Group A

1. Answer the following questions.

(a) Find all maxima and minima of the function 𝑓(𝑥, 𝑦) = 𝑥𝑦,
subject to the constraints 𝑥 + 4𝑦 = 120 and 𝑥, 𝑦 ≥ 0.
(b) Find the points on the circle 𝑥 + 𝑦 = 50 which are closest to
and farthest from the point (1,1).
(c) For what values of 𝛼 are the vectors (0,1, 𝛼), (𝛼, 1,0) and
(1, 𝛼, 1) in ℛ linearly independent?
[10+15+5]

2. Let 𝑓: ℛ → ℛ be a continuous function.

(a) Let 𝑄 denote the set of rational numbers. Prove that, if

𝑓(𝑄) ⊆ {1,2,3, … }, then 𝑓 is a constant function.
(b) Calculate the value of 𝑓′(0) when 𝑓 is differentiable and
|𝑓(𝑥)| ≤ 𝑥 for all 𝑥 ∈ ℛ.
[20+10]

1
3. Suppose a set of 𝑁 = {1,2, … , 𝑛} political parties participated in an
election; 𝑛 ≥ 2. Suppose further that there were a total of 𝑉
voters, each of whom voted for exactly one party. Each party
𝑖 ∈ 𝑁 received a total of 𝑉 votes, so that 𝑉 = ∑ 𝑉 . Given the
vector (𝑉 , 𝑉 , … , 𝑉 ), whose elements are the total number of votes
received by the 𝑛 different parties, define 𝑃 (𝑉 , 𝑉 , … , 𝑉 ) as the
probability that two voters drawn at random with replacement
voted for different parties and define 𝑃 (𝑉 , 𝑉 , … , 𝑉 ) as the
probability that two voters drawn at random without replacement
voted for different parties. Answer the following questions.

(a) Derive the ratio as a function of 𝑉 alone.

(b) Consider the special case where 𝑉 = for all 𝑖 ∈ 𝑁. For this
case, find the probabilities 𝑃 and 𝑃 .
[25+5]

Group B
4. Consider an agent living for two periods, 1 and 2. The agent
maximizes lifetime utility, given by:
1
𝑈 (𝐶 ) + 𝑈 (𝐶 ),
(1 + 𝜌)
where 𝜌 > 0 captures the time preference, while 𝐶 and 𝐶 are the
agent’s consumption in period 1 and period 2, respectively. The
agent supplies one unit of labor inelastically in period 1, earning a
wage 𝑤. A portion of this wage is consumed in period 1 and rest is
saved (denoted 𝑠). In period 2 the agent does not work, but receives
interest income on the savings. Principal plus the interest income on
savings goes to finance period 2 consumption. Thus, 𝐶 + 𝑠 = 𝑤 and
𝐶 = (1 + 𝑟)𝑠, where 𝑟 is the rate of interest. Assume that the per
period utility function can be represented by (and only by) any
positive linear transformation of the form 𝑈(𝐶) = , where
0 < 𝜃 < 1.
2
 (a) Demonstrate, deriving your claim, how optimal savings, 𝑠, would
respond to changes in 𝑟 .
(b) Now suppose, initially, 𝑟 = 𝜌. What happens to optimal savings,
𝑠, if 𝑟 and 𝜌 increase by the same amount (so that the condition
𝑟 = 𝜌 continues to hold)?
[20+10]

5. A profit maximizing monopolist produces a good with the cost

function 𝐶(𝑥) = 𝑐𝑥, 𝑐 > 0, where 𝑥 is the level of output, 𝑥 ≥ 0. It
sells its entire output to a single consumer with the following utility
function:
𝑢(𝑦) = 𝜃 𝑦 − 𝑇(𝑦);

where 𝑦 is the amount of the good purchased by the consumer and T

is the payment made by the consumer to the monopolist to purchase
the output; 0 ≤ 𝑦 ≤ 𝑥; 𝜃 > 0. Suppose

𝑇(𝑦) = 𝑝𝑦 + 𝑡;
where 𝑝 ≥ 0, 𝑡 ≥ 0 if 𝑦 > 0, and 𝑇(0) = 0. Thus, in order to
purchase any positive amount of the good, the consumer may have to
pay a lump-sum amount 𝑡, or a per unit price 𝑝, or both.
(a) Find the profit of the monopolist when it can choose any
non-negative combination of 𝑡 and 𝑝.
(b) Find the profit of the monopolist when it can choose any
non-negative p, but is forced to set 𝑡 = 0. Calculate how this
profit relates to the profit derived in part (a) and explain your
result.
(c) Calculate when social surplus is higher, explaining your result.
(d) Calculate when consumer’s surplus is higher, explaining your
result.
[10+10+5+5]

3
6. Answer the following questions.
(a) Let the input demand functions of a profit-maximizing
competitive firm operating at unit level of output be given by:
( / ) ( / )
𝑥 = 1 + 3𝑤 𝑤 and 𝑥 = 1 + 𝑏𝑤 𝑤 ;

where 𝑤 and 𝑤 are input prices. Find the values of the

parameters 𝑎, 𝑏 and c.

(b) Check whether the following data, summarizing the observed

input-output choices of a competitive firm under three different
output-input price situations, are consistent with the hypothesis of
profit maximization by that firm.

P w q x
Observation 1 50 20 20 25
Observation 2 45 15 24 36
Observation 3 40 20 16 16

Here 𝑝 and 𝑤 denote output price and input price, respectively,

while 𝑞 and 𝑥 denote, respectively, the units of output supplied
and input demanded by the firm. Each of the three rows specifies
an observation of the output-input price configuration and the
output-input choice of the firm under that particular price
configuration.

(c) Suppose, for the production function 𝑓(𝑥 , 𝑥 ), the cost function
of a competitive firm is 𝑐(𝑞; 𝑤) = 𝑤 𝑤 𝑞, where 𝑤 =
(𝑤 , 𝑤 ) is the input price vector and 𝑞 is the level of output;
𝛼 ∈ (0,1). Derive the conditional input demand functions and the
production function of the firm.
[10+10+(5 +5)]

4
 Group C

7. Consider a world economy consisting of Home (H) and Foreign (F).

Each of these countries produces a single good that is both consumed
domestically and exported. Let Foreign output be the numeraire and
let p be the relative price of the H produced good. Assume full
employment in both countries, so that H produces a fixed output Y
and F produces a fixed output Y  . Let E be the Home expenditure
in terms of its own good and let E  be the Foreign expenditure
measured in terms of the foreign good. We will treat E as a
parameter of the model, while 𝐸 ∗ is endogenous. Assume that
consumers have Cobb-Douglas utility functions with fixed
expenditure shares. Let  be the share of expenditure of Home
consumers on the Foreign produced good and let   be the share of
expenditure of Foreign consumers on the Home produced good.
Assume further 1      (i.e., the expenditure share of Home
consumers on the Home produced good is greater than the
expenditure share of Foreign consumers on the Home produced
good). World income equals world expenditure, and goods markets
clear.

Now, suppose E falls.

(a) What will happen to 𝑝?

(b) What will happen to the trade balance of Home, denominated in

units of the Foreign good (i.e., to 𝑝(𝑌 − 𝐸))?

Prove your claims.

[20+10]

5
8. Consider the Solow growth model with constant average propensity to
save 𝑠, labor supply growth rate 𝑛, no technological progress and
zero rate of depreciation. Let 𝑣 denote the capital-output ratio.

(a) Prove that, at the steady state, = 𝑛.

(b) Now suppose that, in some initial situation, > 𝑛. Explain how
market forces will operate to restore, over time, the equality
= 𝑛.

(c) In the process of adjustment in (b), in which direction will the real
wage and real rental on capital change? Explain.
[8+16+6]

9. Answer the following questions.

(a) Using a simple Keynesian model of income determination, derive
and explain the conditions under which a rise in the marginal
propensity to save will reduce aggregate savings in the economy.
(b) Using a model of aggregate demand and aggregate supply, explain
how an increase in fuel prices would impact aggregate output,
employment and the price level.
[15+15]