MEC-001 - ENG-J12 - Compressed PDF
MEC-001 - ENG-J12 - Compressed PDF
MEC-001 - ENG-J12 - Compressed PDF
SECTION - A
Answer any two questions form this section. 2x20=40
1. Consider a world with two agents, A and B. There
are two goods 1 and 2 . The utility functions of
A and B are given as U A = X.?" XA2 and
UB = XB1 XB2• Their initial endowments are
WA =(1,2) and WB =(2,1)
(a) Draw the Edgeworth Box for the agents
considering their initial endowments and
commodity consumptions.
Lr.)
p (b) Find the contract curve through your
Lc) Edgework Box.
CD
(c) Find the demand functions of A and B for
prices Pi,P2 and incomes mA of A and mB
of B.
(d) Find the competitive equilibrium price P*
and equilibrium allocation
()CAP A2,X*B1, X*B2) of this economy.
MEC-001 1 P.T.O.
2. A monopoly insurance company provides
accident insurance to two types of customers; low
risk and high risk, for whom the probability of an
accident is 0.25 and 0.5. There are customers in
the groups of low and high risks in equal number.
Without insurance, each customer's wealth is 16
if there is no accident but zero if there is an
accident. Customers utility function of wealth is
given as u(w) = . The insurance company
cannot identify the type of customer's when they
apply for insurance contract. The company plans
to offer two contracts; First, a payout of 8 in case
there is an accident and requires the customer to
pay a premimum of 7. Second, .a payout of 16 in
case an accident happens but requires customers
to pay a premiiim of 10.
(a) Determine for the low risk and high risk
customers which if any, of these contract
they will buy.
(b) Calculate the insurance company's expected
profit if it offers these contracts. comment
how does the company would like to screen
its customers with these contracts.
MEC-001 2
4. A consumer's utility function is given as
MEC-001 3 P.T.O.
SECTION - B
5. Answer any four questions from this section. 4x10=40
(a) How would you differentiate a static game
from that of a dynamic game ?
(b) Suppose the following game is played for a
infinite number of periods. If the players
are discounting the future at the rates of 8A
and 6B respectively, find the conditions
under which they sustain the outcome (2,2)
in every period.
Player B
Low High
Player A Low (1, 1) (4, 0)
High (0, 4) (2, 2)
MEC-001 4
(a) Will Sita accept the insurance Explain
(b) What is the maximum amount that Sita
would pay for the insurance ?
MEC-001 5 P.T.O.
SECTION - C
MEC-001 6