Unique Paper Code:12271401-OC

Name of the paper: Intermediate Microeconomics II

Name of the course: B.A.(H) Economics (Old Course)
Semester:IV
Duration: hours
Maximum Marks: 75

Instructions for the candidates:

Attempt any four questions.
All questions carry equal marks (18.75 marks each).
Note: Answers may be written either in English or in Hindi; but the same medium should be
used throughout the paper.

( 18.75 )

: ; ए

ए
1. Consider an exchange economy of two goods -apples (A) and mangoes(M) and two
individuals Pranav and Riya. Pranav's and Riya’s utility functions are and
, respectively. Their initial endowments of A and M are given
as: .Assume for simplicity that the price of apple is
normalized to .
(i) Using an Edgeworth box, depict the endowments, preferences of Pranav and Riya and
the contract curve, graphically. Take apples on the horizontal axis.
(ii) Determine the competitive equilibrium allocation of apples and mangoes and the
equilibrium price ratio. Are these allocations Pareto efficient?
(iii) Are these equilibrium allocations fair?

(7+8+3.75)
1. - (ए) औ आ (ए ) औ औ
औ फ औ
एऔ ए ए ए :
ω_P=(1,.5) औ ω_R=(1,1.5) ए P_A=₹1

(i)ए ए, औ , औ

फ |
(ii) औ आ आ औ

आ ?

(iii) आ ?

2. A) Consider a second-hand car market. For each trader the value of a car depends on whether
a trader is a buyer or a seller, and also on whether a car is a lemon or a plum. Buyer’s
reservation prices for a lemon (bad quality car) and plum (good quality car) are 60,000 and
1.2 lakh respectively, while each seller is willing to sell the lemon at and a plum at
lakh.
(i) What is the expected profit that the seller of each quality of car is likely to make
when the probability of a car being a lemon is ? Assume that there is perfect

information and equal splitting of gains from trade between buyers and sellers on
each segment of the market. Then what will be the price of each quality of car?
(ii) Suppose buyers are not able to distinguish between a lemon and a plum, what is the
maximum price that a buyer might pay when 1/3rd of the cars are lemon? Is there any
possibility of market failure? Explain.
(iii) Can the warranty on these cars help to overcome the market failure and create a
pooling or a separating equilibrium? Explain.

B) Suppose a monopoly firm can produce any level of output at a constant marginal cost of 5
per unit and faces a constant price elasticity demand curve: , where is the price
elasticity of demand ( .
 (i) Suppose that is -4. Estimate the consumer surplus in the above market and compare this
with the consumer surplus that would be obtained if the market were to be perfectly competitive.
(ii) If the price elasticity of demand approaches -1, how will the consumer surplus change under
monopoly?
(4+4+4+4+2.75)

2( )ए ए
,औ ( )

( ) ए औ ए आ ₹60,000

औ ₹1.2 , ₹0 औ ए ₹1

(i) ,

? औ
औ

(ii) ए औ , ए

1/3 ?
फ ?

(iii) फ औ ए ए

( ) ए ए ए फ ₹5

औ : ,

(i) ए e -4 एऔ

(ii) -1 , ए

| (4+4+4+4+2.75)
3.A) A farmer cultivates rice adjacent to a dairy farm. Each farmer behaves as a competitive
firm. The farmer benefits from the free waste generated by cows of the dairy farm and the money
value of the benefit to the rice farmers from the cow waste is 1000 from each cow. Dairy farm
has a marginal cost MC = 1000 + 5Q, where Q is the number of cows. The dairy farmer can sell
the milk yielded from each cow at 4000.The waste from each cow is being disposed- off freely
by the dairy farmer.

(i) Find the privately optimal number of cows that the dairy farmer will maintain.

(ii) Find the socially optimal number of cows that the dairy farmer should maintain.

(iii)Suggest two ways in which the socially optimal number of cows can be maintained in this
economy.

B) Suppose two individuals A and B have the following preferences over private good (x) and
public good (g):

√ and √ and the cost of providing public good is

Show that a unique amount of the public good will be supplied at every efficient allocation.

(5+5+3.75+5)
3. ( ) ए फ ए फ
फ औ

₹1000 फ

MC = 1000 + 5Q , Q

4000

(i) ए, फ ए

(ii) ए ए ए
(iii) ए ए

( ) ए ए औ (x) औ (g)

ए :

√ and √ औ
( )=0.5

ए आ ए आ ए |

(5+5+3.75+5)

4. Consider a monopolist who has a linear demand curve of the form and the
cost function of the form . If the monopolist perfectly discriminates
price, then,

(i) How much output will the monopolist produce and how much profit will he generate?
(ii) What is the total profit when he charges a single price?
(iii) Calculate the deadweight loss when a single price is charged by this monopoly.
(iv) What is the deadweight loss under perfect price discrimination? Why?
(6+4+5+3.75)

4 एक एकाधधकारी पर धिचार कीधिए धिसका रेखीय माांग िक्र है तथा लागत फलन

है। यदद एकाधधकारी कीमत में पूर्ण धिभेद करता है तो

(i) ए औ ?

(ii) ए ?

(iii) ए ए

(iv) पूर्ण कीमत धिभेद की धथथधत में कु ल भार हाधन दकतनी होगी? क्यों?
5. Consider the following game:
Player 2
L M R

Player 1 U 8,8 7,7 0,0

B 7,7 9,8 6,6

D 0,0 6,6 5,5

(i) Find the pure-strategy Nash equilibrium (if any).

(ii) After eliminating strictly dominated strategies of each player find the mixed-strategy Nash
equilibrium.
(iii) Assuming that games are played sequentially and player-1 will take his decisions first and
player-2 has perfect information about player-1’s moves. Draw the extensive form for the game.
(iv)Find the backward induction solution of the extensive form game.
(4+6+4+4.75)

5 ए

Player-2

Player-1 L M R

U 8,8 7,7 0,0

B 7,7 9,8 6,6

D 0,0 6,6 5,5

(i) - ( ) ए

(ii)

ए
 (iii) ए औ -1

औ -2 -1 ए

(iv) फ

6. Consider Hotelling’s model of spatial competition in which ice-cream is sold at two shops
A and B. The shops A and B are located along a beach of length 200 meters and the ice-
cream sold by them is identical. The cost of ice-cream production is zero. Assume that
consumers are located uniformly along the beach, one at each meter. Consumers incur a
transportation cost td2 in carrying the ice-cream from the shop to their location where d is
the distance travelled and is constant. A and B choose prices and
simultaneously. A and B are located at 80 meters and 140 meters respectively from the
entrance of the beach. Let a consumer who is indifferent between shops A and B be located
at x meters from the entrance on the beach.
(i) Derive the demand equations for shops A and B respectively. For find
the Nash equilibrium prices.
(ii) Show that if the transportation cost is doubled, profits will be doubled.
(iii) What happen to prices and profits if the shops A and B locate at the opposite ends
of the beach? (8+5+5.75)

6. Aऔ B आ

एऔ 200 औ
आ आ

, ए आ

td2 , d औ t (> 0) A

औ Bए PA औ PB Aऔ B 80 औ 140
Aऔ B x
(i) Aऔ B ए t= .0.001 ए

(ii) ए ए, ए
(iii) Aऔ B औ फ