MASTER OF ARTS

l.f') (Economics)
o\
Term-End Examination
June, 2009

MEC-001: MICRO ECONOMIC ANALYSIS

Time : 3 hours Maximum Marks : 100

Note : Attempt questionsfrom eachsectionas directed.

-
SECTION-A
' 2x20=40
from this section
Ansrcerany trao questions
1.. Discuss the basic difference in approach adopted
by Pigou and Pareto to deal with problems of
welfare economics.
2. What is adverse selection problem ? Point out
the insight you gain from its formulation. Does
market signalling alleviate the problem of adverse
selection ? Give reason in support of your answer.
3. Consider an economy with two persons and two
goods. The utility functions of the individuals are
u A = x 1 A x 2 A;
uB=(*18 x2B+s)2
and the initial endowments are given to be :
wn: (6,2) and wt: (2,6).

MEC.OOl P.T.O.
 (u) Draw Edgeworth Box and show the initial
endowment of the economy.

(b) Find the set of Pareto efficient allocations

and show your result on the Edgeworth Box.

(.) Find the competitive equilibrium of this

economy.

4. Consider an industry with three firms each having

'Ihe
marginal costs equal to zero. inverse demand
curve facing this industry is :

P(qt, qz, qs) : 60 - (qt+ qz+ qs).

(u) If each firm behaves as a cournot

competitor, what is firm 1's best response
function ?

(b) Calculate cournot equilibrium of this

problem.

\L/
Firms 2 and 3 decide to merge and form a
single firm (MC is still zero). Calculate the
new industry equilibrium and comment on
combined profits from firms 2 and 3
considing pre and post merger profits.

MEC-OOI
 SECTION-B

Answeranyfour questions
from th.issection. 4xl2=48
N)
rR 5. Take a consumerwith a two period horizon.
-i< His utility function is given as u = c.rcrand
actualand expectedincomesare Y, :1-0,000
and Y2:5,250. if the interestrate is known
to be 5% Per annum, find the optimum
consumptionexpendituresof the consumer.

6. S u p p o s e K a r e e n a ' su t i l i t y f u n c t i o n i s

I
( Y- \ t
u=l l-. Her initial income when
\ 1000l

healthy is 36,000.However, there is a 50%

chancethat she wili face financial loss on
being taken ill and the income is likely to
reduce by 20,000.

(a) Find the expectedvalue of her income.

(b) What expectedutility she will have

given the possiblestate of her health ?

\,Vhatis the risk premium she will be

willing to pay to cover the risk of
sickness?

MEC-001 P.T.O.
7. Consider the following game given in extensive
form :

i ?
(u) use backwards induction to compute an
equilibrium of the game.

(b) write this game in normal form.

8. Derive the indirect utiiity function from the given

direct utility function tL=alogxt+lr. Use Roy's

identity to conskuct clemand functions for the two

goods .r:, and xr. Ate these the same as demand
functions derived from the direct utility
function ?
g
Explain the equity - efficiency ffade off in optimal
resource use with' welfare considerations'

1 0 . Explain how Shephard's Lemma can be used to

clerive the production function from the cost
function.

MEC-OO1
 SECTION-C

Ansuer all the questions

from this section: 2x6='1.2

1L. Write short notes oi1 any iws of the following :

(u) CES Production functicn

(b) Hoteliing's lernma

(.) Firsi welfare theorem

12. Differentiate between (any tano) :

(u) Hicks and Slr-rtsky's approach to

decompositionof Price effect

(b) lVtonopolyand monopsony

/c) Externaleconomiesand diseconomies.

-oOo-

MEC-00L P.T.O.
 {q.$.rfr.-oor
w.q. ( sTelvrRa
)
Fdrfrqfrqn
q{, 2009
-oor'gF 3Tefunsffiwr
gc.g.t
W4:SqTt qfelndq ctq : fio

ale: yai<r
u-s# dAfrnqnfrtwls,ry{n #rar {r

Eg-A
-va-Bn Aa7i e?nq aardr 2x2A=40
1. qrepr*.rt elpiqrT-q
41 qrrtqleii *-ffiqq q q},t
aw Sd *-BqirTdi(approach) +Etq stTunrperaq
q? Tqf o]fuq r
2. efrqd q*r RqsTwr tz sH+ ffifuTt yre 3triE
*l qilqq I Fn qNTRS*-ds qfdfld EHqsl qrrcrT
$Tvqin 6{fr t? eTqiBilr *-wsh t nS-t r
s. 8qfu'qqdqigsiratifi eletqqe{rnfr-qn*?H r
qfudi613qfrft6 q-d{ ss.R ,
w t
ttA = x1A x2A ;
u B= ( x tBx2 B +s)2
deITgrGE.Fviu 1s.6.\ /ment)Fq yzFRfqi.ri tr
r.oo=(6,2)deiTzu,: (2,6).

MEC.OOl P.T.O.
 (a) q-s-+rtqrw ql rqqT41ffi dql 3l?iq-E{prlqI
^ , , , , . 1 .
!R]-Eq$- 9(4 (enrlon ment) lqtelQq I

(b) qi erdqq-al 3[q-cqqr Eqq (set)Flf, q1fq]

slii 3rq.+qRrnq qq-qd Erffi q{ @ t

\L/
eleirq-{ipli qi qfrg}F{irrfr (competitiv e) lr4'
ftrSnrnq]ffi r

qq * erTq{Sq-r< iqneml e't{ qd e1-&f{qi

sEi'i.lc{ idER 41ft\ r w sdtq fl qffid (interse)
d-.l qm'gvr*n t ,

P(clt,qt, q) : 6o- (tlr+ qz+ qs)-

a

(u) qR rd.fi qd qfr qftd-fr *-sq i qqar

qi-e t n), sd r qr sfr-tq s-qf,{ qffl Rl
d'ni

(b) w qd b 1fr sdmq 4T 3ll'FFf{oiftq t

(c) .TfqWir nqTm sd fr'f, qrfr t gir e-d-6r

qe qd Eiqre { lsiqTn r'ra er'fi q1Uq ti
ii r-AB-d'T+ s{mq q-t 3ilcrffTqiiqq 3ir
fr-mnXd 1pr"-*"rger)deTIfirdT{q{qrdWfr
qEffi sC +'go mu vt M eifrqt

MEC-OO1
 r3|-B

l g--sn Aafaqsri # var ffi t 4x12=48

5. qi Eqqrqfqd b drtq q* sq*ffl qr fr.ff e}ffi r

rn-ffTFs gfrT{t .
;sfi sq"iFt-dr

gTHt- Y, = 10,000,
rr: c, crBa{lqlR'fdfi qq g-gTrqlil
Y, = 5,250qR yfaq-i qrtr*. qrsTEi s qftqtf, i dl
Fs Bqqrsl qr sr3*f,dq Bqqtri{e{ g-6 oifut r

qTrfim fu- EttrT qi 3tq]ffi srFI rr=f v It

{ 1000I
I

t-r e-s q-6-{ej ir ar se-sTsjqFqfi qrq 36,000

i-l
Teiid 50 yfrqrd F-Eq[dqT q6 t f+. Eiqn qs,+T{
B-*iffiq afr E-drfrqbfr et{ enq* 20.000qr{
di qi q.srt-qrrt .

(u) =qfu eTFI*. scrr.fdnAe +'r wn znlH r

(b) svh ertnF{dEr{puto} s-ff ftrfdq w-*i

qrqql riqrRrdwqlFTf,reqr6l,t?

(c) + ]sd1 Eit 3rT-dIRd(cover) 4rFI E-(46'

EltqT{T
ffi dfisq q}frqqrRr T-rd.F
q.rq"rbfr:

MEC-O01 P.T.O.
 q +A R} TAdo q"{f{qR 41frq :
7. T{q Fq
-L

1. 0
1 t

(a) dd *'R-{f,q ql q-a *,{i e ftq vrqffir

(backwardsinduction)*f y*q entt
3{FTq"{
(b) { tr-d ql qqlq 5v (Normalform) e ftTd r
8. rti fC vsql srrfrFrfrrrrH t 3lriqq sq*Frdr qffi{
"c--c---\
tichilflq:

ru=alogx, *.r'. .i q.q3ir .r, d9I.r, 4 d{ tnoq *'

ftCnTtg 1Tqs1 identity513q+{Tqt I wr i req

q-oqt qffif, drr q-o'qo1 aratZ
3qqlFrdT
9. m-eruT*Tfr f{qR +'q,Ta{3rEttrf,q q{|-renw*'T n
+ frq rrFI (tradeoffl ai 4Tfi'
scrdT-fl-.jqrqiTr
q}fui r
L 0 . dlrtd rFtr;l q Tfl|{{ r5q HTqff{ (derive) 4-G q
ffi dqT q1 N sgm.f6qTqr ss-dr t? qrsn
e1frqr

MEC-OO1 10
 ET-C

{s ?d--s
S Fe.fr
er+ h rar dr 2x6="1.2

11. trqfrfun i t frrA dw eleTn

fiz fu ,
(u) ei { qs scqre{qtrq

(b) ffil erTdtqr

(.) qWI S'FIoT ytq (first welfare theorem)

Lz. ftutfufua i t t661* * qtq er<rqrr{A:

(a) q.tqa yiTH 6 gurE+-{ulc i{tr dtr Re@i *
tsqFFI (approach)

(b) qsTirr-{Tiqq *aTqF-tfq-{Ti(monopsony)

(c) qTqqfr-d-qqmE
qq sTfrrd-qqnd

-oOo-

MEC-OO1