NATIONAL INSTITUTE OF TECHNOLOGY ROURKELA

END - TERM EXAMINATION, 2017

SESSION: 2017 – 2018 (AUTUMN)

Subject code: HS - 441 Subject Name: OPTIMIZATION THEORY IN ECONOMICS

Dept. Code: HS No. of pages: 02 Full Marks: 50 Duration: 3 Hours

Figures at the right hand margin indicate marks.

All parts of a question should be answered at one place.

ANSWER ANY ONE OF THE FOLLOWING QUESTION. [1X10=10]

Q. N. 1 An individual’s utility function for two goods is: U= .

It is given that and are the fixed prices of two goods x and y and the
individual’s fixed income is µ. Using the Lagrange multiplier method, find the
demand functions for X and Y (You need not use the second order condition).
Deduce that the elasticity of demand for either good w.r.t. income or its price is
equal to unity.
Q. N. 2
A firm manufactures two types of machines. The cost function of the firm is given
by: ( )
If a total of 8 machines are to be produced, how many machines of each types
should be produced so that the cost of production is minimized.

ANSWER ANY TWO OF THE FOLLOWING QUESTIONS. [2X10=20]

Q. N. 3 Add appropriate dummy variables and solve the following linear programs by the
simplex method.
Maximize   6 x1  2 x2  5x3
2 3 1  x1  10
Subject to 1 0 2  x 2    8 
1 2 5  x3  19
and x1, x2, x3 ≥ 0
Here  , x1, x2, x3 represent the profit function and some uints of three varieties of
outputs.

Q. N. 4 Solve the following by simplex method

Minimize C  12 x1  42 x2
1 2   x1  3
Subject to 1 4   x 2   4
3 1    3

and x1, x2, ≥ 0

Here C, x1, x2 represent the cost function and some uints of three varieties of inputs.
Q. N. 5 Solve the following non-linear programs graphically
Maximize   x1 2  ( x2  2) 2
Subject to 5x1+3x2 ≤ 15
and x1, x2, ≥ 0

ANSWER ANY TWO OF THE FOLLOWING QUESTIONS. [2X10=20]

Q. N. 6 If 2 spiders find a dead insect at the same time, each spider will make menacing
gestures to scare off the other. If one spider backs down, that spider gets nothing and
the other spider gets the insect to itself. If both spiders back down, they can share the
insect. If neither backs down, the spiders will fight. The payoffs resulting from the
fight depend on the sizes of the spiders and are described below.
Spider 1\ Spider 2 Back Down Fight
Back Down 5,5 0,10
Fight 10,0 x,y
a) Suppose the spiders are the same size so that x=y. For what values of x, will
each spider have a dominant strategy? What is the dominant strategy? (Show
your work)
b) Again, suppose the spiders are the same size. For what values of x, will this
game be a Prisoners' Dilemma? (Show your work)
c) Suppose when spider 1 is smaller than spider 2 that x < 0 < y. Show that this
game does not have a dominant strategy equilibrium but that it can be solved
using IEDS.
Q. N. 7
Consider the following strategic-form game.
1\2 L M R
U 2,4 3,0 1,-1
D 3,2 10,3 0,4

a. Find pure- and mixed-strategy Nash equilibria of this game. Be sure to show
all of your steps.
b. What is the strategic advantage of using a mixed strategy?
c. Show that one of player 2's strategies is never a best response to any of
player 1's pure strategies. Show for this game that this strategy is dominated
by a mixed strategy.

Q. N. 8 Distinguish between the following concepts

a) Maximin and Minimax
b) Pure strategy and Mixed Strategy
c) Dominant Strategy Solution and Iterative Elimination of Dominated Strategy
Solution