B.

A (HONS) IV SEM
CLASS TEST-III
Intermediate Microeconomics-II
Time: 1 Hour maximum marks: 25

Q 1.
(a) In a general equilibrium model of production, in an economy two goods- X and Y are
being produced with two homogeneous factor inputs labor (L) and capital (K). The
endowments of factor inputs are given 200 labor hours and 200 capital hours. The
production functions for two goods are given as;
X = f(K,L) = min(LX, KX)
Y = g(K,L) = min(LY, KY)
(i) Trace the locus of technically efficient allocations of K and L for producing X
and Y in an Edgeworth-box diagram.
(ii) Plot the production possibility frontier (PPF) of the economy, using a suitable
diagram.
(iii) What reasons can you suggest about the shape of the PPF obtained in (ii). Explain.
(3, 2, 2)
(b) Following is the pay-off matrix of two firms 1 and 2 compete on A and B strategies;

Firm 2

A B

A 3, 3 5, 4
Firm 1 B 4, 5 2, 2

(i) Find the mixed strategy Nash equilibrium for this game.
(ii) Draw the best response function diagram and identify all Nash equilibriums.
(5, 4)
(c) Let the following be a model of ‘Two Part Tariff’ under monopoly. Let there be only
two consumers in the market with demand curves: Q1 = 14 – 2P1 and Q2 = 10 – 2P2.
It is given that there is a constant marginal cost of rupees 4 per unit.
(i) Suppose you were able to keep the two markets separate, what ‘entry fee’ and
‘usage fee’ would you charge for each group?
(ii) If you had a common ‘Two part tariff’, what would be the entry fee would you
charge?
(iii) Is it possible to increase profit by adopting IIIrd degree price discrimination policy
compared to profit in (i).
(3, 3, 3)