Intermediate Microeconomics II: Market, Government and Welfare — DU B.A (Prog.) Economics as Major Previous Year Question Papers

1. (a) Explain the free rider problem. Consider a case of two individuals, A and B, consuming both public and private goods, where person A is the only contributor to the public good. Illustrate the optimal consumption for both individuals and explain the free-rider problem. (9) (b) Will a monopoly ever provide an efficient level of output on its own? (9) 2. (a) What are externalities? Explain why the tragedy of the commons leads to market inefficiency? MRSA + MRS. = MC(G), (b) Two roommates, A and B, must decide how much of a public good G (a smart TV) to buy. Each has private consumption x; and quasi-linear utility: The total available income is W = x, + *B + C(G), where C(G) = 3G is the cost of providing the public good. (i) For each individual, compute the Marginal Rate of Substitution (MRS) between G and x;. (ii) Using the efficiency condition for public goods, MRS, + MRS = MC(G), find the socially efficient level of the public good G* (iii) Interpret your result. What happens if 3. (a) Suppose that 10 people live on a street and that each of them is willing to pay 72 for each extra streetlight, regardless of the number of streetlights provided. If the cost of providing x streetlights is given by c(x) = x?, what is the Pareto-efficient number of streetlights provided? (9) (b) A monopolist faces the demand curve P = 100 - 20 and has a constant marginal cost of MC = 20. Suppose the government imposes a specific tax of 210 per unit, calculate the change in the price paid by consumers after the tax? (9) 4. (a) State and prove Walras' Law, assuming there are only two consumers and two goods in a pure exchange economy? (9) (b) How does Arrow's Impossibility Theorem challenge the assumptions of welfare economics. (9) 5. (a) Explain how an increase in price level impacts the efficient output level in a monopoly market. (9) (b) The market demand curve of the monopoly market is given as: Q=60-P. Suppose the average and the marginal costs are equal at 710. What are the firm's profit maximization output and price levels? Calculate the firm's profit. (4.5+4.5=9) 6. Write a note on any three of the following: (18) (a) Rawlsian Welfare Function (b) Social and Private Cost (c) Two-part tariff (d) Price Discrimination (e) Deadweight loss under Monopoly