheat) that
results in the social optimum. (6)
=7000n + 18000
Pooling equilibrium requires Sol. Market equilibrium
P= PMC
20000 <7000n + 18000
P=200 Q
2
or
n> C=50 + 80Q +0.5Q
Q.4.4a) Consider â.pure exchage PMC dC
=80 + Q
indiviuais A, Band C with economy consisting of 3
ie., each bas an identical endowment of 2good X and Y,
are U, X U, - endoWment.vector (4, 10). Their utility functiong "Therefore, 200 Q = 80 + Q
XI and U-x (X Ju+Y, 2Q = 200--80
 551
AMAR :B.A. (Hons.) Economics II Year [Semester-4) CC-8:1ntermediates Microeconomics-ii (2022]
or
120 1900
Q= 2 Or Y= 19
Or
Q=60 Y* = 10
Socially optimal level of wheat. X* =30
and
Social cost = Private Cost + External Cost
=50+8OQ + 0.5Q°+0.5Q? (ii) Slope of PPC =
Total social cost =50 + 30Q + Q?
At optimum production
dSC
SMC = = 80+ 2Q
Slope of PPC = Px
for equilibrium Py
80 + 2Q =200-Q 2X
or
Px
3Q =200 - S0
120
or
Q= 2x30
Px =
Py 10
Q=40
(i) Pigvicus tax Px =6
C-50 + 809 + 0.5Q + t + Q Py
SECTION-8
MC = 80 + t+ Q
Q.5.(a) Consider the î0ilowing lobbying game between two firms.
should be subject to Each fîrm may lobby the government in hopes of persuacing it to
MC - P at Q =40 makoa decision that is favourable tõ the firm. The two firms, F1
or 80 + t + 40 =200 -40 and F2, independently and simultaneously decide whether to lobby
9r
(L) or not (N). Lobbying entails a cost of 15. Not lobbying costs
t=40 nothing. If both Tirms lobby or neither firm lobbies, then the
(c) Suppose the government takes a neutral decision,which yields 10 to both irms.
ommodities X and Y isproduction possibili ty curve (PPC) tor
given 2X* + Y?=1900. Him 2 lobbies and Fl does not lobby, then he government makes
(i) If consumers always prefer a decisión that favours firm F2, yielding zero to lobbies and F2 does
3Y, what wiil be the optimum consumption bundles in which X not, the government makes decision in favour of Fl #hich yields
(i)What commodity price
production levels of X and T? to irm Fland zero to firm F2. Assume that i> 25. The normal form
vel of production of X and Y?ratio(PP,) will result in the optimum of this game is :
Sol. (i) (8) F2
2X2 + Y²= 1900
L N
Preference consumption X=3Y L - 5, -5 I-13, 0
Optimum production
N 0, 13 10, 10
2(3Y + y'= 1900
0r () Dotermine the puro-strategy Nash equilibrium of this game.
18Y +y²= 1900
19Y2 = 1900 (G) Compute the mixed-strategy Nash equilibrium of this game.
(ii)Given the mixed-strategy Nash equilibrium computed in part
S62
AMAR :B.A. (Hons.) Economics II 563
Year [Semester 4] CC-8: Intermediates Microeconomics-II {2022]
Ü,What is the
probability that the government malkes a decision
that favours fîrm F1?
OÀS*rises, MSNE
decision favouringdoes the
firm Flprobability
rise or fall?
that the government makes a
Soi. () (1+6+2+1 10) (ü)Probability [P, L, P, = N]
(L, N) with Pure-strategy Narh equilibrium (N, L) with pay off (0, 15)
payoif (x 15, 0) and 5
(iü)Mixed strategy Narh
equilibrium -p(1-)-()20)
EP,[L]=- 5q + (x- 15)(1 -)
=-5q +x- qr- 15 + 15g
=10g +- qr - 15
EP,[NJ Og + 10(1-) (iv) As x rises the probability that the governmnent makes a decision
=1010q favourting firm F,falls.
Randamize if EP,[L] =EP,(N] (6) An electric.utility company provides electricity to a small
10q +x- gt 15 = 10 - 10g town. Thedemand for electricity isplg) =10-0.ig, andthe company's
20q - qgx = 25 t cósts are C(g) = l+0.5g.
Or
g (20 -r) =25 () Does the electric utility company exhibit the properties to be
a "'natural monopoly"?
(i|) Find the unregulated monopolist's profit-maximizing price,
output, and profit.
P (iiü) The government passes a law that requires utility to practice
Marginai Cost pricing (i., e., p = MC). What is the regulated
monopolist's output and profit?
{iv)What is the lump-sum subsidy that the regulator must provide
the electric utility company to practice MC pricing without
1-q= x-20-x+ 25 operating at a loss?
I,- 20
(v)Compute the consumer surplus from the pricing
EP(L) -5p + 15 (1-p) parts (ii) and (itiy strategies in
(1+3 + 2+1 +2 = 9)
-5p + 15 -15p Sol. plg) = 10 -0.lg
=-20p + 15 c(g) =1+ 0.5g
EP,{N] =Op + 10 (1-p) (i) Natural monopolies exhibit
=10 10p decreasing average cost
Randomiza if EP,IL]= EP,[N) clg) =1+ 0.5q
Or
- 20p + 15 = 10 - 10p
Or
- 20p + 10p = l0- 15
ACG) = +0.5
' 10p5
d(AC) -1
<0
1
d
2 Therefore, decreasing AC.
(i) Unregulated
monopolist price, output and profit
 565
CC-8: Intermediates Microeconomics-iI [2022]
AMAR:B.A. (Hons.) Economics II Year (Semester4]
At equilibrium perfectly symmetric, with TC,1 = 2q., i = A, H. (all monetary values
arein thousands of rupees).
MR=MO (i) Assume that firms simultaneously choose their outputs.
MR-10 -0.2g & MC=0.5 Compute the market equilibrium (pricés, quantities and profits ofA
Therefore, 100.2g =0.5 and H).
(ii), If A enters the narket irst, chooses its output and in the
Cr
0.2q = 0.5 - 10
next time period, H enters the market and chooses its output.
or 9.5
= 47.5 Compute the markt eguilibrium of this sequential game (pries,
0.2 quantities and profits of A and H). (5 + 5 = 10)
P, =5.25 Sol.. Total demand.= P=14-q

=(47.5) (5.25) [l+ 0.5 (47.5)] TC, =24,;i=A, H

= 248.375-23.75 (E) Cournot competition
7 =224.625 P,= 14-(g, +9g)
(it)Regulated monopolists.
TR, =P-9A
P=MC =[14q, -99A,
19 -0.1lg =0.5
9 =95 = l4gA
and
t, =0.5
MR, = dTRA 14 2qA H
dqA
=(95) (0.5)= 10.5(95)
dTC
(iv) Subsidy will be Re 1. MC daa -=2
At equilibrium
(v)
Consurmer Surpius (CS,] -pa - Ru|[ MR, = MC
14 2 ,-9=2
-0 5.25)[47.5] 12 2g,-q,=0
= 112.81 94=6-0.54
Best Response function for A
Similarly, Best response function for B
Consumer Surplus(Cs,] =Pnas - Pr [Q)
9=6-0.5,
1 Now, Solving simuianeosly
-|10 -0.5](95) 9A=y 4
=451.25 Therefore,
Q. 8. (a) The bicycle
A) and Hero cycles (),market is populated by two firms, Atlas
facing total demand p 14 cycles q=4+4 -3
the price and g denotes total -g. where pis P=14-8= 6
quantity, On the çosts side, firms Are P-$
566
AMAR: B.A. (IHons.) Economics II Year Microeconomics-II (2022] 567
(Semester-4] CC-8: Intermediates
Now, IA =y= (6- 2).4 = 16
ü)H will folow the best
response that is BR, 4,= 6- 0.5q, If deviates toF,, payoff =-d-c<-d
A will incorporate 'H's best Therefore, no incentive to deviate
response function in to profit maximizing Equilibrium.
function that is Hence, all don't follows is a Nash NPN.g..NF] with pay offs
[F,, F, .., Fg, NFN. j,
(i)Exactly H follows0.....
7A=[P- MC) lqJ (-C,-C,.., - C, 0, 0, 0) therefore no
=[14-9,-IH -2].4, to NF,? Payoff =-d<-c,
- [12 -qA- 6 +0.5g ].gA Will 1st player want to deviate
incentive therefore, no
to F,? Payoff =C<0,
=6g, -0.5g' Will Nth player want to deviate
incentive
exactly H people follow are Nash

Or
Bng-E6-g,
dqA =0 Therefore, all action profiles where
equilibrium profile.
equlibrium
of person follow the
Action profiles where K numberprofles since the
protocols, when
infection in any case
=6-0.5 (6) = 3 0<K<H are not Nash has an incentive to switch to
protocol
not
P=14- (6 +3) =3 spreads and anyone who follow the
n, =5-2j6 = 18 following. Nash equilibrium profiles. Since
Iy =(5- 2)3 = 9 Also, profile where H <KsN are not
folows the protocol has an incentive
whò
the infection does not spread anyone
(6) BachofN people chooses whether or not to folow the protocol to switch to not following.
of werings masks, washing hands and maintaining social distancing markets, market l and market
Q.7. (a) Afiri sells goods in two g., andthe inverse
to avoid the spread of a viral infection. Following te protocols costs 2. Theinverse demand in market 1 is P, 200 -
each axed amount (ae>9). Theprotocols are effective in protecting cost of production
people 'rn the spread of the viral infection if and only if at least H demand in market 2 is P,100-2q,. The marginal
is constant and equal to ? 40.
peopBe îoliow them, where 2<HsN; if the protocols are not effective, competition), what
each iae9 a higher risk of catching the infection which gives each (E) If the firm behaves as a price taker (perfect
in each market? What
would the equilibrium prices and quantities be
one s dísutiiity (> d >c> 0). Each person ranks outcomes from best
to wrosi a3 foliows : (a) any outcomes in which the protocols are is the consumer; producer and total surplus?
prices
effecitv2 and she does not follow them; (b) any outcomes in which (ii) If the firm acts likea monopoly and charges different
markets? What
the protocol is eifective and she also followed then; (c) eny outcomes in each, market how much would it charge in the two
sourplus now?
in which the protocols are not effective and she did not follow them; is the consumer, producer and total
(d) any_outcome in which the protocols are not effective and she (iii) If the government does not let the monopolist charge
folloved then.
different prices, what price will the monopolist charge? Find the
Fìnd the pure strategy Nash equilibrium of this strategic game. consumer, producer and total surplus.
Clearly explain how you establish that a profile is a Nash equilibrium (iv) Compare the total surplus in part (), (ii) and (üi).
profile. (9) (4 + 6+4+1 = 15)
Sol. N-players Sol. (i) P, = 200 -q, and P, = 100 - 24,
Aclions follow (F)and not follow (NF) MC = 40
Payoft: cost of following =C> 0; P =MC P, = MC
Dis::tility from higher risk =d>0; d>C 200 - q, =40 100- 2q, = 40
Cousider the following action profiles or , =160 =30
(E)A1 don't folow (NF,, NE,..NE] with P, =40 P,-40
Paycîs [-d,-d,...)
 AMAR:B.A. (Hons.) Econ omics II Year (Semester-4]
CC-3: Intermediates Microeconormics-II (2022] 569

C.s, -200-40)160 Tbtal Surplus [TSs] = 9600

C.S, = 12800 TS, >TSgp >TSsP
6 There are N people sitting in a room. Each one is asked to
and
C.s, - 100 - 40)30 guess an integer between 1 and 100 and write it confidentially on a
taken
C.S, = 900 paper. The average of all the numbers written on the paper is
and the person(s) whose guess is closest to 2/3 of the average is are
PS, =PS, = 0 the winner(s). Find the Nash equilibrium action profile of this game.
Total Surplus = CS, + CS, + PS, + PS, How willyour answer change if the winier(s) will be the piayer(s) (4)
= 12800 + 900 +0+0 whose guess is closest to 2 times the mean of the guesses?
TS = 13700 Sol. Payoff [1, 1, 1,.... 1] is Nash equilibrium because in the every one
(ii) MR, = MC will be equally close to the 2/3 of the average and all will be winner.
MR, = MC 100] is Nash equiibrium because in this
or 200 -2g, =40 or 100 Payoff [100, 100, 100,
4q, =40 every one will be equally close to the 2 times of the mean guess.
9, = 15 Q. 3. (a) Consider Hotelling's model of a straight highway of
P, = 120 P; =70 length= 100 kilometers,where consumers are uniformly distributed
along the high way., Suppose there are only two stroes (S,, S) that
cS,- 200 - 120130 sell water canson ths highway, located at a distance of 30 ms and
85 kms rom the beginning of thehighway. Each consumer bas a
CS, =3200 transporation cost equal to 0.03d, where d is the distance travelled
1 to the nearest store.
CS.-100-70}15 =22% (i) Calculate the demand (as a functio of price P, P) for the
two stores.
PS, = (70 - 40}15 - 450
(i) Assume that production costs are zero and that the stores
PS, - (P,-MCig, aimat znaximising revenue fom sale of swater cans. if the two stores
=[120 40]80 compete in prices, findtheprices charged at Nash equilibrium.
PS, = 6400 (ii) Suppose a new government regulation restricts the stores
Therefore, Tbtai Surplus= CS, + CS, + PS, + PS, irom, charging different prices îor water cans. Instead the store
=3200 + 225 + 6400 + 450 OWners are givena chance to choose theirlocations on the hig'way
= 10275 Bimultaneously. If they choose the same location, they spit the
(iii) Single price monopoly wili no longer cater business
the
evenly. Where will 8, and S, locate at Nash equilibrium? Is
market - 2, because it Nash equilibrium location choice of S, and S, sociaily optimum?
maximizes prof+tsby charging P, = 120 in market- l and at this price demand Explain.
in market- 2 is zero as maximun wili to pay
in market - 2 is 100. (iu)If a third store (S,) also decides to locate on the same highway
Therefore, P, = 120, q, = 80 and the 3 store.owners choose their ocations on the highway
CS, = 3200 simultaneously, find the Naah equilibrium of the game.
PS, = 6400 (3 + 8 + 4 +l = 14)
... TS =9600 Sol. (i) Indifferent consumer at X
(iv) Total Surplus [TS,] = 13700 P, + (0.03) [X 30]² = P, + 0.03[65 -X}
Total Surplus (TS]= 10275 or P, +0.03X² + 27- 1.8X = P, +126.75 +
0.03X*-3.9X
or
2.1X =[P,-P,]+(126.75 - 27]
S70
AMAR :B.A. (Hons.) Economics II Year
[Semester4) CC-8: IntermediatesMicroeconomics-II [2022] 571
or
X=2P + 47.5 and P, =0.5 [103.25] + 55.125
2.1
or P, = 106.75
or (iii) Both locates at the centre S, =S, 50 is the only Nash equilibrium.
+ 47.5
2.1 No it is not socially optimun because some have to drive halfway to get
and water. Socially optimal location.would (25, 75) kmns, so that no one travels
Q, =100 -X greates than 25 kms.

= 52.5 - P-P]
(iw) This game will not have any Nash equilibrium.
2.1 (6) Suppose a shopping arcade has only 2 stores selling tablet
(iE) PCs. One sells Lenovo tablet, PCs at a price = PA, while the other
'selis iBall tablet PCs at a price = PB. Both tablets are produced at a
Or marginal production costs of 10,000. For the consumers, both tables
PCs are perfect substitutes. Each store's set of actions is the set of
possible prices Pl (non-negative numbers). The low-price seller gets
the entire market; if they charge th» same price, they split the
PPP market.
L, 2.1 2.1 47.5P
(i) What is the Nash equilibrium of this price game? Explain.
dn, (ii) Suppose both stores decide to include one more element in
P - 2P + 47.5 =0 their set of actions:
dP 2.1
P= 20,000 or Free;
P,- 2P, +91.75 =0 i.e., charge a price per tablet PC= 20,000 and advertise that if
P, = 0.5P, + 49.875 the product is available
cheaper at the other store, the customer
and can have it for free. Find the Nash equilibrium of this game. Explain.
(5)

= 52.5P, 2P,2.1
+PP Sol. (i)P, = P,= 10,000 is the onlyNash equlibrium.
(ii) (10,000, 10,000] and (20,000, 20000] are two possible Nash
equilibrium.
T,= 52.5P, P
2.1
+ PP
2.1
OÀmar

da2 2P +P =0
dp2 = 52.5P, - 2.1
Or P,- 2P, + 110.25 =0
or
P,=0.5P, + 55.125
Solving BR, and BR, simulatanously
P, = 0.5 [0.5P, + 55.125] + 49.875
77.4736
Or
P= 0.75

P=103.25