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ECON_702_Mid_Term_2024

The document outlines the mid-term examination for the MPhil in Economics program at Tribhuvan University, focusing on Microeconomics. It includes various problems related to utility functions, demand functions, profit functions, and welfare theorems, requiring detailed explanations and derivations. Students are tasked with solving specific problems in groups, with a total of 30 marks available.

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5 views1 page

ECON_702_Mid_Term_2024

The document outlines the mid-term examination for the MPhil in Economics program at Tribhuvan University, focusing on Microeconomics. It includes various problems related to utility functions, demand functions, profit functions, and welfare theorems, requiring detailed explanations and derivations. Students are tasked with solving specific problems in groups, with a total of 30 marks available.

Uploaded by

SharmaDeep
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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TRIBHUVAN UNIVERSITY

Faculty of Humanities and Social Sciences


Central Department of Economics
MPhil in Economics
Mid Term (Aug 09, 2024)

Time: 1:30 Hrs Microeconomics (ECON. 702) Full Mark: 30

Group A: Solve any one (1x15=15 Marks)


1. Let the utility function and budget constraint for a consumer are given by u = xα1 xβ2
with (α + β = 1) and m = p1 x1 + p2 x2 respectively. Solve the following problems,
providing detailed explanations and derivations where necessary. (5x3=15 Marks)
(a) Derive the Marshallian demand functions x∗1 (p1 , p2 , m) and x∗2 (p1 , p2 , m). Then,
find the indirect utility function V (p1 , p2 , m).
(b) Determine the expenditure function E(p1 , p2 , u) that represents the minimum
expenditure required to achieve a given level of utility u.
(c) Find the compensated (Hicksian) demand functions h1 (p1 , p2 , u) and h2 (p1 , p2 , u)
that minimizes expenditure while achieving the utility level u.
∂E ∂L
(d) State and prove Shephard’s Lemma. [Hint: ∂p i
= ∂p i
= xi (p1 , p2 , m)]
∂V ∂L
(e) State and prove Roy’s Identity. [Hint: ∂pi
= ∂pi
]
2. Assume that X is a coal-firing bricks firm and Y is the traditional laundry. If firm Y
has the right to clean air and firm X gets pollution permit at (tx ) price, their respective
profit functions be:
πy = py .y(Ly , X) − w.Ly + tx .X (1)
πx = px .x(Lx ) − w.Lx − tx .x(Lx ) (2)
Similarly, if X has the right to pollute, and Y has to pay the (b) amount as a bribe
for reducing the level of X’s output from (X̄) threshold level, their respectively profit
functions be:
πy = py .y(Ly , X) − w.Ly − b(X̄ − X) (3)
πx = px .x(Lx ) − w.Lx + b[X̄ − x(Lx )] (4)
Solve these problems and prove that the final outcome will be the same for whoever gets
the initial property right. What basic assumptions were made for this Coasean solution
that claims “externalities can be internalized”? (3+3+3+3+3=15 Marks)

Group B: Solve any two (2x7.5 =15 Marks)

3. “All Giffen goods are inferior, but the converse is not true”, Justify. (7.5 Marks)
4. Prove Hotelling’s lemma when the cost function of a firm is C = rK + wL, and its
constant returns to scale production constraint is Q = K α Lβ . (7.5 Marks)
5. Briefly state and describe “First and Second” welfare theorems. (3+4.5=7.5 Marks)

*Best Wishes*

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