No. of Printed Pages: 8 IMEC-001! MASTER OF ARTS (ECONOMICS) Term-End Examination
00

o June, 2016
MEC-001 MICROECONOMIC ANALYSIS

Time :3 Iwurs Maximum Marks: 100
Note: Attempt questions fronz each section as per instnlctwns gillen under each section.

SECTION

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

1. Consider a pure exchange economy with two commodies and total resources ey) 10). Consumers A and B have identical preferences represented by the following utility function

ui(xi, yi) Yi) for B}. Suppose initial endowments are ey^A for A and for B. Draw an Edgeworth box and indicate the endowment point. Define the set of Pareto efficient allocations and draw them in the diagram. Compute the competitive equilibrium (Walrasian) and show the allocation. State if the equilibrium is efficient.

2. In what type of market structure the Stackelberg model becomes operational Justify your answer.

Find the Stackelberg model equilibrium if market demand is
Q 3200 -1600p where
Q Q1 Q2 and the cost functions of two firms 1 (the leader) and 2 (the follower) are:

TC1(Q1) =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 same preference represented by utility function 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, Compute the competitive equilibrium in this market; Compute the market equilibrium when the government regulates it and directs the companies to offer full insurance; Discuss the efficiency in each situation, without and with regulation.

4. State and explain two Pigovian conditions in welfare analysis.

Using Pigovian framework, discuss the causes of divergence between private and social costs and return.

Relate the problems of Pigovian social welfare to production of public goods and suggest measures of solution.

SECTION

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

5. Determine the equilibrium output price and profit of a multi-plant monopoly firm with Total cost function TC(fi) =200 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

CH H^2/100 and CA=[A2/100 Both the products are produced under competitive market conditions in which prices charged are PH Rs 2 and PA =Rs 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 xi and a public good F. Utility of each consumer i is given by

mi(xi, xi sqrt(F). If wi denotes the fixed income of consumer What is the total amount of F supplied by a single producer What is the socially optimal amount of F Suppose number of people in the town increases. Explain if the socially optimal quantity of F would increase or decrease.

8. Given the following extensive form game Find the subgame perfect Nash equilibrium Write its normal form and solve for Nash equilibrium Compare the solutions of the game obtained in and above and state which of these offers a better solution. <img src='./qimages/12440-8c.jpg'> <br>

9. What IS an actuarially fair game?

Consider a bet: if the next card drawn from the deck is not heart, you get Rs 0040 if that event does not occur you lose Rs 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: Px=2 and Py with given income, I=240, derive the
Demand functions for X and Y. Indirect utility function. Expenditure function.

11. Write short notes any two on the following: Hotelling's Lemma Separating equilibrium Translog cost function