SYLLABUS FOR MSQE

(Program Code: MQEK and MQED) 2016

Syllabus for PEA (Mathematics), 2016

Algebra: Binomial Theorem, AP, GP, HP, Exponential, Logarithmic Series,

Sequence, Permutations and Combinations, Theory of Polynomial Equations;
(up to third degree).
Matrix Algebra: Vectors and Matrices, Matrix Operations, Determinants.
Calculus: Functions, Limits, Continuity, Differentiation of functions of one
or more variables. Unconstrained Optimization, Definite and Indefinite
Integrals: Integration by parts and integration by substitution, Constrained
optimization of functions of not more than two variables.
Elementary Statistics: Elementary probability theory, measures of central
tendency, dispersion, correlation and regression, probability distributions,
standard distributions-Binomial and Normal.

Syllabus for PEB (Economics), 2016

Microeconomics: Theory of consumer behaviour, theory of production,

market structure under perfect competition, monopoly, price discrimination,
duopoly with Cournot and Bertrand competition (elementary problems) and
welfare economics.
Macroeconomics: National income accounting, simple Keynesian Model of
income determination and the multiplier, IS-LM Model, models of aggregate
demand and aggregate supply, Harrod-Domar and Solow models of growth,
money, banking and inflation.

PEB (2016)
Answer any 6 questions. All questions carry equal marks.
1. Consider an exchange economy consisting of two individuals 1 and 2, and two goods,
X and Y. The utility function of individual 1 is U1 = X1 + Y1 , and that of individual 2 is
min{X2 , Y2 }, where Xi (resp. Yi ) is the amount of X (resp. Y ) consumed by individual i,
where i = 1, 2. Individual 1 has 4 units of X and 8 units of Y, and individual 2 has 6 units
of X and 4 units of Y to begin with.
(i) What is the set of Pareto optimal outcomes in this economy? Justify your answer.
(ii) What is the competitive equilibrium in this economy? Justify your answer.
(iii) Are the perfectly competitive equilibria Pareto optimal?
(iv) Now consider another economy where everything is as before, apart from individual
2s preferences, which are as follows: (a) among any two any bundles consisting of X and
Y, individual 2 prefers the bundle which has a larger amount of commodity X irrespective
of the amount of commodity Y in the two bundles, and (b) between any two bundles with
the same amount of X, she prefers the one with a larger amount of Y . Find the set of
Pareto optimal outcomes in this economy. [6]+[6]+[2]+[6]
2. Consider a monopolist who can sell in the domestic market, as well as in the export
market. In the domestic market she faces a demand pd = 10 qd , where pd and qd are
domestic price and demand respectively. In the export market she can sell unlimited
2
quantities at a price of 4. Suppose the monopolist has a single plant with cost function q4 .
(a) Solve for total output, domestic sale and exports of the monopolist.
(b) Solve for the domestic and world welfare at this equilibrium. [10]+[10]
3. A consumer consumes electricity, denoted by E, and butter, denoted by B. The per
unit price of B is 1. To consume electricity the consumer has to pay a xed charge R, and
a per unit price of p. If consumption of E 12 then p = 1; otherwise p = 2. The utility
function of the consumer is 3E + B, and her income is I > R.
(i) Draw the consumers budget line.
(ii) If R = 0 and I = 1, nd the consumers optimal consumption of E and B.
(iii) Consider a dierent pricing scheme where there is a rental charge of R and the price
of E is 1 for any X 1/2, and every additional unit beyond 12 is priced at p = 2. Find the
optimal consumption of B and E when R = 1 and I = 3. [7]+[7]+[6]
1

4. A monopoly publishing house publishes a magazine, earning revenue from selling the
magazine, as well as by publishing advertisements. Thus R = q.p(q) + A(q), where R is
total revenue, q denotes quantity, p(q) is the inverse demand function, and A(q) is the
advertising revenue. Assume that p(q) is decreasing and A(q) is increasing in q. The cost
of production c(q) is also increasing in the quantity sold. Assume all functions are twice
dierentiable in q.
(i) Derive the prot-maximising outcome.
(ii) Is the marginal revenue curve necessarily negatively sloped?
(iii) Can the monopolist x the price of the magazine below the marginal cost of production?[7]+[7]+[6]
5. Consider a Solow style growth model where the production function is given by
Yt = At F (Kt , Ht )
where Yt = output of the nal good, Kt is the capital stock, At = the level of technology,
and Ht = the quantity of labor used in production (the labor force). Assume technology
is equal to At = A0 (1 + )t where > 0 is the growth rate of technology, A0 is the time 0
level of technology, and Ht+1 = (1+n)Ht , where n > 0 is the labour force growth rate. The
production function is homogenous of degree 1 and satises the usual properties. (Assume
that inputs are essential and Inada conditions hold). Assume that capital evolves according
to
Kt+1 = (1 )Kt + It
where It is the level of investment.
(i) Dene yt =

Yt
Ht .Show

that
yt = At f (kt )

where f (k) = F (k, 1).

(ii) Dene kt =

Kt
Ht

and it =

It
Ht .

Show that
kt+1 =

(1 )kt + it
1+n

(iii) Suppose the savings rate is given by st = yt where [0, 1]. Derive the condition
that determines the steady state capital stock when = 0. How many non-zero steady
states are there ?
(iv) Let t = kt+1
kt be the gross growth rate. Suppose = 0. Derive an expression for t
dt
and evaluate and discuss the sign for dk
.
t

(v) Let f (kt ) = kt , A0 = 1, and > 0. Along a balanced growth path show that
and yt+1
yt grow at the same rate. [2]+[3]+[5]+[5]+[5]

kt+1
kt

6. Consider the aggregate supply curve for an economy given by

Pt = Pte (1 + )F (ut , z)
where Pt = actual price level at time period t, Pte = expected prices at time t, and the
function, F, given by,
F (ut , z) = 1 ut + z
captures the eects of the unemployment rate (ut ) at time t and the level of unemploment
benets (z) on the price level (through their eects on wages). Assume > 0 denotes the
monopoly markup. Assume and z are constant.
(i) Show that the aggregate supply curve can be transformed to be written in terms of
t (the ination rate) and the expected ination rate, te , i.e. t = te + ( + z) ut ,
P e Pt
where t = Pt1PtPt and te = t+1Pt . What is this equation called ? Briey interpret it.
(ii) Now assume that te = t1 where > 0. What is this equation called ? Re-write
the equation in the above bullet and interpret when = 1 and = 1.
(iii) Let te = t1 Derive the natura rate of unemployment, and express the change in
the ination rate in terms of the natural rate. Briey interpret this equation.
(iv) How would you think about wage indexation in this model ? Does wage indexation
increase the eect of unemployment on ination? Assume te = t1 . [8]+[3]+[6]+[6]
7. Consider an inter-temporal choice problem in which a consumer maximises utility,
u(c2 )
,
U (c1 , c2 ) = u(c1 ) +
1+
where ci is the consumption in period i, i = 1, 2, and is the discount factor (measure of
the consumers impatience), subject to
c2
Y2
c1 +
= Y1 +
W,
1+
1+r
where Yi is the consumers income in period i = 1, 2, and r is the rate of interest. Assume
ci > 1 i.
(i) Let u(ci ) = log(ci ). Find a condition such that there is consumption smoothing.
(ii) Plot the two cases where (a) the consumer biases its consumption towards the future,
and (b) where the consumer biases it consumption towards the present. Put c2 on the
vertical axis and c1 on the horizontal axis.
(iii) Suppose there is consumption smoothing. Solve for c1 = c1 (r, Y1 , Y2 ). Interpret this
equation.

(iv) Dene YP , the permanent income, as that constant stream of income (YP , YP ) which
gives the same lifetime income as does the uctuating income stream (Y1 , Y2 ). What does
this imply about the optimal choice of c1 , c2 , and YP ? Interpret your result graphically.
[5]+[6]+[4]+[5]
8. Consider a cake of size 1 which can be divided between two individuals, A and B. Let
(resp. ) be the amount allocated to A (resp. B), where + = 1 and 0 , 1.
Agents As utility function is uA () = and that of agent B is uB () = .
(i) What is the set of Pareto optimal allocations in this economy?
(ii) Suppose A is asked to cut the cake in two parts, after which B can choose which of
the two segments to pick for herself, leaving the other segment for agent A. How should A
cut the cake?
(iii) Suppose A is altruistic, and his utility function puts weight on what B obtains, i.e.
uA (, ) = + , where is the weight on agent Bs utility. (a) If 0 < < 1, does the
answer to either 8(i) or 8(ii) change? (b) What if > 1? [5]+[5]+[10]
9. A rm uses four inputs to produce an output with a production function
f (x1 , x2 , x3 , x4 ) = min{x1 , x2 } + min{x3 , x4 }.
(i) Suppose that 1 unit of output is to be produced and factor prices are 1, 2, 3 and 4 for
x1 , x2 , x3 and x4 respectively. Solve for the optimal factor demands.
(ii) Derive the cost function.
(iii) What kind of returns to scale does this technology exhibit? [6]+[8]+[6]
10. Consider an IS-LM model where the sectoral demand functions are given by
C = 90 + 0.75Y,
G = 30, I = 300 50r,
M
M
( )d = 0.25Y 62.5r, ( )s = 500.
P
P
Any disequilibrium in the international money market is corrected instantaneously through
a change in r. However, any disequilibrium in the goods market, which is corrected through
a change in Y , takes much longer to be eliminated.
(a) Now consider an initial situation where Y = 2500, r = 1/5. What is the change in
the level of I that must occur before there is any change in the level of Y ?
(b) Draw a graph to explain your answer.
(c) Calculate the value of (r, Y ) that puts both the money and goods market in equilibrium. What is the value of investment at this point compared to (r = 2, Y = 2500)?
[10]+[5]+[5]