Group A 1. (30 marks: 5+10 +15]. iables Let Xj, ...,X, be independent and identically distributed random va with a uniform distribution on (0,4) where @ > 0. joint probability density function of X1,....Xn (a) (5 marks] Write down t wn. And (b) [10 marks] Suppose 2; is a realization of X,, for each 7 suppose the value of @ is unknown. Find the value of 0 that maximizes the joint pdf. in part (a) given that 24,...,tn have been observed. (This is called the maximum likelihood estimate of 0.) (c) [15 marks} Consider the function: f(e,y) =a? + y? ~ 2x ximum value of f over the region {(x,y) | 2x? + 3y? -— (i) Find the 2x < 100} (ii) Find the minimum value of f over the region {(x,y) | 22? + 3y° — 2x > 100} 2. [30 marks: 345+10+6+6] A tournament consists of n players and all possible C(n,2) wise matches between them, There are no ties in a match: in any match, one of the two players wins. The score of a player is the number of matehes she twins out of all her (n— 1) matches in the tournament. Denote the score vector of the tournament as $= (s1,..-,5») and assume without loss of generality 812522... 2 Sn. (a) (3 marks) For any 2 C(k,2), where C(k,2) = (b) (5 marks) Suppose > 3 and players 1,2,3 win every match against players in {4,...,n}. Find the value of 54+... + 52? so + 2 for some (c) (10 marks) Suppose sn = 80,801 = 80 + 1,8n-2 positive integer so and n > 3. Show that ctor s such that (d) (6 marks) A tournament generates a score 8; — 8j41 = 1 forall 7 € {1,....n—1}. | 1What is the score vector of this tournament’? For e very Player j, who does Player j beat in this tournament’? (©) (@ marks) Suppose there are six players, Le, n a tourna- ment such that each player has a score of at least two and difference in scores of any two players is not more than one. What tor of this tournament? Construct who) which generates this scor a tournament (de e vector. ribing who beats 3. [30 mark Consider the following equation in x: (i x 1)(w — 2)- nn) (a) a real number. Argue whether Providing a proof or a counter where n > 1 is the following stat example. 8 positive integer and f is ements are true or false by (a) (6 marks) Suppose n = 9. There is a real solution to Equation (1) for every value of k. (b) (6 marks) Suppose n = 3. There is a real sol every value of k. lution to Equation (1) for (¢) (6 marks) For all & > 0 and for © very real solution to Equation (1). Positive integer n > 1, there is a (4) (4 marks) For all k <0 and for every odd positive integer n > 1, there is a real solution to Equation (1) (€) (8 marks) For all & <0, then ¢ is some e @ real solution to Equation ( ‘ven positive integer n such that 1) exists.Group B agents of size 1. A represen- san economy inhabited by identica ; and Jabour supply (l) is ce over consumption (0) 1, Con tative agent's p given by the utility function ule) ~yi*, 0 0 is the productivity of labour. Both the com- modity matkot and labour market are perfectly competitive: the buyers and sellers take the price as given while taking demand and supply de- cons, Let us denote the hourly wage rate by w > 0 and price of the consumption good by p> 0. (a) [25 marks: 13 + 7 + 5] Competitive Equilibrium: A competitive equilibrium is given by the allocation of consumption and labour, (c7#,1C¥) , and the relative price ratio, 7, such that, given w and p, a representative agent decides her labour supply, 1S, and con- sumption demand, ¢?, to maximize her utility; a firm decides its labour demand, 1, and supply of consumption good, c%, to maximize its profit; and, finally, both the commodity market and labour market clear, that is, 2 = 15 and c? = (i) [13 marks] Set up the representative agent’s utility maximization problem, Write down the first order conditions for this maximiza- tion problem and determine [$ and c? as functions of w and p. (ii) [7 marks] Set up a firm’s profit maximiz: 1) and cS as functions of w and p. (iii) [5 marks] De and the relative price ratio, #. tion problem. Determine (b) [5 marks} Pareto efficient allocation: For this economy define the concept of a Pareto efficient allocation of consumption and labour. Find out a Pareto efficient allocation of consumption and labour in this economy. Provide a clear explanation. termine the competitive equilibrium allocation, (c7®, IC) ,2. [30 marks = 12 4 18) er year from pension (a) [12 marks] Ms. A’s income consists of Rs. be oab ieee of rice plus the earnings from whatever she sells eee ve income on tice (2) she harvests annually from her farm. She spends i peareneee and on all other expenses (y). All other expens : i sold for Rs. 20 Tupees, so that the price of y is Rs. 1. Last year " 3000 kilograms, just per kilogram, and Ms. A’s rice consumption was Pec the amount produced on her farm. This year the price erent per kilogram. Ms, A has standard convex preferences . ic other expenses. Answer the following two questions without refe any utility function or indifference curves AST marks} What will happen to her rice increas consumption this y : 2 Give a clear explanation » decrease, or remain the same? Give a clear explanatio for your answer, (8) [5 marks] Will she be better or worse off this year compared to last “year? Explain cleatly, (b) [18 marks] There are two goods « and y. Mr. Preferences over the two goods. He has Bood x and ey > 0 units of good y. He of income. When the price of good y Rs. pe, he decides neither to buy B has standard convex endowments of es > 0 units of docs not have any other source Rs. 1 and the price of good x hor to sell good a (i) [8 marks] Suppose that, for good a, PL < Ps if an individual is a seller and Rs, PH > pe if an individual is a buyer. The price of Good y remains Rs, 1 no matter whether an individual buys or sells good y. Write down the equation of the new budget constraint and draw it labelling the important points clearly, Gi) [10 marks] Will Mr. B buy or sell good «? By how much? Give a clear explanation for your answer without referr function or indifference curves, the prices have become Rs. ‘ing to any utilityGHT+T+ 10] eee Moneseuey who faces two types of potential borrowers the size L to iny fe Pisky type. ach type of borrower needs & i of a produces su ot some project, The borrower cau repay only ite bases : is alae gers eet Fetus to cover the repayment. Suppose Hat the sale Vt Pee ble to obtain a secure return of ft from the investment, where M> Ls On the other hand, the risky type is an uncertain prospects he can obtain a Piaher return RY (vhete A> R), but only with probability p. With probability nent backfires and he gots a return of 0, The money’ Tender lv Gnoush fimds to lend to just one applicant, and there are two of them — one BSS One safe. Each borrower knows his own type, but the moneyleuder does hot Know the borrower's type, He just knows that one borrower is a sale type and the other one is a risky type. Since the moneylender has enough funds to lend to just one applicant, when both the borrowers apply’ for the loan, he gives the loan randomly to one of them, say by tossing a coin, ume that the lender supplies the loan from his own resources and his opportunity cost is zero. 1=p, his invostny applicant, (a) [6 marks] What is the highest interest rate, call it ig, for which the ~~ safe borrower wan the loan? What is the highest interest rate, i,, for which the risky borrower wants the loan? Who is willing to pay’ a higher interest rate, the risky borrower or the safe borrower? (b) [7 marks] The lender's objective is to maximize his “Argue clearly that the lender’s effective choice is between two interest rates, i, and i,. (That is, argue that the lender will not choose any interest rate strictly lower than min {i,,i,}, any interest rate strictly higher than max {i,,i,}. or any int is.) (c) [7 marks} Argue that when the lender charges i,, his expected profit is given by p(1+i,) LL. Derive, with a clear argument, the expression of lender's expected profit when he charges i expected profit, t rate strictly in between i, and (4) [10 marks] An equilibrium with credit rationing occurs when, at the equilibrium interest rate, some borrowers who want to obtain loans are unable to do so; however, lenders do not raise the interest rate to elimi nate the excess demand. Explain clearly that we have an equilibrium with credit rationing whenGroup C 1. (80 marks=34+8+2+10+443] Consider an economy where identical agents (of mass 1) live for two peri ode: youth (period 1) and old age (period 2). The utility fimetion of a repre- sentative agent born at time fis given by u(creseatir) = 108 (614) + Blog (cays), where e denotes consumption in youth, cy denotes e and 0 < 3 <1 is the discount factor refle ‘ting her t youth the representative agent supplies her « inelasticall nd the ‘onsumption in old age, ® preference. In her ndowment of 1 unit of labour ves the market-determnined wage rate wy. So in her youth went faces the budget constraint ¢1. + 5, = Ww, where s; denotes 8 When old, she just constiines her savings from youth plus the interest earning on her savings, sirvsi, whete rey is the market-determined interest fig it Period £41. That is, when old, her budget constraint is crest = (+ rest) st. [8 marks} Set. up the agent's wtlity maximization problem by showing her choice variables clearly, (b) [8 marks] Write down the first order « - problem and derive the savings functior does, depends on the interest rate ‘onditions for this maximization n. Explain how savings, s., if it Toe The production function of the economy is given by Y, = AKPL}-9, 9 0, E Vis the y kK, Y is 1 olopica i vel of wi +0, Wis the eapital 8 is the poputati F lation with grows at the rate n GDP, and a © jg, 4) h grows at the rat Assume that K = sY ~6k Afr aS the capital labor ratio in efficieney units. Let output per given by Q = AZ®. The param 0), 1] denotes the savings rate. The parameter § ¢ (0, 1] denotes the depreciation on capital Define 2 worker 1 (a) [5 marks] Derive an expression for (b) [5 marks} Instead constant (9), now « ssuming that the rate of technological progress is ancous increase in A is pro- portional to output per worker, ic., there is learning by doing ume that the insta i=49 Show that the law of motion of capital is given by — (F4 n)\Z (c) [10 marks} Draw a diagram describing the dy model with learning by doing. Plot Z on thi priate functions on the y ~ aris sunies of growth in the ~ axis, and the appro- (d) [10 marks} In contrast to the model with no learning by doing, does an increase in the investment rate raise the balanced-growth rate 7? What does this tell you about the change in policy having level effects versus growth effects in the model with learning by doing in contrast to the model when there is no learning by doing ? Show your answer using the. diagram in part (c).3, [80 marks =104-104-343+4 | Suppose households who live till 7 periods maximize Yh, 3" In(en) where cy represents their income in period n= 1,b4 ff 2.0 and B is a parameter with 0 < 3 < 1. Suppose per period income and the saving of households are y, and sy respectively and the activity starts from the beginning of their life ¢. Further, the net interest rate on saving in between any two periods is exogenously fixed at r and so the gross rate of return is 1+r. Households have only two activities in every period - consuming and saving. ) [L0 marks] Write down the sequence of budget constraints (one for each period) and the aggregate budget constraint derived from these periodic budget constraints where on the left hand side, consumption levels for all the periods appear, and on the right hand side, income in all periods appears. (b) [10 marks} Under what condition between 8 and r, is the optimal s lution for the above problem yield constant consumption, C, in every period ? (c) Suppose the condition that you derive in (b) holds. Then answer the following questions in (c) and (d) (i) [3 marks] For a transitory change in income in period £ only, caleu- late the change in the constant level of consumption, C. [3 marks] For a transitory change in income in period t+ k calculate the change in the constant level of consumption, C. only, d) [4 marks] For a permanent change in income (assume the same amount of income change in all periods), caleulate the change in the constant level of consumption, C. Compare this value derived with part ¢ (i).