© scanned with Oken Scanner: (a) MRS‘xy= MRS? it is Pareto efficient )_ Noagent enves the other ~ therefore equitable. Fair is Pareto efficient and ‘equitable- hence fair 2 WJ can not be SWF, Ua= 400. & can not be SWF, (max at U,='400). i) Private optimum occurs where P = MC, or 100/Q = Q. Thus Q= 10. Qomee socially efficient number of appliances is Q=20, then P + MEB = MCat Q=20, 100/Q + EQ = Q. Given Q=20. Sol ,, we get,E= 0.75 or 3/4. ii) Level of the subsidy that would achieve social optimum level assuming S as the per Jt subsidywill be 100/Q = MC - S. Since the efficient amount of appliances is Q = 20, the proper subsidy would solve 100/20 = 20 - S or S= 15 per unit. * = (1-B) P; + B P2or P)- B (Pr-P2) old when the expected value or P” (to the buyer) is less than the Hand greater or equal to the value of lemons for buyers. i.e. ‘only lemons will be sold). * is equal or greater than the value of plums to sellers ition when all cars will be sold) A mark for any other answer, © scanned with Oken Scanner® -Y) No ears will be sold when the P'is less than the value of lemons to sellers ie. V2, So when P"< Vzor give 1 mark for any other answer. [Link] ae First order condition» YMRSox! = PoP. 300/G + 200/G = 1 Or G = 300+200 = 500 5 (i) Total cost of Public good is P, (500) Contribution of each person would be 500/2 = 250 Amount left for private good would be 1000 - P, (250) = 750 Also Accept if done like this —» 300/G + 200/G = 1/P S00/G= 1/Px—> G=500P. Contribution of each person would be S00P3/2 ‘Amount left for private good would be1000 - (250)Px. (ii) No as preferences are quasi-lincar a unique level of public good is there. 6) . similar problem arises with health insurance—insurance companiescan’t base their (bis ve average incidence of health problems in thepopulation. They can only base their rates on the average incidence ofhealth problems in the group of potential purchasers. But the people whowant to purchase health insurance the most are the ones who are likely to need it the most and thus the rates must reflect this [Link] such a situation it is possible that everyone can be made better offby requiring the purchase of insurance that reflects the average risk in thepopulation. The high-risk people are better off because they can purchase insurance at rates that are lower than the actual risk they face and the lowriskpeople can purchase insurance that is more favorable to them than theinsurance offered if only high-tisk people purchased it.A situation like this, where the market equilibrium is dominated by @ is quite surprising to most economists. Weusually think that the case that employers offer health plans to benefits. The insurance company ‘of employees and is assuredthat all employees theadverse selection. (Varian, 723- —_ © scanned with Oken Scanner7 oe 5. ae ‘are two Nash equilibria of the game are: (Stag, - - » Stag) and (Hare... 5 Hare). Any player that deviates from the first profile obtains a hare rather than the fraction 1/0 of the stag. Any player that deviates from the second profile obtains nothing, rather than a hare. An action profile in which at least | and at most (5-1) ie 4 hunters pursue thestag is not a Nash equilibrium, since any one of them is better off catching ahare. An action profile in which at least Sand at most (10-1) ie. 9 hunters pursuethe stag is not a Nash equilibrium, since any one of the remaining hunters isbetter off joining the pursuit of the stag (thereby ning herself the ht toa share ofthe stag). ii\Thé set of Nash equilibria consists of the action profile (Hare, . . . ,Hare) in which all hunters catch hares, and any action profile in which exactly Thunters pursue the stag P e and the remaining 3 hunters catch hares. Any player that deviatesfrom the first profile obtains nothing, rather than a hare. A player whoswitches from the pursuit of the stag to catching a hare in the second typeof profile is worse off, since she obtains a hare rather than the fraction 1/7ofthe stag; a player who switches from catching a hare to pursuing the stag isalso worse off since she obtains the fraction 1/8 of the stag rather thana hare which is less than 1/[Link] other action profile is a Nash equilibrium, by the following argument. + If some hunters, but fewer than 5, pursue the stag then each of themobtains nothing, and is better off catching a hare. yer than Thunters pursue the stag then each one thatpursues a hare is € stag then the fraction of the stagthat each of them obtains > ‘is better offeatching a hare, gy equi. (Advertising, RED) R&D, Advertising) © scanned with Oken Scanner= 3pq+ Sp - Spq + 4q—4pq + 2- 2p - 2q + 2pq=- 4pq + 3p +2q +2 Equate EP, at p = 0 and EPaat p=1 2qt2= -2q+5, q= 3/4 © FimB: EPp [ (a, 1-q), (p, 1-p)] = 3qp +5 q(1-p) +4(1-) p+ 2(1-a) (1-p) = 3qp+ Sq-Sqp+4p-4qpt 2-2p-2q+2qp == 4pq + 2p + 3q+2 Equate EPp at q = 0 and EPpat q=I 2p+2 = -2pt5, p=%So the mixed strategy [Link]=3/4 and 4=3/4, : Rok Pest ete iv) Putting values of p=3/4 and q=3/4 in the Expected payoff function to get: © EP,=-4pq + 3p +2q +2 = 7/2 =3.5, EPpy =- 4pq + 2p +3q +2 =22=3.5 © scanned with Oken Scanneri) A sub-game perfect Nash equi. is a strategy profile that is a Nash equi. on every proper -game, Identify 3 sub-games and show Nash equi. SPNE: Safe owner not open; thug not kill/open, not kill/not open with payoff (4,3) If only Payoffs are written- give only 1 mark. Tfonly descriptive explanation of SPNE- give only 1 mark. Or accept any answer if explanation is given showing equi. path. iii) No, the thug’s threat is not credible, because if safe owner chooses not to open the safe even then SPNE strategy of thug is to not Kill, so it’s an empty threat. 6.) i) B+S0>(90-X) > xX>40 (1) A>+(90+X)>140X>50 (2) So, X>50 ii) Down, Right with payoffs (50, 50) ff) 140>(0+x)50>x (1) (0-X)> 50 x<40 (2) So, X <40, Note: If only X>50 in first part and X <40 in third part — deduct 1 mark Wfonly X 250 in first part and X <40 in third part - give full marks. Q7. Braa, —Pit Px QaL P+ PVA PiQi=Th =P)- Py? + PP 2/4 P)Qo-Th= Pp- Py? + PyP 3/4 1-27) + Py "2Q2=Thh= P2- P2? + Py BRP) — P= Py/B + 1/2 Put this in profit function of firm 1. Tl, =Pi- Py? + Py/4 (1/2 + Py/8) -2Pi+ 1/16 P, =0 Mh =0.326 T= 0.327 (P2) — Py= P2/8 + 1/2Best Response curves & ‘© (iii) Firm twill gain. by lowering its price or give 2 marks for any other answer. ') Inthe Stackelberg game, the leader uses what has been called a “top dog” strategy, ; aggressively overproducing to force the follower to seale back its production. The leader bey eams more than in the associated simultaneous game (Cournot), while the follower earns less. While it is generally true that the leader prefers the sequential game to the simultaneous ‘game (the leader can do at least as well, and generally better, by playing its Nash equilibrium strategy from the simultaneous game), it is not generally true that the leader harms the follower by behaving as a““top dog.” Sometimes the leader benefits by behaving as a “puppy dog,” as illustrated in Example 15.9.(Top dog strategy — page 501, N&S. Optimal Tariff + II = 2a + (p - MC) (a1 + a2) ‘formula of optimal tariff- give only 1 mark. T1=(0.5) (2) (40-2P)(20-P) + (P-10) (80-3P) ] j = (40-2P) (20-P) + (P-10) (80-3P) = 800-40P-40P-+2P* +80P -3P*— 800+30P ‘consumer surplus in each market following the Consumer surplus Mkt.2 ~ (5) (20-10)(20) = 100 T(Q) = 100 +10 © scanned with Oken Scanner© Scanned with Oken Scanner