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91 views13 pagesProblem Set Micro
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Problem Set GE-1: General Equilibrium
1. For each of the following cases, solve for the Walrasian equilibrium.
(x and y are goods and A and B are agents; x, indicates number of units of good x with agent A etc.)
Utility ofagentA —_—_Uttility of agent B Endowment of agent A Endowment of agent B
X4Yaq t+ 12x4+3Y, | *eye + 8xe +978 (8,30) (10,10)
O5in% +05Iny4 | xBYe (42,12) (24,0)
Nat Va Xe +4/Ye 48) (20,8)
XaYa 33 (800,800) (200,4200)
2. For each of the cases below, draw the Edgeworth box representing the preferences and indicating the initial endowments
(Using grid paper, lke that in math notebooks, will help draw neat diagrams.)
Utility of agent A Utility of agent B | Endowment of agent A | Endowment of agent B
a + Ya Xe +Ys (50,50) (50,50)
ta + Ye 2x5 +s (50,50) (0,100)
2a, +Ya Xe +Ys (50,50) (50,100)
min(%,, Ya) mints, Vs) (50,50) (50,100)
Ya Xe (50,50) (50,50)
Xq Xp (50,50) (50,50)
Ta a= Xe (55) (55)
min@ta, Ya) “te + Ye (0,10) (10,0)
Xt 2V4 / min(%g, 2ys) (12,0) (0,12)
Xa +Ta max(X5, Ys) (0.5,0.5) (0.5,0.5)
mina Va) max(p, Ye) (22,5) (18,5)
3. For each of the cases in question 1, derive the equation of the locus of all Pareto efficent allocations.
4. Consider an economy with (wea, Wai Wee, Ws) a8 initial endowments, and uy = xZy3~* and up = xfy3"* , where the notation is as
defined above. Solve forthe competitive equlbrium price and answer the following questions
ratio
we
\What happens to equilibrium price when a increases? What is the economic interpretation of this observation?
'b. What happens to equilibrium price when 8 increases? What is the economic interpretation?
© Suppose a = 8.
|. Show that the equilibrium price is independent of the initial distribution of the endowments and only depends on the
, where wy and w are total endowments of good y and good x respectively.
|i, Show that the Pareto efficient allocations lig on the main diagonal ofthe Edgeworth ox. 1 French ese in G2 of GE-1, indicat the Pareto Seton the Edgeworth box
2. Solve forthe competitive equi:
Utility of agent A Utility of agent 8 -Endowment of agent A ——_Endowment of agent 8
ty Ne) GD )
MW (08) (16,8)
tut y G8) ao)
%+% maxis) | (0505) (0505)
min (6x, Ya) BF | (20,20) I 0,100)
3. Suppose we have an economy with preferences iy = 214 + and up = e*#1% and intial endowments (2.2) and (3) respectively
Show that there no equllbcum with pies (3, 1) (No need to find the actual equilib.)
4, Inthe context of @ pure exchange economy, it possible te have a Pareto efficient allocation tht isnot an eouilriom that can be
achuved by any competitive Wading process? Explain with the help ofa diagram.
GPA Classes
a. Draw a well-labelled rough sketch of the production possibilities
frontier for the above Edgeworth box in production. Clearly mark and
label the points corresponding to A, B, C, Ox and Oy in your diagram.
b. Which good is more capital intensive?
2. Suppose the goods X and Y are produced using capital (k) and labour (The
production functions are:
xewosps
kbsiis
Total availability of capital in the economy is 100 units and labour is 400
units.
a. Derive the equation of the production possibilities frontier. Plot the
equation.
b. Is this production possibilities frontier concave?
GPA Classes
3. Let two goods be X and ¥ and two factor inputs L and K. Total labour in the
economy is 20 units, and total K = 120 units. Production of X is given by X =
min (6Lx, K:) and that of Y is given by Y = L#°Kj7°. Draw the edgeworth box
diagram and find the wage rental equilibrium in the economy.
4 Given constant returns to scale and homogenous inputs, can the PPF be
concave? Explain. Discuss how the existence of specialized inputs may be a
reason for the concavity of the PPF.
= Problem Set GT-1: Game Theory
1. On the basis of the following payoff matrix, state whether the following
statements are true, false or incomplete. If true, explain briefly. If false
or incomplete, correct/complete the statement.
Player 2
Player 1
o]@|>
"
we
¥
N
a. Action B strictly dominates action C for player 1.
b. Action X is strictly dominated by Y for player 2.
¢. Cis the best response for player 1 because it gives him maximum
payoff.
2. For the following payoff matrix, determine whether the given
statements are true or false. Write the correct statement, if false.
Player 2
x Y
a_ [al 21 | 43
a [Bp / 30 22
a. One of the players has an action which is a best response for more
than one action of the other player.
b. The equilibrium for the game is (4,3)
c. Both players have a strictly dominated action. {jSSmaaf)
3. Find the equilibrium of the following game by iteratively eliminating
strictly dominated strategies.
142] 2] oclR
uv fias[ial|ae
M [4.1/3.3 |62
D [92.8 | 81
4. Consider the following game. If both players play the strategy F (or
Football), Player 1 gets a pay-off of 5, whereas Player 2 gets 1; if they both
play O (or Opera), Player 1 gets a pay-off of 1 whereas Player 2 gets 5; if
Player 1 plays Fand Player 2 plays O, they both get a pay-off of 0. If Player
1 plays O and Player 2 plays F, they both get a pay-off equal to 4.
Identify the actions and action profiles of the game. Reoresent the eame
in normal form 5. A strictly dominant action for player i is one which gives strictly higher
payoff than all other actions of player j, for ail action profiles a, of other
players. Do the games in Qi, 2 and 3 above have a strictly dominant action
for any player? In general, answer the following:
a. If an action is strictly dominant for player i, will it be in the player's
best response set for some a)?
b. If an action is in the best response set for some a, will it also be a
strictly dominant action gece Problem Set GT-2
Jearh ny notation th: is 1s
questions are listed roughly in ascending order of difficulty level. There are 4 pages in the document.
1. Answer the following questions for the given payoff matrix
Player 2
L c R
32] 52 [05,4
43|7,05| 3,1
5,2 9,-2| 23
Player 1
o
a. Identify the strictly dominated actions for each player, if any.
b. Identify the pure strategy Nash equilibrium, if any.
¢. After removing the strictly dominated actions, find the mixed strategy equilibrium for
‘the game.
2. For the following game. construct the best response diagram and show that there is no
equilibrium in strictly mixed strategies.
Player 2
xX Y
5 2,2 | 0,0
= [| 00 | 00
3. Two firms A and B are engaged in a joint R&D project. Each firm has two options: to put in
effort (E), or not put in effort (N). The cost of putting in effort is some fixed amount C &
(0,1). If they both put in effort, the project is successful and the total output is 2, which is
equally divided between them. If either firm doesn’t put effort, the output is zero.
a. Model the situation as a simultaneous game. Draw the best response diagram and
identify all equilibria.
4. Construct an example (with 2 players and 2 actions), where the unique Nash equilibrium (in
pure strategies) is not a strict Nash. 5. For what values of the parameters is the following game a Prisoner's Dilemma with (8, 8) as.
the unique equilibrium?
Player 2
A [8
a [A | xx | zy
= |e yz | 00
6. An amount of Rs. 4 will be distributed between two people A and B. The two people will be
asked to simultaneously write a whole number between 0 and 4 on a piece of paper. if the
sum of the two numbers is at most 4, then both of them will get the number of rupees that
they have written. If the sum exceeds 4 and both of them have written the same number then
both will get Rs. 2 else the one who has written the smaller number will get the number of
rupees he has written and the other will get 4 minus the amount given to the other player.
Determine the best responses of each player to the other player's actions, plot them in a dot-
circle diagram and find all pure strategy Nash equilibria of the game.
(Hint: The dot-circle diagram is given in Figure 37.1 in the book (Osborne))
Player 2
x Y
A | 48 | 00
B | 8,20 P,Q
Play
er.
Ifin a simultaneous game, (B, Y) is the only Nash equilibrium of this game, what must be
true of P and Q? For these values, is the Nash equilibrium strict?
8. Consider the game below:
Player 2
x Y
A | 140,140 | 20,160
B | 90+x,90-X | 50,50
a. For what values of X, do both players have a strictly dominated action?
Player
1
b. Whats the Nash equilibrium for this game?
cc. For what values of X do none of the players have a strictly dominated action? Each hunter in a group of 10 hunters has two options, either to catch a Stag or Hare. If at least
5 or more hunters together pursue the stag, they are guaranteed to catch it and share it
equally among the ones who caught it. (Less than 5 people can't catch it) Ahare is guaranteed.
to be caught even if one person pursues it and need not be shared with others. Assume that
there is only one stag and 10 hares.
a. What will be the pure strategy Nash equilibrium of the Strategic game if each hunter
a
prefers." of the stag to the whole hare?
ah
b. What will be the pure strategy Nash equilibrium if each hunter prefers" of the
stag to a hare, but prefers a hare to any fraction smaller that =" ofthe hare?
(Hint: payoff matrix can’t be drawn. Take different cases and present a verbal
argument to identify the Nash, by using the “no unilateral deviation” definition of
the Nash equilibrium. For example, isa unilateral deviation profitable if all are
pursuing a stag in part (a)? Is a unilateral deviation profitable if 3 people are
pursuing the stag?)
10. Two people are engaged in a joint project. if each person i = 1,2 putsin the effort x, € [0,1],
the outcome of the project is 41,2. The cost of effort is x; and x respectively. The output
of the project is split equally between the two people irrespective of the individual effort
levels. Solve the game in pure strategies.
(Hint: The action set doesn’t comprise of finite actions in this case, so a payoff matrix can’t be
drawn. Wi
out the net payoff to each player i, for different values of x_;. To find the best
response, maximise the net payoff for i, with respect to x,. Be careful, first order conditions
may not work here: it is an optimization problem over a closed interval. Graphing the best
response will help to find the equilibria.)
11. Consider the game of rock, paper and scissors played between two players A and B. Rock
beats scissors, scissors beat paper and paper beats rock. Whoever wins, gets one point, the
‘one who loses gets ~1, and if there is a tie, both get 0. Construct the pay-off matrix. Solve for
the pure strategy Nash equilibria, if any. 12. For the above game with three actions, an arbitrary mixed strategy profile can be written as
12) where py, 2 are the probabilities allotted to
(Pu Pa Ps —Pai dade 1 a4 —
actions R and P by the first player, and q.,q2 are the probabilities allotted to actions Rand P
by the second player.
2,2,2:2,2,3) isa Nash equilibrium. (Hint
For this game, show that the strategy profile (
show that unilateral deviation from this profile does not improve expected payoff for either
player),
Als calulate expected payotts for player 1 forthe strategy profiles (2,2,
(£.5.0:5.4,2) and hence show that @.,2:8.2
3) is not a Nash equilibrium.
Questions from the book
Osborne
Exercise 18.1 (Hermaphrodite fish)
Exercise 41.1 (Strict and non-strict equilibria)
Exercise 42.1 (Finding Nash using best response functions)
Problem Set: GT-3
r
Austin starts a sequential game where he can go up to Jane and
either snatch her book or refrain. If he refrains, he gets no utility
and Jane gets 10. If he snatches and Jane doesn’t retaliate,
Austin gets 5 and Jane gets -10. If she retaliates, he gets -5 and
she gets x-10.
a. Draw the extensive form of the game.
b. For what values of x will Austin snatch the book in
subgame perfect Nash equilibrium?
2. Consider Q3 in the problem set GT-2. Model the gana Glasses
sequential game, with firm A moving first.
a. Find all Nash equilibria of the sequential game.
b. Find all subgame perfect Nash equilibria
im “A Nash equilibrium requires behaviour to be rational only along the equilibrium path”. Discuss this statement.
GPA Classes
3. Model the two-player Battle of Sexes game as a sequential game
with husband playing first. Solve the game for subgame perfect
Nash equilibrium, What is the outcome along the equilibrium
path? Does the equilibrium/outcome change if wife moves first?
4. Model the following sequential game between players 1 and 2.
Player 1 starts the game and can take one of two actions, A or B.
If player 1 chooses A, player 2 can choose among actions C or D.
If player 1 chooses B, player 2 can choose between actions E or
F. The payoffs for the action profiles are: (3,0) for (A,C), (2,0) for
(A,D), (1,0) for (B,£) and (2,1) for (B,F), with player 1’s payoff
listed first.
a. Define a subgame perfect Nash caution i)
b. Identify all subzames of the given zame. GS cmesey
c. Find all Nash equilibria and SPNE of the game. 5. Consider Q7 of GT-2. Model the game in extensive form if player
1 moves first.
a. Suppose (B,Y) is the sub-game perfect Nash equilibrium
outcome. What must be true of P and Q? (Hint: what’s the
difference between equilibrium strategy profile and
outcome?)
. How do the above values compare against the restrictions
on P and Qin the simultaneous game (see solution to Q7
for GT-2)?
so
6. Consider the following sequential game between players T and
S, where T starts the game (payoffs for T are listed first). Identify
all subgames, strategies of both players, and the sub game
perfect Nash equilibrium. Is the SPNE efficient?
T Ss T
O—t +e +e 4 > an
D D D
GPA Classes
(1,0) (0,2) 3,1)
7. Identify all subgames and strategies for each player in the
following game. Find the Nash equilibria and SPNE.
(4,6)
°° GPA Classes
(9,5) Problem Set M-1: Monopoly
1, The demand curve facing a perfectly price discriminating monopolist is Q = 2000 —
0.059? + 10000. Find the optimal
10P and his cost function is given by C(Q)
quantity and profits (be carefull). Calculate deadweight loss of monopoly.
2. Write a short note on marginal cost pricing regulation for a natural monopoly. What
are the advantages of using a two-tier pricing system instead of marginal cost,
pricing?
3. Two consumers have demand curves given by q, = 24 —p, and qy = 24 — 2p,
respectively. A monopolist serving the market has constant marginal cost of 6/ut.
4, State true or false, and explain in two-three sentences.
a. A profit-making monopolist always reduces economic welfare in society.
b. Ifa monopolist is making zero profits, it means itis producing an efficient
quantity.
¢._ Ifa monopolist’s marginal revenue curve coincides with the market demand
curve, then there is no deadweight loss of monopoly.
5. Amonopolist faces two demand curves from two kinds of consumers, given by Py =
40 ~q, and pz = 20 ~ ©. The monopolist has constant marginal cost equal to 10
per unit
@. What is the optimal linear two-part tariff?
b. What is the linear two-part tariff if the monopolist could charge a different
entry fee from each consumer?
Suppose the monopolist decides to implement third-degree price
discrimination in the market. Calculate the prices, quantities and profits in
each market
6. Amonopolist caters to two groups of consumers with demand curves q, = 10 — p
and qz = 10 — 2p. The marginal cost is Rs. 2/unit.
a. If the market cannot be segmented, what will be the single price charged to
all consumers? What quantity will be sold? b. Suppose a linear two-part tariff is adopted. Calculate the prices and
quantities according to the Oi tariff rule. Show that the ‘effective’ price per
unit
is lower for the group which buys a larger number of meals.
c. Comment on your results from the parts a and b.
7. For a monopolist, if the demand curve is given by q = p~? and his constant marginal
cost is k, find the ratio of consumer surplus under monopoly to consumer surplus
under perfect competition.
Book exercises:
GPA Classes
14.3 (market for widgets, with demand curve q = 60 — p)
1488 (government subsidy) [Hint: use the inverse elasticity rule] iam
‘The production of good X affects the costs of good Y. Specifically, C¥(x) =
and C (yx) =
20x are the total cost functions of goods X and Y. Both the goods are sold in competitive
‘markets at prices 30 and 90 per unit, respectively
a. Does good ¥ face a positive or negative externality due to good X?
Find the amounts of good X and ¥ produced and their profits at the private optimum,
Find the socially optimal amounts of X and ¥.
4. Find the total profits at the social optimum. Compare the profits at the private
optimum
. Find the amount of tax/subsidy that the producer of X should be given to induce him
to produce at the socially optimal level
2. Two power plants (M and H) in city C burn coal to generate electricity and hence produce
smoke as a by-product. Reducing smoke is costly, and the total costs of abating (reducing)
smoke for each plant are cy = 5x; and cy = 7x#+ 10xq. The total benefit of smoke
abatement to the city is given by 100(x;; + xu).
a. Calculate the socially optimal level of abatement for each power plant. (Hint: what is
the net benefit of abatement? What willbe the objective of a social planner to achieve
the social optimal?)
b. What is the private optimal level of abatement? (Hint: producers’ objective is to
‘minimize costs).
& Sunnose a tax aft ner unit is imnased on each anwer olant. What will he the new cost
functions with the tax? How (using which condition/equation) will the plants decide
‘on their optimal level of abatement? What should be the tax rate so that the socially
‘optimum abatement is achieved? Is the tax negative or positive? 3. Consider a plant that manufactures dynamite (4) and a nearby farm producing tomatoes (t)
‘The cost of production of dynamite is cp(d,n)
© (n—2)? where d is the amount of
dynamite produced and nis the intensity of use of nitrogen in the production process. The
intensity of using nitrogen is related to the by-product ammonia, which affects the cost of
production of tomatoes such that cy
arepg =P, = 1.
2. Is the production externality described above positive or negative? Explain
mathematically and verbally
Find the privately optimal level of dynamite and tomatoes.
Find the joint profits at the privately optimal level
What isthe socially optimal level of d and t? GPA Classes
‘What isthe joint profit at the socially optimal level? Comparing to the answer to part
« is the private optimal efficient this case?
f._ Is the externality being over-produced or under-produced at the private optimal?
= +2r—nt. The prices of tomatoes and dynamite
4, The demand for energy efficient appliances is given by