MEC-101/001: MICROECONOMIC ANALYSIS Assignment (TMA) Course Code: MEC-101 Assignment Code: MEC-101/AST/2019-20 Maximum Marks: 100 Note: Answer all the questions. While questions in Section A carry 20 marks each (to be answered in about 700 words each) those in Section B carry 12 marks each (to be answered in about 500 words each). Section-A 1. (a) What are the assumptions on which the First fundamental theorem of welfare economics rests? (b) Consider a pure-exchange economy of two individuals (A and B) and two goods (X and Y). Individual A is endowed with 1 unit of good X and none of good Y, while individual B with 1 unit of good Y and none of good X. Assuming utility function of individual A and B to be UA = (XA) α (YA) 1− α and UB = (XB) β (YB) 1− β where Xi and Yi for i = {A, B} represent individual i’s consumption of good X and Y, respectively. Determine the Walrasian equilibrium price ratio. 2. (a) Elucidate price and output determination under any two non-collusive models of Oligopoly. (b) Consider a market structure comprising two identical firms (A and B), each with the cost function given by Ci = 30Qi , where Qi for i = {A, B} is output produced by each firm. Market demand is given by P = 210 − 1.5Q, where Q = QA + QB (i) Find Cournot equilibrium. (ii) What will be the outcome if the firms decide to collude? Compare it with the results under the Cournot equilibrium. 4 SECTION B 3. What is meant by a Subgame Perfect Nash equilibrium? What will be the Subgame Perfect Nash equilibria for the following game? 4. (a) A CES production function approaches a Cobb-Douglas production function as a special case. Comment. (b) Given the production function Q = F(P, R), where Q denotes output produced using factors P and R. Assume v and s to be price of factor P and R, respectively. Using the given information, represent the expression for the Shephard’s Lemma. 5. (a) What is meant by the Dual problem in context of the utility and expenditure optimisation exercise? (b) Derive the Hicksian Demand functions for good X and Y given the following utility function: U(X, Y) = √𝑋 + 2√𝑌 6. What is a von Neumann-Morgenstern expected utility function? An individual’s von Neumann-Morgenstern (vNM) utility function is given by U(M) = √𝑀 where M denotes money. Assume this individual has Rs 4 with him. A lottery ticket that will be worth Rs 12 with probability 1 2 and zero otherwise is available in the market. What is the maximum price he would pay to obtain it? 7. Write short notes on the following: (i) Significance of Value judgments in Welfare Economics. (ii) A. C. Pigou’s contribution to Welfare Economics