Memon 8649 _ [his question paper contains 8 printed pages.] << Sr-No. of Question Paper : 420 G Roll No.. i ne Zols Oman Ges Code : 227401 Name ofthe Course: B.A, (Hons.) Economics e - ‘Name of the:Paper + Course XIV Thtermediate Micro Economics ~ II 3 Semester iv Duration / #4 + 3 Hours (we Maximum Marks /Wler : 75 ns for Candidates xyrite your Roll No. on the top immediately on receipt of this question Paper 2, Do three questions from Part A and two from Part B. —A 3. Simple calculator is allowed. 4, Answors may be written either in English or in Hindi; but the seme medium should be used throughout the paper. 1 3 eee gre fre ae Prefer et are gTRTT: FEE | ey on fe ae we oe wa “a” dT a we F see AE 5. wae aeaeece a a Se Bt | 4. qe eres ar CA te TOK Ae, Ar we TTI : & tet ae PARTA (err =) s "s i. (@) The endowment of consumer A is 800 units of x and 800 units of y and the of y. If the y,/x, and endowment of consumer B is 200 units of x and 4200 uni marginal rates of substitution (MRS,,) of Aand B are: MRS,,* MRS,” = yq/42Xq5 fespectively, then : , BLO.420 2 @ Draw an appropriate Edgeworth box shoving the Spa's A > ND cheuusl 5 @ Is use Curent ics sfficient 2 1 NS Sep eiee a. Vi Von bth > | Gi) Can an exfhange miake both A and B betteroff? yoP ayer | Braseoped ? (©) Describe the conditions under which the general equilibrium of production A (an 7 and consumption is attained in an econom: Lop buen Ione cs af Ras 3 2» 3¥2. (©) Two consumers (A and B) consume two goods (X and Y) in an exchange economy and their preferences are given by u, =x," y," and Uy = 2X5 Yyy where X,. Y,) X, and y,, are the consumption of x and y by consumers A and B, respectively. If there are 20 units of x and 20 units of y available, derive an equation for the contract curve, . (4+6+5=15) (&) sien A a afia FR x & fay s00 garg # wT YB fae 800 wars F ‘satiaar B at afta Par x H fare 200 wang Bea y fay 4200 xan Saft AG B a thie wiearie oft ee (MRS,) HAE: MRSA =y,/x, vt MRS, = Y¥q/4x, Bt (i) after Bf A aalt ye oR wed sae VIE (a) ar atwrr (arg) one gE (ee) Br (ii) @4t A wa BR Ree were eH PA ae eT et Pe (a) oF at at ren wife fare siecle yer one sere wa Seah aT aT Tiger weet wet 8 (7) ee faferr selerren 4 at satan (A vt B) aga (Xe Y) a oni ae Boe sre waren Fret & af Bu, = 2,05 y,°5 mat uy =2 K, Yop TE Ky Yop xy 00 y, Boo A Ud BP ERI HH xe yar RITE aE x a 20 ETE wat y A Mt 20 sane Goer 2 dh dfear am St aMiae Aelia aifare (a) Consider a pure exchange economy with 10 units of x and 10 units of * There are two consumers and both have identical utility functions. In this economy, can any initial allocation ‘be Pareto efficient if the individual utilit functions are: ~rei —>[ Mad Flak a OUEN=xfy GUE say > Re I (b) Consider an €coniomy with only‘one good, food (f) and three people in economy (A, B and C). If A has 400 units of food, B has 100 units, and C420 3 = has only 16 units, and all have the same utility function : u,= Vf for i= A, | Band ©, then: 2 (@ What are the utility levels for A, B and C if each agent consumes only ~ his own endowment. Also find the level of social welfare, if the social welfare function is the sum of the individual utilities. | (i) Assume now that the government considers a redistribution of food by taking 175 units from A and giving them to C. However, the government spoils 91 units in transportation, so that C only gets 84 of these extra units. What is each person’s utility level now and determine how the \ social welfare changes due to the redistribution ? Also find the social welfare level, if the social welfare is given by the Rawlsian social \ welfare function, Me (©) Define fair allocation. If a teacher wants to distribute some books among students, would an equal division lead to a fair allocation ? Explain. 7 " (5+6+4=15) ’ (&) ser we ge Rite eforsear #, x ah 10 Se ee y Sho ee Ba Ste 3 oei vee sled wet Sear wert cat 3 ea slater H, af cafe Swimarset (UG, y)—xt+y. GU y)=xy 3 aaa wits aed Re seer raat #1 fe) wer ew orfaeen ¥ aa er ag oeig arn (f) # oe av aT {A,B Cc) Siok AS aa a A a00 SHE, BS ae wo eae Fo CH daa 16 eas 2 amr ah ar wert Sea wert uP oe! A, Be CR a: () aR wate wie Sam oat Shia AR an sete ea ea AB CE fare savin Bae aan 2 2 ale arafSees erea wert, waaay Seehfirarstl eT air 2 at anata: ear aa ea are ATE (i) WH oe wer yt Pree Bes AT aA 5 aE dee CHE TH Braet cemen 91 genet ara S ore as Ae A Cat Pas 5a gareal aftitea wea Sit 1 at oa Fete wa ar Seen eR AT Bi Pre’ Br, Bren gee ge Foor Haro arafses aa A ake ner. ae anf ae, waster arate eer eT wet Rar ett arate ear aH aI SE 1 a) Sra ge der aR AAC ae Ew oA, OTS we gS Feat afta aren arent 2 at aan wart acon aI art Seen At stake HET ? STAT ate 1 . OS PLO.N 420 4 : 3. (@) Illustrate how the output of a negative externality producing industry remains - ‘high under a market determined equilibrium in relation to the socially optimal _ level. sh a Hobmntan feu (b) An industry generates waste in the course of production thus imposing external. costs on third parties. The demand curve for the product is P= 24—Q, where P and Q are the price and quantity respectively. The private marginal cost curve is PMC = 2 + Q, and the extemal cast is EC = 0.5Q,") ~ @ What are the equilibrium price and product when there a ci no correction for the externality 2 Deo. 2th (21-0) 0-6 “Wat isthe socially optimal ont aa zach | ay 8" 4° Gilly) How much tax should be levied to achieve the socially efficient level ae of output ? " (©) Whats a poltution D < pollution depend is (Gt6+4=15) Se gover 2 yas 9 ee ak Paik ager Sh aes ier gore ah Rafe 1 () 3 = | wide) (@) we sett S sent & cher safe sere Gia 2 BR ater ana Tat TT wa Ut 2 Sout SI Ai aw P= 24-Q 3 et Pe Qala wae ee ‘Seuet oh fot Gaia art aay PMC = 2+Q @ wa aA SR EC-0.5Q 21 (i) wa agen (after) ¥ at weiss at a =e Res A daha aaa ‘rat wat Bhat 1 (i) weer aegagerat Senet sae? (ii) arin SereT Fae at wer aes fae Bera Tee Sn wet F 7 (at) segue stem 3 ean areas @ 7 aa Se SS eS REST a ea ae vert afte we Fk aa 2? e 4. (a) Two friends (A and B) share a room and both prefer a clean room to a dirty ‘one, but cach of them may or may not work to clean. Assume that ‘C” and “D” are the pay-offs to each when the room is clean or dirty, respectively. . Doing the cleaning work reduces pay-off by “x” for both A and B, but the sosts are shared equally if both clean the room. ~‘ [matte fov chooks - @ Is cleaning the room a private orgKblic good ? Give reasons, 3 tt ©) Analyze the situation as a game and write down the pay-off matrix. Tz> mu fenders Bes, (©) In the context of the landowner and worker ofasymmetric information, derive the ‘participation Constraint” and “inc. compatibility constraint” for any incentive scheme to worl © Assume thatthe buyers of used-cars value bad ones at Rs. 1000 and good ones at Rs, 2000. The sellers are willing to part with a bad car for Rs-250_ and a good one for Rs, 1750. If the proportion of bad cars is “x” and the buyers pay according to the expected value, then for what value of “x” de all of the used cars get sold? men 9 geek (6+4+5=15) ; EB 3 () dae (Aw B) ea at at angles er 2 gets ard 2 alk Ba ah ae aa. Sec mer ar wee @, ART are an a a ard ae a Aad a a ait Sse Cx Dama ee ee 42 ant oma # aE and sa verahh a XStedaxta faq aaa at Rafts awd? ae aa at a ae weer () eR ot eae we Bal ag Star ay 21 rem aa | (i) 5a WR oh eos orm Ree ge sod ot oneyE et (iii) Bat Rae F water D<(C— x) 8 Sarge ou win ad ye Paula Stig fr aaa eee & We ar aay (1) wigs en 8 tte wine ed aes Sere a Beh eed shea do 3 fe ended star ee stomer waar ex = Reis Ymantet eS (@) water wi gi state ak Sone St geen S as S Aer fhe ve aan sreet BHF? (e) ee ventana arom ater aa Q=30—P aan are HAT CQ)=4Y #1 (i) wane & sien are afreemen iva, wear GT SP et ATT | (i) cere rman eoreor Se SUMAN ET SS ASE (a) werent eB at wast aT aE Q, =200—P, Fat Q, = 100- O.SP,, 8 at sae fe aan wanted) A gitar aot ats fae SIM wes eT ere B 7 (@) “A linear two-part tariff can be used to achieve the same outcome as under first degree price discrimination in specific cases.” Do you agree or disaaree ? Give reasons. Salut er (b) Consider the following game where the payoff’ are : Firm B Advertize First | Advertize Second Firm A | Advertize First 18, 18 23,20 \ [Advertize Second a2 16, 16 |q Wea, OH @ Determine whether any firm has a dominant strategy, ~ [rer | wate. Gi) Is there any puge strategy Nash-Equilibrium, if firms move simultaneously ? foc yea ( AP, AS) Gi) Determine if there is any first mover advantge when firms move sequentially ? Consider both the cases, ie, firm A moving first and firm * Bmoving first. “(Yr Wo (© The following table shows the payoffs trom each pair of choices that a bowler and a batsman can make in a cricket match. Batsman Hit * Defend Bowler |_Fast-bowl =100, 100 100, —100 Slow-bowl 100, —100) -100, 100 @ Does a Nash-Equilibrium in pure strategies exist in this game 2 | aude MK => Years ne 2 (i) Find a Nash-Equilibrium in mixed stratégies se (te) “erat fate oR Rafael 4 feemn gee air Saat fore wea ae aed F at er weer Ah fia fe F ser B" war sae wees F ar saeaa F? wr AAT (@) Profits = fx SiG, ae Set Bex ek 2: (44+6+5=15) a a ee fees | Baa fant wie [ser fewer 13,18 | 23, 20 fede fear ef 16, 16 (i) Britta site fe sar fet es SE (i) aH et ae we set ES aa SE ye oof da ga Be? aft va ein re wort € at elite siae Be aan gem oe wet aa aT ant Gor ae canal sraig ¢ ed ais Saar a ye3 ara aan 2, Rae afae 1 (0) we fete Fada ed dea S gas SS RSS Afar aia 3 seat & ger ear war #1 PLO.—— = eee S4 sp, \ Siero SEIS, 1Ofe toys, (S- ze — Pa te 420 E 8 ae 7 acta wee a Fear ada We 100, 100 100, -100 j aint ae 100, ~100 =100, 100 (i) a a BaF ae oH Ae igs Romer 8? (Ge RAR Hire wr Bex gsr a SG >, ee = A @ explain wh - Ye Nash equilibrium in the Bertrand model of oli 'y both firms charging price equal to marginal cost is the only, igopoly. 2s = she ©) Two firms face the market demand curve: Q@) = 160 — 2P, where P is di Price, Q is output and Q = Q, +Q,. Bach firm bas a marginal cost equal to 2. S © What are the profit maximizing quantities for the two firms if they act a G@ What are the profit maximizing prices and quantities for the firms iF they act as Bertrand competitors ? Pepe See: 2 Oe se ‘vels for the two. firms, if firm 1 acts a: 4, = Fh, 4i2 39 () seat ards ats at oF ar Rear an ayer 31 omen are 1 : as Cournot competitors 2 X Gi) What are ouput te leader ? one ea at sta area & waar wea ft (8) @w an ame ai am Q(P) = 160 2P, 2 wet P ana, Q sent 2) (Q=Q + Q) wet wef at Se amr MC=221 () 98 ae oo a Rh ah we ed ee 2, Sa safteretencr arar et | sis gar abit? Sot) aR A wl aces ont ae ae ae 8, ot ae arteries sire ae a? ‘ | eR. a How (ii) af wor wat \ sur? \ |14-05-21 I Solution. B. A. (H) Economics, 4" Semester, II Year Paper XIV: Intermediate Micro Economics if Unique Paper Code: 227401, Date of Exantination: 11/5/2013 Serial No. of Question Paper: 420 1 : Pt |G Saleen Fy se ean Seeeeene 2 x 8 © Ss es sare oo we need: MRS y*=MRS xy" 800/800 = 1, MRS 4. "= 420/800 3 secust ast tually’ tau Ariieallauaton 32 Since. iii). At this allocation, A is willing to trade | of y tor I 0 Lof x. If 1 of s is exchanged ‘and there can be many possible exch "Ahtematively, one can also say that any trade that belongs inside the would make both better off. better of ens-shaped area bb) The significance of 3 conditions, viz., equilibrium in production, equilibrium in consumption ») fT cimultancous equiibriom has o be given from Chapter 31 of Variam and pp. 426 27 of S&N. ¢) To determine contract curve, we first eal pute the MRS for consumer A as a function of Xa, o ipnd for consumer B as a function off Xq and yg, Then impose the restriction that total Ue gumption of x should equal tothe available x, and do the same for y. Finally, seaNanee to get an equation of ya as & function of Xa. (On the contract curve, MRS*= MRS® — MU" Mu", 2MU®x/ MU" y => (0.5 x47 ya) /(0.5 xa" Byy/2xpe yal X, yo! xB Since Xa * — Xa) 7 The contract ci ra2a) i) If the utility funetions are of the form u(x.y) = x + y, any initial allocation will be Pareto efficient. In this case, the indifference curves merge with each other with slope (-1) and MRS for ‘goods are equal across persons. Each point in the box is Pareto efficient, since one can not make someone belter off without making the other worse-off, by moving from any given allocation ince the entire box is Pareto optimal, any initial allocation becomes Pareto optimal. ii) But, when utility funetions are of the form u(x) = xy, any initial allocation need not be Pareto efficient. Pareto efficiency requires that MRS for goods is equal across persons. If the initial allocation is such that MRS are not equal, then the allocation is not Pareto efficient. b) i) Ifeach agent consumes their own endowment utilities are Ux = 20, Un = 10, Uc respectively. If the social welfare function is the sum of the individual utilities. then W = 34. ii) The utility levels now are U, = 10, respectively The social welfere function now is W = 35. and it has increased. If the social welfare is according to the Rawisian welfare function, then W = 10. ¢) Fair allocation requires an allocation to be equitable (no envy) and Pareto efficient. An equal civision may not be Pareto efficient (see Chapter 31.5 of Varian). a) F this question, the student can give the optimality analysis given in pp. 630-32 of S&N and reach to the point that marginal product of y in produeing x is smaller under market allocation than under optimal allocation, Or the graphical analysis of Fig. 19.1 (pp. 635-36 of S&N) should be alright. b) i) If there, is no correction for the externality, the equilibrium will occur at the point where the demand P = 24 — Q intersects the private marginal cost curve PMC = 2 + Q. This occurs at 24 — Q=2+Q> QeleArQ ii) At the social optimum marginal benefit, P = 24 ~ Q, with equal marginal cost, SMC = PMC * EC, This occurs where 24 — Q = (2 + Q) + 0.5Q = Q = 8.8. Thus, the social optimum is to produce Q? = 8.8 iii) The per unit tax of t should be set to shift the MPC curve so that it intersects the demand al benefit is P = 15.2 and the 4 curve at socially optimal quantity Q* = 8.8, At Q = 8.8, the mar; marginal private cost is PMC = 2 + 8.80 =10.80. Therefore, the optimal tax is t=15.2 10.8 = 4 c) The answer would provide the definition and refer to the Coase theorem result on the independence of the initial sight assignment (sce pp. 635-36 of S&N).4. i) Cleaning the room is not a private good, It is a public good because the benefits are non- excludable and non-rival, ii) The pay-off matrix i hae \ [___Gleaning | _ Not Gieanin Cleaning = 05x, C= 05x cSacual| A Not Cleaning ate J oem ¢ there are two Nash equilibrium: (Not Cleaning, Cleaning) and (Cleaning, Not Cleaning), the room will be clean, b) The answer should define the two conditions from Chapter 37.7, pp 706-08 of Varian: Six))-C (s)>u and, $ (fix) ~C (x*)> S fx) -C@) ©) Buyers are willing to pay for a car of unknown quality = P= 1000x + 2000 (1 000 — 1000s. All cars get sold if the market price is 1 1750 = 2000 ~ 1000x => x = 0.25. Thus, sil ears get sold for x <0 ), thus: 2) The difference occurs because the monopolist looks at the marginal valuation of quali profit-maximizing level; whereas the average over all output levels is considered for the sume under competition (see pp. 473-74 of S&N). b) i) The monopoly produces at MR = MC. Thus, MR = 30 ~2Q= Q = Q= 10 ‘We can find from the demand function: P = 30 ~ Q = 20. Profit = PQ— C (Q) = 20 x 10 ~ 50 = 150. ii) We can find the socially optimal price and quantity by equating price and MC: 30~Q= Q => Q=15 and P = 30 ~ Q= 15, Since, monopoly sells Q = 10 at P = 20, this generates Consumer Surplus = (30 ~ 20) * 1 (0 and Deadweight Loss = (20-10) (15-10) ¢) The monopolist will not benefit from 3 degree price dis Given P; = 200 ~ Q, and P2 = 200 ~ 2Qs, we have: MR; = 200 ~ 2Qi, MRo The 3" degree price discriminating monopolist will set price at: MR, = MRa ‘Thus, 200 ~ 2Q, = 200 ~ 4Q: = Q: = 2Q: Using this relation, we ean solve for P, and P2: P; = 200 — Qi and P2 = 200 ~ 2Q) = 200 ~ Q (since Q = 2Qs) > Pi =P When MR,=MRz, the monopolist is charging the same price in both the markets, which he can achieve without practicing price discrimination, thus the monopolist will not benefit. (The elasticity-based explanations should alse be accepted). serimination.6. a) The first degree price discrimination transfers the consumer surplus at P = MC to the producer. A monopolist selling at two-part tariff will choose P = MC as the marginal price and charge a fixed fee equal to the consumer surplus. If consumers are not identical, the fixed fee can be set equal to the consumer surplus enjoyed by the least eager buyer. So. when there is only one consumer or when all consumers are identical, then a single two part tariff would result in the same level of output as in first degree price discrimination. But, when consumers are not identical (and have different demand curves), then the output with assingle two-part tariff would be different the output in first degree price discrimination. b) i) Fim A has a dominant strategy to advertise first, Firm B does not have a dominant strate; ii) The pure strategy Nash equilibrium is: (advertise first, advertise second) associated with pay- off (23, 20). iii), We define the game tree with Firm A moving first ee EPvaeASE R716) _ fe \ Ada tne eetineesees Akcind B The backward induction outcome is (23, 20) associated with (advertise first, advertise second). So there is no firs-mover advantage for firm A. since the same result can be achieved in a simultaneous move game. We also define the game tree with Firm B moving first: Similarly. there is no first-mover advantage for firm B. °) i) There is no Nash equilibrium in pure strategies in this game. ii) To find the mixed strategy equilibrium, we need to find the probabilities with which the batsman hit and defend so that the bowler’s payoff from bowling fast ball and slow ball are the same, Letting the probability of hit be P and defend (do not hit) be I~ P. Then the bowler’s expected payoff if he chooses fast bowl is [-L00P +100(1~ P)] and the expected payoff if hechooses slow bowl is [100P -100(1~ P)]. Equating these yields: [-100P +100(1- Py] = [100P 00(1= Py] =» 100-200P = 200P -100 + P= 0.5 ‘Thus, if the batsman plays hit with a $0% probability and defend with a 50% probability, then Nash equilibrium in mixed strategies is possible. The problem is syrametre, thus the bowler would also play fast-ball with a 50% probability and slow-ball with a 50% probability in Nash equilibrium. 7 a) Because, there is no possible profitable deviation for the firm to charge a price other than the marginal cost + Nash equilibrium (see pp. 494 of S&N). b) i) Given Q (P) = 160 ~ 2P, The firm 1's profit function is: m = Pai — ¢1 (gi) = [80 ~ 0.5(q1 + q2)] ai Max m2 = Ox 1/2qy = 80 — 0.5q3 ~qi -2=0 = q)=—0.5q. +78 — Reaction funetions of firm 1 ay Similarly, firm 2’s profit function is: 1 2/0q2 = 80 ~ 0.541 ~ 0.5q) +78 — Reaction functions of firm 2, (2) snot equilibrium is at the inte:section of reaction functions, substiture (2) in (1) ue 15g, +78)+78 Sqy=9.259)-439—.q, By symmetry or substitution qz = 52. So Cournot output is (qi*, gz") = 2, 52) —_— Pa — extn) 80 - 0.5(q1 + 43)] a: ii), In Bertrand model, firms compete in price and hence price is driven down to MC ( Q = 160 - 2P = 156. Two identical firms would each produce half the quantity = 78. So, Bertrand output is (qu*. qo*) = (78, 78) iii). In Stackelberg model, the leader takes the follower’s reaction function as given, thus we substitute firm 2’s reaction funetion into firm 1’s profit function: + ap] qi ~ 2 an = [80-0.5(qi—0.5 qi + 78)) gi = 2 = [80 9.5qr + 0.25 qi—39)] qi ~2 qi = (41 ~ 0.2541) a = 2 a Max m:= 8x y/@q, = 41 -0.5q1 — qi - 2-0 => qi To solve for ga, put qi = 78 in firm 2’s reaction function: q: ‘The Stackelberg output is (q1*, g2*) = (78, 39). = 0.578 + 78 = 39.