Test Papers / Previous Question Papers of Indira Gandhi National Open University MEC001 Microeconomic Analysis December 2006

Master of Arts (MA) ECONOMICS
Term-End Examination

MEC001: Microeconomic Analysis

Time: 3 hours
Maximum Marks: 100

Note : Attempt questions from each section as directed.

Section A
Answer two questions from this section. (2x20)

1. There are two people (1 and 2 in an economy. They consume two goods xⁱ₁ and xⁱ₂, (where 'i' stands for commodities).Their initial endowments are wⁱ₁ and wⁱ₂.lf you know that they have identical preference, compute the equilibria of the following :
Max (xⁱ₁)^0.6 (xⁱ₂)^0.4
subject to P₁xⁱ₁ + P₂xⁱ₂=P₁wⁱ₁ + P₂wⁱ₂ where endowments of the agents are given as,
Agent 1: w¹₁=7 w¹₂=5
Agent 2: w²₁=3 w²₂=7

2. Discuss the major differences in the approach to welfare economics formulated by Pigou and Pareto. Which approach would you prefer? Give reasons to support your answer.

3. Describe the Cournot ,model of duopoly. Using reaction functions, show that the Cournot equilibrium is a stable one.

4. What kind of adverse selection problems do you expect to be faced by insurance companies ? Explain the main reasons for such 3 problem. Do you think that this can lead to a lemons problem in the insurance market ? Give reasons to support your answer.

Section B
Answer ony four questions from this section.

5. Explain the equity efficiency trade-off in optimal resource use with welfare considerations.

6. What is the Slutsky equation ? Suppose there are only two goods x₁ and x₂. You know that x₂ is an inferior good. What can you conclude from the Slutsky equation about the slope of the demand curve for good x₁ ?

7. suppose there are two goods of which your consumption in the year-1 is c₁ and consumption in year-2 is c₂. Endowments in the two years are m₁= 100 and m₂= 100. The interest rate is given as r = 10%.If your utility function is u(c₁, c₂) = (c^0.75₁ c^0.25₂) , determine how much you would like to borrow or lend in the first year.

8. Consider a monopolist operating in two separate rnarkets. The demand functions in these are,
p₁=96-2q₁
p₂=190-6q₂
If the total cost function is C=6+4q+2q² where q₁+q₂=q, determine the profit maximising prices and quantities in each market.

9. What is Nash equilibrium ? Solve for the Nash equilibrium in the following game through elimination of dominated strategies:

10. Given a production function q=AK^αL^1-α, show that its elasticity of substitution through Allen's definition is equal to 1.

Section C
Answer two questions from this section. (2x10)

11. Define the following terms :

(i) CES Production function

(ii) Cream skimming

(iii) Merger

(iv) Stage game

(v) Basing-point price

12. Answer as directed :

(i) Use two different Edgeworth box diagrams to illustrate the potential conflicts between the objectives of equality and allocative efficiency.

(ii) The vNM utility function of an individual is u=m^1/2. If her intitial wealth is 36, will she accept a gamble in which she wins 13 with probability of 2/3 and lose 11 with probability of 1/3 ?

13. Write short notes on :

(i) Indirect utility function

(ii) Stackelbergm odel of price leadership