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MEC101 Assignment Answers

The document outlines an assignment for MEC 101: Microeconomic Analysis, covering various topics such as production functions, market failure, and game theory. Key calculations include maximum output, marginal product of labor, and conditions for least-cost combinations. Additionally, it discusses concepts like Pareto optimality, efficiency wages, and Cournot equilibrium.

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16 views2 pages

MEC101 Assignment Answers

The document outlines an assignment for MEC 101: Microeconomic Analysis, covering various topics such as production functions, market failure, and game theory. Key calculations include maximum output, marginal product of labor, and conditions for least-cost combinations. Additionally, it discusses concepts like Pareto optimality, efficiency wages, and Cournot equilibrium.

Uploaded by

suryatripathi215
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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MEC 101: Microeconomic Analysis – Assignment 2024–25

Section A

Q1(a)
We are given the production function:
Q = 5 √L · K

(i) Maximum Output Calculation:


Given L = 9 and K = 9,
Q = 5 · √9 · 9 = 135
Thus, the maximum number of toys that can be produced in a day is 135.

(ii) Marginal Product of Labour (MPL):


MPL = ∂Q/∂L = (5K)/(2√L)
Substituting L = 9 and K = 9:
MPL = (5·9)/(2·3) = 7.5

(iii) Returns to Scale:


Doubling L and K: L = 18, K = 18
Q = 5 · √18 · 18 ≈ 381.6 > 2×135 = 270
Hence, the production function shows increasing returns to scale.

Q1(b)
(i) Shephard's Lemma:
Shephard's Lemma states that the partial derivative of the cost function with respect to input prices gives the condi

(ii) Least-Cost Combination:


Given: Q = 5L^0.5 K^0.3, Labour cost = ■1, Capital cost = ■2
Minimize C = L + 2K s.t. Q = 5L^0.5 K^0.3

Using Lagrangian:
L = L + 2K + λ(Q/5 - L^0.5 K^0.3)

FOCs give the condition: L = (3/5)K


This gives the least-cost input combination for a given output.

Section B
Q3(a) - Market Failure
Market failure occurs when the allocation of resources is inefficient. Causes include externalities, public goods, ma
Q3(b) - Rawls' Principles
1) Equal Liberty: Equal basic liberties for all. 2) Difference Principle: Inequalities must benefit the least advantaged
Q4(a) - Game Types
Complete info: all players know the game structure. Incomplete info: players lack info about others' payoffs/types (B
Q4(b) - Prisoner's Dilemma
Dominant strategy for both A and B is to confess. Resulting in (-5, -5), even though both would be better off not con
Q5(a) - Pareto Optimality
Conditions: 1) MRS same for all consumers, 2) MRTS same for all producers, 3) MRT = MRS. These ensure resou
Q5(b) - Expected Value and Variance
E(X) = 40, Variance = 2940, using probability-weighted sum of returns and their squares.
Q6(a) - Efficiency Wage
Higher-than-market wages reduce turnover, increase effort, attract talent, and reduce shirking. Explains involuntary
Q6(b) - Cournot Equilibrium
Q1 = Q2 = 8, Total output = 16, Market Price = 18. Solved using reaction functions and demand curve: P = 50 - 2Q
Q7 - Short Notes
(a) vNM theory: Expected utility maximization under uncertainty.
(b) Slutsky's Theorem: Separates substitution and income effects.
(c) Arrow-Pratt Measure: Quantifies risk aversion.
(d) Bergson-Samuelson Function: Aggregates individual utilities into a social welfare function.

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