Sr. No. of Question Paper: 3289 A Unique Paper Code 12271401 INTERMEDIATE Name of the Paper MICROECONOMICS I Name of the Course BA (H) Eco. Core Semester Vi Duration ; 3 Hours Maximum Marks : 75 Instructions for Candidates 1. Write your Roll No. on the top immediately on receipt of this question paper. 2. The question paper is divided into two sections. 3. Attempt four questions in all, selecting two from Section A and two from Section B. 4. Use of simple calculator is permitted. 5. Answers may be written either in English or Hindi; but the same medium should be used throughout the Paper.3289 Brat & fay fae 1 a ST oe He wera BARAT A aoae fA ae Pelee ETC Soret Seana FerRATT | wes va eta) ¥ faenfira 2 as AAS ste wis BA a a UT ae BY, Ge A eH al ect aif 1 MUR Haryetee Hh Sra AT ara 2 WAST 0a ST See SHaloi aT fea feet vay sre FY Sifare, ctf wit Sad ar areas vay & ata ee 1 SECTION A (a) Suppose there are two ‘consumers A and B who consume 2 goods X and Y in a pure exchange economy. Their utility functions are U,=2X,+Y,, and U, = X,Y,. respectively. If the initial endowments of the two goods-are [S25 Y= 10) (X= 8 Y, = 10)] (i) Plot the initial endowment point in an Edgeworth box. (ii) Derive the consumption contract curve and plot it.3289 5 (ii) Find the competitive equilibrium allocation and price ratio (iv) Verify if the competitive equilibrium allocation is fair or not. (9.5) (b) A housing developer wants to build houses on a piece of land located next to an airport. However, the noise pollution from the planes that land at the airport reduces the value of houses and hence the profits of the developer. If X denotes the number of planes that fly per day and Y be the number of houses the developer builds. The profit functions of the airport and the developer are as follows : m, = 56X — X? TM = 70Y. — Y?— KY- (i) If no bargains can be struck between the airport and the developer and each can decide its own level of activity, how many planes (X*) will fly to maximise the profits of the airport? Find the maximum profits? (ii) Given that X* planes fly, how many houses will be built to maximise profits of the developer? Find the maximum profits of the house developer. BSTO?4 3289 Git) Suppose that 4 local ordinance makes ; 3 it ittegal to land planes at the airport becgyy se they impose an externality on the develope, r Find the optimum number of houses by, and the profits made by the developer unde, such a rule: (iv) Suppose there is no ban on planes landing at the airport. If a single firm buys thy developer's land and the airport, how many planes will be flown and houses built to maximise joint profits? © (a) am aif f& a sriact A sk Be ot YS fata anforgen % 2 aeqat X she Y at swt we #) sa suite anf U,=2X, + Y,, se U,=X, Y, Awami ae a aaat & ann ae F (KX, Y,=10) (X,=8, ¥,=10)] (i) wee waaet fig at en venad alan Fie ati (i) sein sata ae geet at ok A aie a3289 (@) 5 Git) after ager sinter ote afer ora ar rat wang (iv) sar wRRenit aigeer ster ara 8? em sirare Renrrral ean wank sr ame Reva of Sew Gat ww aT aT 21 wretieh, cargoes we ga ad fmt Seah wewor wa Fae a a aarat ® ate gate Baae Bone at wear #1 aft 6 wae Serr we ar fae aA aren wt cafe 2 hey freer wat oA area weer #1 ward see ste Jan BAM wet FA WER e: , = 56K — K? My = 70Y - Y? - XY (i) aR wag oe ott tae S da aE eer wai ot on aett & site wets aoe alata aU w frie & meet é, at eat oF pe a aifterar act fay fara fam (X*) Set Ht? area aM aI afar? PEO.3289 e 33 (ii) ae ted ge fh X* fone aga #, Bae A ayy ah afters ae fry eA ve ATE oe ag fraenct aT aera any art athe (ii) sie ee ert roe efor we fae @) gare sda wearer Baar a Baer ye meter aaa Bh ge cee HH Pt ah eT ary ay wa A ears BET gi Bae aT FE ag qa a ve TT (iv) ara Afng fa wah oe oe fara Bsa sabe ofa a #1 ae aE ea oF Bae a ite sit vad aes ated 2, at ages am ay sifrman at & fae few Rear sare at afte we were ae? 2. (a) The output of commodities X and Y, as a function of homogeneous inputs (L and K) is expressed in terms of the following production functions : X=2/Kx Y=41'? x27 where L is labour-hours and K is eapital-hours devoted in production of X and Y. Initial endowment of labour and capital (in hundreds of hours) are as follows: 0); (Ly = 50, Ky = 50) (x= 50, Ky : (i) Find the equation of the production contract curve for the commodities X and Y. (ii) Find the market equilibrium allocation of L and K used in production of X and Y, and the equilibrium price ratio (P//P,)- (ii) At the equilibrium level of production, find the ratio K/L (factor intensity) used in the production of X and Y. (iv) It is given that the production possibility frontier (PPF) corresponding to the } production contract curve derived in part (i) above exhibits increasing rate of product transformation (RPT,,), ie., the PPF is strictly concave to'the origin. Identify the possible source of increasing RPT, (3454242512) Ea;3289 8 (b) Moral hazard and adverse selection ate problem, Ries imperfect information in insurance marke, o Distinguish between them with reference to the problems faved by companies offering healt insurance policies. Also, in the same context, suggest a way of mitigating the problem of (i) moral hazard and (ji) adverse selection. (6.5) (a) warts ee (L ate K) Bee Her See Gat X sie Y an genes Reafaters genet weet Fae 3 ras foror ora B @ ri, wan? @ she K, Xahe YB sews Hwa Yat-ne Bi orm ote eh at en aaa (ea Hey 3) wr vane # (Lx =50, Ky=50); (Ly=50, K,=50) (i) ast x st ¥ & fay gener sau ae aT Titer ae af ae . (i) X ste ¥ @ gener 9 sqaa L, att K & are Ager orden ate geet IH aT (P,/P,) a Va wai3289 9 (ii) semen aR aiqeer eee, X oh YR eT Bat KIL (emten Aten) mt geen ae arg (iv) me fear an Pe oat oa (1) A aT eure sige ar seqen sere ee Ata (ppr) sere afta a weal ze (RPT.,) 7 yefifa act, seifa, PPP as #4 8 eT seca By RPT, Aaa Sas ats A Weart Fel (a) Ae Stes sie vag wae ater aon Fort arent at arene #1 earea Son fated A rsa aaa ant Sahat at aoe At oe ae arent aed H sad ate slat aU ae A ah ae F (i) Afra daz atk (ii) vRaS aT A are aT ae at ar ST GA! 3, (a) An individual’s invetse demand function for commodity X is given by: P, = 10 - Q,, where the per unit market price P, captures his marginal willingness to pay for commodity X. Assume there are 10 individuals with the same demand curve, P.T.O.3289 10 (i) Find and plot the market demand curve for X if it is a private good. (ii) Find and plot the market demand curve for X if it is a public good. If the marginal cost of providing the public good X is Rs. 10, find the efficient quantity of public good provided. (iii) State the condition for Pareto efficient allocation of (a) two private goods (X and Y) between two individuals (A and B), and (b) one public good (G) and one private good (Y) between A and B. Compare * the two conditions. (2+4+3.5=9.5) (b) In a market, two ‘types’ of sleeping mattresses are sold - those of high quality (H) and those of low quality (L). Buyers with limited information on quality are unable to identify one type from another unless they have purchased one and used it for some time. If quality was perfectly identifiable, buyers would be willing to pay Rs. 25,000 for an H type and Rs. 18,000 for an L3289 type of mattress In the presence of asymmetric information, buyers are willing to pay average price. Manufacturers of mattresses can also offer product warranty, which is relatively cheaper for the H type manufacturers. Suppose offering a product warranty entai net costs of Rs, 5,000 and Rs. 9,000 to H type and L type manufacturers respectively. The product warranty itself does not enhance quality of the mattress produced. It is merely used as a signal of quality. (® Will offering a warranty serve as an effective signal for separating equilibrium in the market for mattresses? Explain. (ii) If the proportion of H-type mattresses in the market is , (0 < n < 1), what values of 77 achieve a pooling equilibrium? 0) aaa X & fare ear ade ar SA aT err ST = 10 - sqyaet rer fear aan @ ar wR) ee ATA FT incre aaa vas & fare yprare wet a saat Ss soot roger #1 ae 9 A HE wT ae SO afta #1 P.T.O,12 3289 “a fare are iT aR ATE Hie A apy () x* can ee Prot aq BH (i) x fag aan ain a aA aie wife BY ate ae eon een eg #1 aft abt: ey X qeerar eh At aia ae & 10, Hers at af cafes west ga ae HT! (it) Rat aN ardet F fer wh FATE (a) & afer (@ ate at) ata 2 Fst wrart (vou site ag), site (a) Asi Bt aa ww ada aq (G) ae ee Prt meq (¥) a aat a gear mel (@) we won %, a var’ Bat STW aw F- et qe ae (H) sie FT WeM aA (L)i want & at 4 aifta wrat ae ater wae wae a gat @ wa ae wart % send Ha Foo aH fe sat ew at ate ah qe ama} fae wear etre et fan a amet Ya ae A wat we3289 13 wot 8, at atten Hwee fe 25,000 eH ate L wane & af BARE 0,000 8H ver oar an ay Aare RAY rene ren AY taREaf W, eaere iter aioe gar ay dre Bi me ws Ran sere area Sad FH war as Peters F fare ates ae Bi at aAfry fy gene AY aKa AA eH cry ae L cea & frafansit at arm: 5,000 o1a sk 9,000 ead Hye aera oat #1 seme an ead seat ae A goat ¥ ofa aa ah 21 gaat oui daa great S wea Set Ff ore a (i) Far aR at Aare me | fore aa ga a xa wet & fae we wrt aha FTF ar Bet? eerarea (ii) a wae % Hw Sow wT sg y, (0 25, The normal form of this game is: 2 iE 5 15 i N yn (i) Determine the pure-strategy Nash S 0, FL equilibrium of this game. P.T.O.18 3289 ed-strategy Na ) Compute the ™ xed oN (ii) Cor a equilibrium of this & sh equiliby ad-strategy Nash equilibriun, jiven the mixe Git) Given ted in part (i), what is the probability comp! spimane government makes 2 dceision tha h favours firm FI? rises, does the probability that the 5 x rises, > t makes a decision favouring (1+6+2+1=10) governmen firm FI rise or fall? (b) An electric utility company provides electricity to a small town, The demand for electricity is p(q)=10-0.1q, and the company’s costs are C(q) = 1 + 0.5q- (i) Does the electric utility company exhibit the properties to be a “natural monopoly”? (ii) Find the unregulated monopolist’s profit- maximizing price, output, and profit. iii) The government passes a law that requires utility to practice Marginal Cost pricing (ie. P=MC). What is the regulated monopolist’s output and profit?~,) 19 8? (iv) What is the lump-sum subsidy that the regulator must provide the electric utility company to practice MC pricing without operating at a loss? (v) Compute the consumer surplus from the pricing strategies in parts (ii) and (iii) (143+24142=9) (a) Swat Sata Rata aia aw faa ati ater wad aver at a aaa Pola aa fare Tait ey At sais Facer St deh ae aad #1 aw, FL ait F2, cada et @ sit wm art aa aed @ fa od (L) am a@t (N)i eer #15 Barer ont Bier A ama ae Hae a1 a aati nd att at aT ae wi oid set att 2 at weer we acest Pri at @, ot Sat wat at 10 wfermet Bat Bi afe wel 2 ‘aia site FI sitet set axa 8, at ree ua foie act 2 ot wl F2 9a 4 2, wt FL ate att WH FD ay 30 warner tat 81 sit H, afe wa FI citat site F2 sat arch @, at aca Fl a ver % Prot at & fare wf Fla x ate we PD a yee ves oe AT P.T.0,0 3289 + Pewee er mrt j Se apne ae i" qe ta Ga-OTR AH THT Pie, wt (a) ae abet HAA FT IETF a (ii) sar (ii) ¥ mor A Me Peer Ay aq at 28, weet wa HFS oe 2 fag 99 at er ore #7 (iv) SAHA x agar R, war eT # Ae ae Fl @ va # fla aat-8 oT a act 2? (@) ww Riga sutinn aie ve ae a mee A fas wart ett #) fiat BI HiT p(q)=10—0.1q @, a ert a ar C(q)=1+0.5q #1 (i) war relegate ae aut at “orpiaes vate” a an % velit act 87318? (ii) (ii) (iv) 21 saat were a aI — ie a4, rem ait art at var army) AHR UH ET ft ae A farerah fer Ata ‘aera ea Fifer (p= MC) at steer ae fee sectiar a starve ad 21 faPrafir anfteant an genet sik amt aa 27 aaa afar gear 2 ot Par at feat ssratfirar aie at arent 1 Hae & feat ema ar Pron ar snare et fae wat men ae? ‘art (ii) sit (iii) ¥ yer Pate write & coriteat siferda at arora at (a) The bicycle market is populated by two firms, Atlas cycles (A) and Hero cycles (H), facing total demand p~=14~q, where p is the price and q denotes total quantity. On the costs side, firms are perfectly symmetric, with TC, = 2q, i= A, H. (all monetary values are in thousands of rupees). POL22 3289 , diy Ansume that firms siMUlLANCOUSI chy theie outputs, COMPUTE THE Magy equilibrium (prices, quantities and py of A and H) (ii) If A enters the market fitst, chooses ovtput and in the next time period, 1 en the market and chooses its output. Comp, the market equilibrium of this sequen, game (prices, quantities and profits of 4 and H), (S+5=19 (b) Each of N people chooses whether or not to folioy | the protocol of wearing masks, washing hands ang maintaining social distancing to avoid the spreag | of a viral infection. Following the protocols costs each a fixed amount (= > 0). The protocols are effective in protecting people from the spread o the viral infection if and oniy if at least H people follow them, where 2 < H < N; if the protocols are not effective, each faces a higher risk of catching the infection which gives each one 8 disutility (= d > ¢ > 0). Bach person ranks Outcomes from best to worst as follows: (a) aly5289 23 outcome in which the protocols are otf © effective ang she does not follow them; (b) any outcom i come in which the protocol is effective and she also followed also followed them; (c) any outcome in which the protocols a ocols are not effective and she did not follow them; (d) any outcome in which the protocols are not effective and she followed them. Find the pure strategy Nash equilibrium of this strategic game. Clearly explain how you establish that a profile is a Nash equilibrium profile. (9) (#) aefeer atom 2 wal, veo aria (A) ate at wefea (H) a snare @, Ga WT p=14-q RA SAT TE WTB, Get p stag # se q aa AT at zafar 21 ama vat we, we yd ae a wala @, TC, = 2, i= A, H. (ait sifter yea wart wre #1 (i) wr @ fe ee ew we ot oe TT eee Br ara eet (a, aA ste ~ st a & yard) at wet Ft i) aR A wea ane Hwa wet FT NT merge: ga & ater rere #1 P.T.O.3289 ae ¥ vt wear Bike HAT HEHE ETAT By gy ont a A aM AA A roy a (aia, wear atte A ae Ha ear) (a) wake Nae ae GaN FAH AT AHA Fy, Aad S fae wen Gert, or TM ate arte ae wary wat F wear HI eT HET Far Ae Hela, a aed Fe weds ST Ue Pita af ai a % cr 0) West ah a at HHT SS yay a aan 3 wit aa F ale sit daa at va ae a we H ait Saar Wert Hed @, eT 2 c> 0) wae alta itor at water S wae are Tt F waar ze (sz) ware St aftore fora achat wat Baz site ae ST ert et seca @; (a) aE oA fon fared wa wera 2 ott ser Sra eT A fare (a) ate «A afer faret wide wart ae & site set saat eT saat fava, (m1) aE At afeoner Fore stchaiter wend el 2 oie Set sre rere fara |4289 25 Se eT Ao) ar FAME RIE YD gay fa, 1 @)A firm sells goods in two markets, marker 1 and market 2. The inverse demand in market 1 ig P, = 200 ~ q,, and the inverse demand in market 2 is p, = 100 ~ 24,, The marginal cost of production is constant and equal to Rs, 40. (@ Tf the firm behaves as a price taker (perfect competition), what would the ~ equilibrium prices and quantities be in each market? What is the consumer, producer and total surplus? (ii) If the firm acts like a monopoly and charges different prices in each market, how much would it charge in the two markets? What is the consumer, producer and total surplus now? (iii) If the government does not let the monopolist charge different prices, what price will the monopolist charge? Find the consumer, producer and total surplus. P.T.O.6 3289 a ! (iv) Compare the total surplus in parts (jy; i » (ii) and (iii) (44644 *Is15 ) (p) There are N people sitting in a FoOm. Hach ong, asked to guess an it entially on a paper. The average op nteger between I and 109 ang nd write it con all the numbers written on the paper is taken ang the person(s) whose guess is closest to 2/3 of the average is/are the winner(s). Find the Nash equilibrium action profile of this game. How with your answer change if the winner(s) will be the player(s) whose guess is closest to 2 times the mean of the guesses? () (=) ww wa 2 ara, ata 1 ste are 2 F aay as 21 mom 1% eRe aT p, = 200 —q, 2, sit aR 2.4 ama wt p, = 10024, #1 sane aH aia ana fea 2? gk 40 wt # aar 21 (i) afew war ar ror (Gol wfReatrar) Bee Vome ach 8, a ake ara Faget site wt ae AA? suite, seer site aa saftey ger 27@) 27 Oe ree Te Hotere ret se aE mH A sae AY arom 9 Pt Tem a? one retry seme ate Ee sft an a? (ii) A wen eae a stem orn attms ae age 2 A kere fer tne ea soiem, Seren sie as offre ae Ae; (iv) SF (i), (ii) ate (iit) Fg sR aA eH mt we aR FN ot ad 21 weds at ake 100 S ae we De ar agar cay & fe ser ara # site =e em wT We Tea er a feat SF fare wer aT Ay anna ferdt wg wht eenstt ar sites fer arate ait fare cafe ar sqrt sitet B 2/3 Baad wie Bar @, ae fader Far 21 ga Vat HT A ages fa Shores a var A sR eC RT AE FT (fer) we Fert A fier sgt Tel BTL 2 une aia #7 PTO.28 3289 324 x's model of a straigl (a) Consider Hotelling’s model of a straight Highway, 100 kilometres, where cong of length uniformly distributed along the highway, Sup, there are only two stores (S1, $2) that sett way, cans on this highway, located at a distance of 44 kms and 65 kms from the beginning of the highwy, Each consumer has @ transportation cost equal 4 0.03¢2, where d is the distance travelled to thy nearest store. ( Calculate the demand (as a function of prices P,, P,) for the two stores, (ii) Assume that production costs are zero and that the stores aim at maximising revenue from sale of water cans. If the two stores compete in prices, find the prices charged at Nash equilibrium. (ii) Suppose a new government regulation restricts the stores from charging different prices for water cans. Instead, the store owners are given a chance to choose their locations on the highway simultaneously If they choose the same location, they split the business evenly. Where will S, and S,4289 29 locate at Nash equilibrium Is the Nash equilibrium location ¢} 8, « choice of ‘ and s, socially optimum? Explain Gv) Ifa thitd store (S,) also decides to locate on the same highway and the 3 store Owners choose their locations on the highway simultaneously, find the Nash equilibrium of this game. (3+6+4+1=14) (b) Suppose a shopping arcade has only 2 stores selling tablet PCs. One sells Lenovo tablet PCs at a price ~ P,, while the other sells iBall tablet PCs at a price = Py. Both tablets are produced at a marginal production costs of Rs. 10,000. For the consumers, both tablet PCs are perfect substitutes Each store’s set of actions is the set of possible prices P, (nonnegative numbers). The low-price seller gets the entire market; if they charge the same price, they split the market. () What is the Nash equilibrium of this price game? Explain. (ii) Suppose both stores decide to. include one more element in their set of actions : P.T,0.Pele ME ete A om a ne 2g Ra A ei wee yn ig |e ABE Ue bed 8 ve) ue gag ge ah | ta eG Eg tle bie Lote ay ete) Node tela ye (lg ne bn Se Cd ‘Id ete) ie yg mae we () "208 Be ge coe ns auosety p ae “g yea mmpe 2 PLO ia esbaym yp MERA se 1g any eB om ay oo ye ey OF geal yp piemn °2 Riek teay we wan ah yutsen BE ue g (CS “1S) YOO ke wpe ay days le 1g aes ey YL SS tle ae ge te ye UREA Le See, *PMe Ye ieejais ab oman Re eel 224) ODL 8) 6 oatOld sevemdt— ap) fd 22 te Bea 28 be yng Ap MB cee 1g tet) YR Od Bake ee “ha $B MOM IARE 1g A they Dh ete Abe dle ‘ah ODO seme ue 2? Hee 18 dehie 2b SY = eee Oa -2eRe BME nh peg ae aa “ds Bhp te Od-2pe2 ERE od 1g waz BEE ‘em ee 20-20? Ae ne wy iS te (i) Re bie ie ie te BE Bg BEE ts uekue ah ia dom ooh be DS YE ARE ee mh an BBE BE we (eS) 2A BRE Sue a (a1) Nebula 2g RETR he eye Lt “sb Wm OS A LS ea Je os MIS woeBo ke ue ee 2b wey Be ‘ne ete RP BB ne 1 ey ae A hs tte 2h yen le bath ke Oh ea a See a gmk my ate) Te att3289 32 eon), aon eet TAT AT CATE FACT A; gy a ee @ ates aed @, TT TOM aT Pn a2 (i) ga apa Ba HT Ae geet FB? aaa (ii) ar aAfare fa Stat ete TET HTH Ae H yy ak at afta wet a Pula aa # P= 20,000 a FY Yea; anit, uit cate PC at atat = & 20,000 sik faames ¢ f& ofa sere eee ee HET STHar 2, at mee ea aye Fora ae aaa 21 ae Ge ar An ager are ae oie area | (4000)