MASTER OF ARTS (ECONOMICS) Term-End Examination December, 2014 MEC-001 : MICRO ECONOMIC ANALYSIS

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1 No. of Printed Pages : 11 MEC-001 V) r MASTER OF ARTS (ECONOMICS) Term-End Examination December, 2014 MEC-001 : MICRO ECONOMIC ANALYSIS Time : 3 hours Maximum Marks : 100 Note : Attempt questions from each section as per instructions given under each section. SECTION - A Answer any two questions from this section : 2x20=40 1. Consider a pure exchange economy with 2 goods (X and Y) and 2 consumers (A and B) having utility functions : Consumer A : ua = (xa)2 ya, who is endowed with (2, 6) of the commodities; Consumer B : ub = xbyb, who is endowed with (4, 2) of the commodities. Compute the market equilibrium price and quantity combinations of the consumers that will result in efficient allocation of resources. MEC P.T.O.

2 2. Suppose there are two types of used cars : good and bad. A good car if it is known to be good, is worth Rs to a buyer and Rs to a seller. You are told that the supply of cars in that market is fixed and possible buyers are infinite. A bad car, on the other hand, is worth Rs to a buyer and Rs to the seller. There are as twice many bad cars as good cars. (a) What would be the prices of bad cars and good cars, if there was perfect information? (b) What would be the price of used car if neither buyer nor seller knew whether a particular car was good one or bad one and all agents are risk neutral? (c) Assume buyers cannot tell if a car is good or bad. Which would be the market price for used cars and how many good cars would be offered? (d) Consider that there are two good cars to every bad car; but buyers cannot tell if a car is good or bad. Which would be the market price for used cars and how many good cars would be offered? 3. There are 2 firms in an industry facing market demand : Q = P. Their costs functions are as follows : Firm 1 : TC1 (q1) = 0.25 q1 and Firm 2 : TC2 (q2) = 0.5 q2. Solve for the cournot output levels, market price and profit levels of the firms. 4. Discuss the views of Pigou on the theory of social welfare. Make a case to refute his arguments. MEC-001 2

3 SECTION - B,zr, 5. Answer any five questions from this section : 5x12=60 An industry with n = 100 identical firms faces the inverse demand curve P= function : and total cost TC (qi ) = 50 + (qi ) 2 2 (a) Find the long run equilibrium, quantity and the price of the industry. (b) Suppose that the government imposes a license fee of 15. Find the new long-run equilibrium of the industry. (c) Suppose that the government imposes a per-unit tax of Calculate the short run equilibrium. 6. An industry is having one dominant firm with zero production cost and 50 competitive firms, (a, each with cost function : TCi = [\ --ii )2/2 /. The market demand faced by the industry is Q = P (a) Calculate the price set by the dominant firm (b) Calculate output levels of all firms 7. A consumer has the following utility function with income (I) and market prices Px and Py : u =10X 3 Y0.7. Using this, (a) derive the indirect utility function (b) derive the expenditure function. MEC P.T.O.

4 8. Suppose 10 people live on street and that each of them is willing to pay Rs. 2 for each extra dustbin, regardless of the number of dustbins provided. If the cost of providing dustbins is given by C (x) = x2, what is the pareto efficient number of dustbins to provide? 9. Consider the pay-off matrix of a game given below : Player 1 Player 2 I 0 A 1,1 3,3 N 2, 4 4, 2 (a) Find all the Nash equilibria of this game. Which player(s), if any, would have a dominant strategy? (b) Suppose that player 1 moves first by choosing either A or N. players 2 observes player l's action and then chooses I or, 0. For every action combination, the player's pay-offs are the same as in the above pay-off matrix. Draw a tree of this new game. How many strategies does player 1 have and what are they? Find all the subgame perfect equilibria of this game. 10. If John's utility function over his utility function is u(y) =- Y. (a) What are his preferences towards risk, risk averse, risk neutral or risk loving? Give reasons in support of your answer. MEC-001 4

5 (b) John drives to work every day and has to spend money to pass through the toll gate. He thought of devising a way to evade payment. However, he knows that there is 1 a 4 probability of being caught at the gate in a given day if he cheats and the cost to be incurred by him towards payment of fine is Rs. 36. If his daily income is Rs. 100, what is the maximum amount he will be willing to pay for one day at the toll gate? 11. Critically examine the arguments put forth by Boumol in his model of alternative theory of firm. MEC P.T.O.

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