Intermediate Microeconomics I: Behavioural foundations of Market Interactions — DU B.A. (Hons.) Economics Previous Year Question Papers

1. (a) Suppose a consumer consumes two goods X and Y. The utility function is U = Log(.)) + V. If the price of good X = 20.50, the price of good Y = 81, and his income is 210. (i) Find the initial equilibrium of the consumer. (i) Find the new equilibrium if the price of X falls to ? 0.10 (iii) Using Slutsky decomposition technique, decompose the total price effect into Substitution effect and the income effect for good X. (3+3+4) (b) Check whether the underlying preferences for the following utility functions are monotonic and homothetic. Also, draw the indifference curve representing the following preferences. 2. (a) In an economy, households who met certain eligibility requirements were allowed to purchase food stamps under a welfare scheme, which can then be used to purchase food at retail outlets. A household can buy food stamps worth 72X by paying &X. The maximum worth of food stamps can be 7150. Suppose that a household which earns 7400 is eligible for the scheme. (i) Show the budget line of this household using a diagram. Plot the actual money spent on food on the X-axis and expenditure on all other goods on the Y-axis. (ii) Now, suppose that the Government announces a grant of 7200 of food stamps a month to qualified households instead of requiring the households to purchase food stamps. How would this affect the household's budget line? Does it behave like a lump sum subsidy -explain using a diagram. (4+6) (b) Suppose a decision maker maximizes his expected utility, with the utility function given by U(X) = X"2, for X> 0. She has assets worth 750,000 and a house worth 7200,000. If the house burns down, it would be worth 740,000. The probability of the house burning down is 1 percent. What is the expected utility? Calculate the certainty equivalent. (4+4) 3. (a) Mr. Douglas' demand function for good X is: X (Px, Py, M) = 2Px+ 2M/S Py, where Px is price of X, Py is price of Y and M is income. His income is 72000, price of X is 710 and price of Y is $20. If the price of X falls to (i) Find the change in demand for X due to a change in its price. (ii) How should his income change so that he can afford his old commodity at Px = 8 and Py = 20. What would his new income be, and how much would be the demand for X at this new income, at prices: (iii) In the above question, decompose the total price effect into the substitution and income effect. (3+3+3) (b) Rekha has an endowment of two goods, apples and oranges. Both apples and oranges are normal goods. She is a net seller of apples and a net buyer of oranges. (i) If the price of apples increases and she continues to remain a net seller, show this with the help of a graph. (i) What would happen if the price of oranges increase, Would Rekha be better off or worse off in case (i) she chooses to remain a net buyer? (ii) in case she chooses to become a net seller. (4+S)