FINAL EXAMINATION 2021

MICROECONOMICS
CITD (SIS) JNU
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• This examination accounts for 50% of your total score in this course.
• Please answer any TWO parts of SECTION A. All questions in SECTION B are com-
pulsory.
• PLEASE WRITE LEGIBLY AND CLEARLY. Label all diagrams and graphs. Marks
will be deducted for incomplete diagrams and graphs.
• PLEASE WRITE TO THE POINT. Marks will be deducted for irrelevant and digressive
answers or answers that are mechanically copied from the lecture notes.
• Any evidence of cheating and soliciting unauthorised help will result in a heavy penalty
including an award of zero mark in the examination.
•PLEASE ALLOCATE YOUR TIME OPTIMALLY.
• On finishing the examination, please scan and send the script to
sushama@mail.jnu.ac.in AND sushama@jnu.ac.in
Maximum marks: 100

SECTION A

1. By invoking the properties of a profit function, explain why the output supply function
of a profit maximising producer is non-decreasing in its own price and each input demand
function is non-increasing in its own price. (25%)

2. In the case where the number of commodities is equal to N = 2 explain and illustrate
the existence of a competitive equilibrium using the excess supply function of the second-
good when price of the first good is normalised to be equal to one. Suppose the graph of
the excess supply function of the second good has a negative slope when it intersects the
p2 axis at p∗2 . Explain how competitive forces will drive price to good 2 to p∗2 starting from
a disequilibrium where the price of good 2 is less than p∗2 and a disequilibrium where the
price of good 2 is more than p∗2 . (25%)

Please turn over

1
3. Explain whether there can be trade-offs in the government objectives of equity and
efficiency in (25%)

(a) a first-best world where the government can employ first-best instruments of person-
alised lump-sum taxes/transfers.
(b) In second-best worlds where the first-best instruments of personalised lump-sum taxes
are not available and the government has to resort to second-best instruments.

SECTION B

1. Suppose that the cost function of a firm is given by C(u, w1 , w2 ) = uβ w1α1 w2α2 , where
β, α1 , and α2 are parameters; u denotes the scalar output of the firm; and w1 and w2 are
the prices of two inputs used by the firm. (30%)
(a) What restrictions must be placed on the parameters in order for this to be properly
derived cost function?
(b) What is special feature of the underlying production function? Explain your answer.
(c) Relate local returns to scale to the parameters of the cost function.
(d) Assuming that the output price is r, what parametric restrictions are needed to ensure
the existence of a unique solution to the profit maximisation problem? Explain your
answer.
(e) Derive the supply function maintaining the the conditions in part (d).
(f) Derive the profit function.
(g) Derive the profit maximising input demand functions.

2. Consider an economy with N goods and commodity taxes that drive a wedge between
the price vector faced by consumers q ∈ RN + and price vector faced by the producers
N
p ∈ R+ . Hence the commodity tax vector is t = q − p. There are J profit maximis-
ing firms indexed by j = 1, . . . , J that take p as given. There are H utility maximising
consumers indexed by h = 1, . . . , H, who take q as given. The profits of the firms are com-
pletely taxed away so that consumers receive no profit incomes. The endowment vector
of any consumer h is ω h . Each consumer receives only an endowment income qω h . Define
a market equilibrium in this economy with respect to two price vectors q and p. Explain
the nature of price normalisations required at an equilibrium of this economy. (20%)

End of examination.