BECC-108 EM (2022-23)

Description

B.E.C.C-108

INTERMEDIATE MICROECONOMICS – II

Answer all the questions.

Section I: Long answer questions (word limit – 500 words). Each question carries 20 marks.

1.(a) Consider an economy with only one good, food. There are three people in the economy, A, B and C. A has 400 units of food, B has 100 units, and C has only 16 units. All have the same utility, Ui =√f for i = A, B, C and where f stands for food. The social welfare function for this society is the sum of the utilities of the three individuals.

(i) The government decides to redistribute food more equally, so it takes 175 units from A and gives them to B. However, the government spoils 79 of these units in transportation, so B ultimately gets only 96 units of food. What is each person’s utility level now? Find the social welfare level in this case.

(ii) Assume now that the government considers a different redistribution scheme. Starting with the original endowments, the government takes 175 units from A. This time it wishes to give them to C, but in transportation it destroys 91 units, so C only gets 84 of these extra units. What is each person’s utility level now? Find the social welfare level in this case.

(iii) Compare parts (i) and (ii) in terms of social welfare. Explain what you infer.

(b) Explain the First theorem of welfare and Second theorem of welfare.

2. (a) What is the difference between a Dominant strategy and a Nash equilibrium?

(b) Consider the following game: Two criminals are thinking about pulling off a bank robbery. The take from the bank would be Rs.25,000 each, but the job requires two people (one to rob the bank and one to drive the getaway car. Each criminal could instead rob a liquor store. The take from robing aliquor store is only Rs.2000 but can be done with one person acting alone.

i) Write down the payoff matrix for this game. (3)

ii) Explain the pure strategy equilibria. (3)

(c) Consider the following version of the prisoner’s dilemma game:

1. a) What is each player’s dominant strategy? Explain. (4)
2. b) Explain the Nash equilibrium of the game. (4)

Cooperate Cheat

Cooperate Rs.100, Rs. 100 Rs.0, Rs.120

Cheat Rs.120, Rs.0 Rs.50, Rs.50

Section II: Medium answer questions (word limit – 250 words). Each question carries 10 marks.

3. What is a natural monopoly? Discuss and differentiate the marginal cost pricing and average cost pricing under natural monopoly.
4. Differentiate between Signalling and Screening as solutions to problem of asymmetric information. Give a brief explanation of how do these solutions work.
5. With the help of Grand Utility Possibility Curve, explain how does society maximise social welfare.

Section III: Short answer questions (word limit – 100 words). Each question carries 6 marks.

6. Do you think in a system where people pay for their own education, there might be underspending on education? Give reasons for your response.
7. Briefly explain the problem of Moral Hazard that arises in the insurance industry.
8. What do you mean by the term ‘Dead Weight Loss’? Explain with the help of a diagram. Discuss the reasons of its existence.
9. Discuss the concept of Pareto Optimality and briefly explain its criteria.
10. Differentiate between a Normal form game and Extensive form game.

BECC108, BECC 108 ENGLISH MEDIUM