Name: Roll No:

Name: Devpriyo Ray Roll No: DC20200007

Indian Institute of Management Ahmedabad

Microeconomics (ME), 1st Term Tuesday, November 1, 2020
PGP1/FABM1/PhD1 Time: 3 pm to 4.30 pm
Final Exam
Sections B and C

Read the following instructions.

1. This is a closed-book and closed-notes exam. Calculators allowed but no laptops and
cellphones.
2. Please answer all questions.
3. There are 6 questions of 10 marks each. Each question has sub-questions. The part
marking for each sub-question is indicated on the side in square bracket. There is no
part-of-part marking.
4. All questions have specific answers (SAQs). Fill-in your answers only in the box
provided at the appropriate question number. Only this answer will be considered for
grading.
5. You need to type the answers in this word file and submit the word/pdf file, including
first page containing your name/roll number.
6. Moodle will not accept late submissions. It will be solely your responsibility to
upload the word/pdf file before the deadline.

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1. Ahmedabad zoo has hired you to assist them in setting admission prices. The zoo's
managers recognize that there are two distinct demand curves for zoo admission. One
demand curve applies to those ages 12 to 64 (indexed by A), while the other is for
children and senior citizens (indexed by C). The two demand curves are:

PA = 9.6 – 0.08QA and PC = 4 – 0.05QC

where PA = adult price, PC = children's/senior citizen's price, QA = daily quantity of adults,

and QC = daily quantity of children and senior citizens. Crowding is not a problem at the
zoo, so that the managers consider marginal cost to be zero. The fixed cost is Rs. 80.

a. If the zoo decides to price discriminate, what should the price and quantity be in each
for adults, and children and senior citizens? [2 + 2 + 2 + 2 points]

The ticket price for adults (A) is Rs.____________4.8____________________

The quantity of adult tickets sold is _______________60___________________

The ticket price for children and senior citizens (C) is Rs. _________2__________

The quantity of children and senior citizens tickets sold is ______40___________

b. Suppose the zoo is now required to charge the same price to both groups. What would
be the price and the quantity in each market? [1 + 1 points]

The ticket price will be Rs. ___________200/45_____________________

The quantity of tickets sold will be ____________100_____________________

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2. The market for colas exhibits the following demand curve.

P = 20 – Q
Suppose there are two duopolists in the market (Tipsi and Mock-a-Cola), where the firms
have to make critical decisions on capacity. The market has the following characteristics
with i indexing the firms.
Ci = qi2 (Each firm has the same cost function)
MCi = 2qi
MRT = 20 – 2qT – qM
MRM = 20 – 2qM – qT
qT + qM = Q

a. What is the reaction function for each firm? [2 + 2 points]

Tipsi’s reaction function is __20 - 2qT - qM - 2qT_____________

Mock-A-Cola’s reaction function is _20 - 2qM – qT - 2qM _____________

b. What is the quantity produced by each firm, and the equilibrium price if Tipsi decides
its production quantity first, with Mock-A-Cola deciding quantity next? [1 + 1 + 2
points]

The quantity produced by Tipsi is _________4.28571_________________

The quantity produced by Mock-A-Cola is _______3.928571___________

The equilibrium price is Rs. _____________11.78571___________________

c. What is the consumer surplus? [2 points]

The consumer surplus in this market is __________33.7372449______________

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3. Mridula is a risk-averse decision maker whose utility function is given by U ( I )= √ I ,

where I denotes Mridula’s monetary payoff from an investment. Mridula is considering
an investment in machine tools factory with a payoff of Rs. 1,000,000 with probability
0.6, and Rs. 250,000 with probability 0.4.
a. What is the expected value of the investment? [2 points]

The expected value of the investment is Rs. _______700,000________________

b. What is the certainty equivalent of the factory investment? [4 points]

The certainty equivalent of the factory investment is Rs. ___640,000_________

c. If the cost of the investment is Rs. 600,000, should Mridula invest in this factory? [4
points]

Mridula will invest in the factory.

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4. Recovering from the lockdown, two airlines FlyHigher and Hot Airways are considering
pricing strategies on the Delhi-Ahmedabad route. The three prices they are considering
are high prices (corresponding to Rs. 15,000 per ticket), Medium prices (Rs. 10000 per
ticket) and Low prices (Rs. 5000 per ticket). The profits per day for each firm (in Rs.
Lakhs) from the different combinations of strategies is given by the following table. Each
cell, the numbers represent (Profits for Hot Airways, Profits for FlyHigher).

FlyHigher

High Medium Low

Hot High 10,10 14,12 14,15
Airways Medium 12,14 20,20 28,15
Low 15,14 15,28 25,25

a. Is there a dominant strategy for each firm? [2 points]

There does not exist a dominant strategy for each firm.

b. What is the Nash equilibrium strategy for each firm? [2 + 2 points]

The Nash equilibrium strategy for Hot Airways is ______Medium____________

The Nash equilibrium strategy for FlyHigher is ________Medium_________
The Nash equilibrium outcome for Hot Airways is ___20______
The Nash equilibrium outcome for FlyHigher is _____20__________

c. What is the Nash equilibrium outcome for each firm? [2 + 2 points]

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5. As per the APMC (Agricultural Produce Marketing Committee) Act, all cotton growers
from the surrounding regions off Ahmedabad must sell their cotton in the Ahmedabad
APMC. The few agents who buy cotton from the growers in APMC have formed a tacit
collusion among themselves. The demand for cotton is given by the relation P = 22 – 2K
and the supply of cotton is given by the relation P = 4 + 2K, where P is the price of cotton
per unit and K is the units of cotton sold.

a. What is the price and quantity combination (P, K) cotton growers would achieve in
the APMC market? [3 + 3 points]

The price of cotton (P) is ______13_________

The quantity of cotton (K) is _________4.5____________

b. There was a perception that cotton growers were getting a raw deal in the APMC
market. Therefore, government brought amendment to the APMC act and removed
the restriction of growers selling their cotton in APMC alone. If the demand
condition for the cotton growers in the surrounding regions of Ahmedabad APMC
remain same, how much would be the welfare gain to the society as a whole as
compared to the situation before the APMC amendment? [2 points]

The gain in social welfare is ________13.5____________

c. Some lobby groups, however, were successful in withdrawing the amendment to the
APMC act. Instead, they demanded minimum support price (MSP), for the cotton in
APMC markets. If the lobby groups want cotton MSP to be 13, how much welfare
gain would be there to growers as compared to the situation when the APMC
amendment was introduced. [2 points]

The gain in welfare to growers with MSP =13 is __________0______________

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6. Spicejet plans to offer twice daily seaplane service from Sabarmati Riverfront to the
Statue of Unity. As such, the river needs to be sufficiently deep to allow planes to take off
and land. Deeper water allows larger and heavier seaplanes to operate, increasing the
benefits to Spicejet.

Most of the Sabarmati Riverfront water is sourced from the Narmada canal, whose water
has alternate claims from cotton growing farmers. The table below shows the potential
benefits to Spicejet travelers if the water is released to the waterfront, versus the potential
benefits to cotton farmers, all as a function of the riverfront water depth.

Benefits to Spicejet flyers (Rs. Production benefit to cotton

Water level
lakh) farmers (Rs. lakh)
10 0 204
20 28 180
30 62 148
40 100 120
50 144 70
60 204 0

(a) If Spicejet and the farmers decide to use bargaining instead of going to court, then what is
the efficient water level they would decide? [4 points]

The socially efficient water level is _________60____________

(b) With bargaining, if Spicejet has a right to use as much water for the riverfront that it
wishes, how much will the farmers pay Spicejet so that Spicejet sets the water depth at
the mutual agreed level? [3 points]

The farmers will pay Spicejet Rs. _____________0__________

(c) Suppose the farmers have the right to use as much canal water as they wish. With
bargaining, how much would Spicejet pay the farmers so that farmers forgo enough water
to allow the efficient water depth? [3 points]

Spicejet will pay the farmers Rs. __________204____________ 7