Entrance Examination for M. A.

Economics, 2014

Option A (Series 01)

Time. 3 hours Maximum marks. 100

General Instructions. Please read the following instructions carefully:

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EEE 2014 A 01 1

Before you start

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of each page is marked with EEE 2014 A 01. Report any inconsistency
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work, to do your calculations and drawings. No other paper will be
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You may begin now. Best Wishes!

Part I

• This part of the examination consists of 20 multiple-choice questions.

Each question is followed by four possible answers, at least one of which
is correct. If more than one choice is correct, choose only the ‘best
one’. The ‘best answer’ is the one that implies (or includes) the other
correct answer(s). Indicate your chosen best answer on the bubble-
sheet by shading the appropriate bubble.
• For each question, you will get: 1 mark if you choose only the best
answer; 0 mark if you choose none of the answers. However, if you
choose something other than the best answer or multiple an-
swers, you will get −1/3 mark for that question.

n+1
Question 1. Let an = 1 + n1 , n = 1, 2, .... Then the sequence (an )∞

n=1
(a) is an increasing sequence.
(b) first increases, then decreases.
(c) is a decreasing sequence.
(d) first decreases, then increases.
Answer (c).

Question 2. Let M, A, B, C be respectively the four matrices below:

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       

4 7 ,
1 1 ,
1 2 ,
1 1 .
7 9 1 1 3 4 4 5
Then M = xA + yB + zC,
(a) but x, y, z are not unique.
(b) z = −1
(c) z = −1 and z = −2 both can hold.
(d) x, y, z are unique but z = 2.
Answer (b).

Question 3. Let f be a continuous function from [a, b] to [a, b], and is dif-
ferentiable on (a, b). We will say that point y ∈ [a, b] is a fixed point of f if
y = f (y). If the derivative f 0 (x) 6= 1 for any x ∈ (a, b), then f has
(a) has multiple, and an odd number of, fixed points.
(b) no fixed points in [a, b].
(c) has multiple, but an even number of, fixed points.
(d) exactly one fixed point in [a, b].
Answer (d).

Question 4. Which of the following statements is true for all real numbers
a, b with a < b ?
(a) sin b − sin a ≤ b − a.
(b) sin b − sin a ≥ b − a.
(c) | sin b − sin a| ≥ b − a.
(d) | sin b − sin a| ≤ |b − a|.
Answer (d).

Question 5. Let O(0, 0), P (3, 4) and Q(6, 0) be the vertices of a triangle
OP Q. If a point S in the interior of the OP Q is such that triangles OP S,
P QS and OQS have equal area, then the coordinates of S are:
(a) (4/3, 3).
(b) (3, 2/3).
(c) (3, 4/3).
(d) (4/3, 2/3).
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Answer (c).

The following data is the starting point for Questions 1-4. Con-
sider an exchange economy with two agents, 1 and 2, and two goods, X
and Y . Agent 1’s endowment is (0, 10) and Agent 2’s endowment is (11, 0).
Agent 1 strictly prefers bundle (a, b) to bundle (c, d) if, either a > c, or
a = c and b > d. Agent 2 strictly prefers bundle (a, b) to bundle (c, d) if
min{a, b} > min{c, d}. For both agents, we say that bundle (a, b) is indif-
ferent to bundle (c, d) if, neither (a, b), nor (c, d), is strictly preferred to the
other.

Question 6. This exchange economy has

(a) one competitive equilibrium allocation
(b) two competitive equilibrium allocations
(c) an infinite number of competitive equilibrium allocations
(d) no competitive equilibrium allocations
Answer: (a)

Question 7. Which of the following changes makes (pX , pY ) = (1, 0) a com-

petitive equilibrium price vector?
(a) agent 2’s endowment changes to (9, 0)
(b) agent 2’s endowment changes to (10, 0)
(c) agent 1’s endowment changes to (0, 12)
(d) none of the above
Answer: (d)

Question 8. Suppose only agent 2’s preferences are changed. The changed
preferences of agent 2’s become identical to those of agent 1. Then,
(a) there is no equilibrium price ratio
(b) both of the following are true
(c) pX /pY = 0 is an equilibrium price ratio
(d) pY /pX = 0 is an equilibrium price ratio
Answer: (a)
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Question 9. Suppose only agent 2’s preferences are changed. The changed
preference is such that agent 2 strictly prefers bundle (a, b) to bundle (c, d)
if, either b > d, or b = d and a > c. Then,
(a) there is no equilibrium price ratio
(b) both of the following are true
(c) pX /pY = 0 is an equilibrium price ratio
(d) pX /pY > 0 is an equilibrium price ratio
Answer: (d)

Question 10. Suppose only agent 1’s preferences are changed. After change,
agent 1’s preferences become identical to those of agent 2. Then,
(a) there is no equilibrium price ratio
(b) both of the following are true
(c) pX /pY = 0 is an equilibrium price ratio
(d) pY /pX = 0 is an equilibrium price ratio
Answer: (c)

Question 11. Suppose that we classify all households into one of two states,
rich and poor. The probability of a particular generation being in either of
these states depends only on the state in which their parents were. If a parent
is poor today, their child is likely to be poor which probability 0.7. If a parent
is rich today, their child is likely to be poor with probability 0.6. What is the
probability that the great grandson of a poor man will be poor?
(a) 0.72
(b) 0.67
(c) 0.62
(d) 0.78
Answer (b)

Question 12. Consider the experiment of tossing two fair coins. Let the
event A be a head on the first coin, the event C be a head on the second
coin, the event D be that both coins match and the event G be two heads.
Which of the following is false?
(a) C and D are statistically independent
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(b) A and G are statistically independent

(c) A and D are statistically independent
(d) A and C are statistically independent
Answer: (b)

Question 13. Let Y denote the number of heads obtained when 3 fair coins
are tossed. Then, the expectation of Z = 4 + 5Y 2 is
(a) 17
(b) 18
(c) 19
(d) None of the above.
Answer: (c)

Question 14. Let Y denote the number of heads obtained when 3 fair coins
are tossed. Then, the variance of Z = 4 + 5Y 2 is
(a) 185.5
(b) 178.5
(c) 187.5
(d) None of the above.
Answer: (c)

Question 15. Let events E, F and G be pairwise independent with P r(G) >
0 and P r(E ∩ F ∩ G) = 0. Let X C denote the complement of event X. Then,
P r(E C ∩ F C |G) =?
(a) P r(E C ) + P r(F C )
(b) P r(E C ) − P r(F C )
(c) P r(E C ) − P r(F )
(d) None of the above.
Answer: (c)

Question 16. 5 men and 5 women are seated randomly in a single row of
chairs. The expected number of women sitting next to at least 1 man equals
(a) 11/3
(b) 13/3
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(c) 35/9
(d) 37/9
Answer (c).

Question 17. Let M be a 3 × 3 matrix such that M 2 = M . Which of the

following is necessarily true?
(a) M is invertible.
(b) det(M ) = 0.
(c) det(M 5 ) = det(M ).
(d) None of the above.
Answer: (c)

Question 18. Suppose a straight line in R3 passes through the point (−1, 3, 3)
in the direction of the vector (1, 2, 3). The line will hit the xy-plane at point
(a) (2, −1, 0)
(b) (1, 3, 0)
(c) (3, 1, 0)
(d) None of the above
Answer: (a)

Question 19. X is a random variable. Which of the following statements is

always true
(a) The expectation of X exists.
(b) The distribution function of X is strictly increasing.
(c) X has a median
(d) None of the above
Answer (c)

Question 20. Consider two disjoint events A and B in a sample space S.

Which of the following is correct?
(a) A and B are always independent
(b) A and B cannot be independent
(c) A and B are independent if both of them have positive probability
(d) None of the above
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Answer: (d)

End of Part I.
Proceed to Part II of the examination on the next page.
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Part II
• This part of the examination consists of 40 multiple-choice questions.
Each question is followed by four possible answers, at least one of which
is correct. If more than one choice is correct, choose only the ‘best
one’. The ‘best answer’ is the one that implies (or includes) the other
correct answer(s). Indicate your chosen best answer on the bubble-
sheet by shading the appropriate bubble.
• For each question, you will get: 2 marks if you choose only the best
answer; 0 mark if you choose none of the answers. However, if you
choose something other than the best answer or multiple an-
swers, then you will get −2/3 mark for that question.
• The following notational conventions apply wherever the following sym-
bols are used. < denotes the set of real numbers. <n denotes the n-
dimensional vector space.

√
Question 21. limn→∞ n
n=
(a) 0
(b) 0.5
(c) 1
(d) 2
Answer: (c).
Question 22. limx→0 x2 cos x1 =
 

(a) −1
(b) 0
(c) 1
(d) The limit does not exist.
Answer (b).
Question 23. Suppose A1 , A2 , . . . , is a countably infinite family of subsets
of a vector space. Suppose all of these sets are linearly independent, and that
A1 ⊆ A2 ⊆ . . .. Then ∪∞
i=1 Ai is
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(a) a linearly independent set of vectors.

(b) a linearly dependent set of vectors.
(c) linearly independent provided the vectors are orthogonal.
(d) not necessarily either dependent or independent.
Answer (a).

Question 24. If u and v are distinct vectors and k and t are distinct scalars,
then the vectors u + k(u − v) and u + t(u − v)
(a) are linearly independent.
(b) may be identical.
(c) are linearly dependent.
(d) are distinct.
Answer (d).

Question 25. Let d ((x1 , x2 ), (y1 , y2 )) = max {|x1 − y1 |, |x2 − y2 |} be the dis-
tance between two points (x1 , x2 ) and (y1 , y2 ) on the plane. Then the circle
centered at the origin with radius length equal to 1 is
(a) a square with side length = √ 1.
(b) a square with side length = 2.
(c) a square with side length = 2.
(d) a circle with radius = 1.
Answer (c).

Question 26. The set of all pairs of positive integers a, b, a < b such that
ab = b a
(a) is an empty set.
(b) consists of a single pair.
(c) consists of multiple, but finite number of, pairs.
(d) is countably infinite.
Answer (b).

Question 27. Suppose c is a given positive real number. The equation

ln x = cx2 must have a solution if
(a) c < 1/(2e).
(b) c < 1/e.
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(c) c > 1/(2e).

(d) c > 1/e.
Answer (a).

Question 28. Sania’s boat is at point A on the sea. The closest point on
land, point B, is 2 km. away. Point C on land is 6 k.m. from point B, such
that triangle (ABC) is right-angled at point B. Sanya wishes to reach point
¯ and jog the remaining distance
C, by rowing to some point P on the line BC,
to C. If she rows 2 km. per hour and jogs 5 km. per hour, at what distance
from point B should she choose her landing point P , in order to minimize
her time to√reach point C?
√ 4
(a) 21/
(b) 4/√21
(c) 4/ √12
(d) 21/ 21
Answer (b).

How much time will she need to reach point C?

Question 29. Suppose Aj , j = 1, 2, . . . are non-empty sets of real numbers.

Define the sets Cn = ∩∞ ∞
k=l ∪j=k Aj , n = 1, 2, . . .. Which of the choices below
must then hold for a given n? (where the symbol ⊂ stands for ‘strict subset’).
(a) Cn ⊂ Cn+1
(b) Cn+1 ⊂ Cn
(c) Cn = Cn+1
(d) None of the above need hold.
Answer: (c)

Question 30. Suppose x and y are given integers. Consider the following
statements:
A. If 2x + 3y is divisible by 17, then 9x + 5y is divisible by 17.
B. If 9x + 5y is divisible by 17, then 2x + 3y is divisible by 17.
Which of the following is true?
(a) A is true and B is false.
(b) B is true and A is false.
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(c) Both A and B are true.

(d) Neither A nor B is true.
Answer (c).
The following data is the starting point for Questions 1-2. Con-
sider an exchange economy with two goods. Suppose agents i and j have
the same preferences. Moreover, suppose their preferences have the following
property: if (a, b) and (c, d) are distinct bundles that are indifferent to each
other, then the bundle ((a + c)/2, (b + d)/2) is strictly preferred to (a, b) and
(c, d).
Question 31. In a Pareto efficient allocation, i and j
(a) will get the same bundle
(b) may get different bundles
(c) will get the same bundle, provided their endowments are identical
(d) will get the same bundle, provided their endowments are identical and
the preferences are monotonically increasing
Answer: (b)
Question 32. In a competitive equilibrium allocation, i and j
(a) will get the same bundle
(b) may get different bundles
(c) will get the same bundle, provided their endowments are identical
(d) will get the same bundle, provided their endowments are identical and
the preferences are monotonically increasing
Answer: (c)
The following data is the starting point for Questions 3-5. Two firms
produce the same commodity. Let x1 and x2 be the quantity choices of firms
1 and 2 respectively. The total quantity is X = x1 + x2 . The inverse demand
function is P = a − bX, where P is the market price, and a and b are the
intercept and slope parameters respectively. Firms 1 and 2 have constant
average costs equal to c1 and c2 respectively. Suppose b > 0, 0 < c1 < c2 < a
and a + c1 > 2c2 .
Question 33. In a Cournot equilibrium,
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(a) firm 1 has the larger market share and the larger profit
(b) firm 2 has the larger market share and the larger profit
(c) firm 1 has the larger market share and the smaller profit
(d) firm 2 has the larger market share and the smaller profit
Answer: (a)

Question 34. If a increases, then

(a) the market share of firm 1 increases and price increases
(b) the market share of firm 1 decreases and price increases
(c) the market share of firm 1 increases and price decreases
(d) the market share of firm 1 decreases and price decreases
Answer: (b)

Question 35. If b decreases, then

(a) the price and market share of firm 1 increase
(b) the price and market share of firm 1 decrease
(c) the market shares are unchanged but price increases
(d) neither price, nor market shares, change
Answer: (d)

Question 36. Suppose that an economy has endowment of K units of capital

and L units of labour. Two final goods X1 and X2 can be produced by the
following technologies, √ √
X1 = kl, X2 = l
where k is quantity of capital and l is quantity of labour. Find the production
possibility frontier.
(a) X12 + KX22 = KL
(b) X12 + √ X22 = KL√
(c) X1 + KX2 = KL
(d) X1 + X22 = KL
Answer: (a)

Question 37. A two-person two commodity economy has social endowment

of x = 1 unit of food and y = 1 unit of wine. Agents preferences are increasing
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in own consumption but decreasing in wine consumption of the other person.

Preferences of agents A and B are as follows,

uA (xA , yA , yB ) = xA [1+max(yA −yB , 0)], uB (xB , yB , yA ) = xB [1+max(yB −yA , 0)]

where A consumes xA and yA units of x and y respectively, similarly B’s

consumption is xB and yB .
Which of the following is a Pareto optimum allocation.
(a) xA = 41 , xB = 34 , yA = yB = 12
(b) xA = xB = 21 , yA = 14 , yB = 34
(c) xA = 41 , xB = 34 , yA = 1, yB = 0
(d) xA = 41 , xB = 34 , yA = 0, yB = 1
Answer: (d)

Question 38. Consider a two-person two-goods pure exchange economy. The

initial endowment vectors are e1 = (1, 0) and e2 = (0, 1). The two individuals
have identical preferences represented by the utility functions:

1 2
 1, when x + y < 1
u (x, y) = u (x, y) = 
x + y, when x + y ≥ 1,
where x is the quantity of the first good and y is the quantity of the second
good. For this economy, the set of Pareto optimum allocations
(a) consists of The entire Edgeworth box
(b) is just the qual division of the goods
(c) is a null set
(d) is {(0, 0), (1, 1)}
Answer: (d)

Question 39. A monopolist seller produces a good with constant marginal

cost c ≥ 0. The monopolist sells the entire output to a consumer whose
√
utility from consuming x units of the product is given by θ x − t, where t is
the payment made by the consumer to the monopolist. Suppose, consumer’s
outside option is 0, i.e., if she does not buy the good from the monopolist,
she gets 0 utility. Then, the monopolist’s profit is
(a) θ/4c
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(b) θ2 /4c
(c) cθ2
(d) cθ/2
Answer: (b)

Question 40. Consider an economy consisting of n ≥ 2 individuals with pref-

erence relations defined over the set of alternatives X. Let S = {a, b, c, d, e}
and T = {a, b, c, d} be two subsets of X. Now consider the following state-
ments:
• A. If a is Pareto optimal (PO) with respect to set S, then a is PO with
respect to set T .
• B. If a is PO with respect to set T , then a is PO with respect to set S.
• C. If a is PO with respect to set S and b is not PO with respect to set
T , then a is Pareto superior to b.
• D. If a is the only PO alternative in set S and b is not with respect to
set S, then a is Pareto superior to b.
How many of the above statements are correct?
(a) 1
(b) 2
(c) 3
(d) All are correct.
Answer: (b)

Question 41. 5 men and 5 women are seated randomly in a single circle of
chairs. The expected number of women sitting next to at least 1 man equals
(a) 23/6
(b) 25/6
(c) 4
(d) 17/4
Answer (b).
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Question 42. Ms. A selects a number X randomly from the uniform distri-
bution on [0, 1]. Then Mr. B repeatedly, and independently, draws numbers
Y1 , Y2 , .... from the uniform distribution on [0, 1], until he gets a number
larger than X/2, then stops. The expected number of draws that Mr. B
makes equals
(a) 2 ln 2
(b) ln 2
(c) 2/e
(d) 6/e
Answer (a).

Question 43. The expected sum of the numbers Mr. B draws, given X = x,
equals
(a) ln 2
(b) 1/(1 − 12 )
(c) 1/(2 − x)
(d) 3/(1 − 12 )
Answer (c).

Question 44. There are two fair coins (i.e. Heads and Tails are equally likely
for tosses of both). Coin 1 is tossed 3 times. Let X be the number of Heads
that occur. After this, Coin 2 is tossed X times. Let Y be the number of
Heads that we get with Coin 2. The probability Prob(X ≥ 2|Y = 1) equals
(a) 1/2
(b) 4/7
(c) 2/3
(d) 11/18
Answer (d)

Question 45. Two independent random variables X and Y have the same
probability density function:

 c(1 + x) x ∈ [0, 1]
f (x) = 
0 otherwise
Then the variance of their sum, Var(X + Y ) equals
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(a) 2/9
(b) 13/81
(c) 4/45
(d) 5/18
Answer (b).
Question 46. Suppose two restaurants are going to be located at a street
that is ten kilometers long. The location of each restaurant will be chosen
randomly. What is the probability that they will be located less than five
kilometers apart?
(a) 1/4
(b) 1/2
(c) 3/4
(d) 1/3

Answer (a).
Question 47. Consider the linear regression model: yi = β1 D11 + β2 D2i + εi ,
where D1i = 1 if 1 < i < N and D1i = 0 if N +1 < i < n for some i < N < n;
and D2 = 1 − D1. Can this model be estimated using least squares?
(a) No, because D1 and D2 are perfectly collinear
(b) Yes, and it is equivalent to running two separate regressions of y on
D1 and y on D2, respectively.
(c) No, because there is no variability in D1 and D2
(d) Yes, provided an intercept term is included.

Answer: (b)
Question 48. Consider the least squares regression of y on a single variable
x. Which of the following statements is true about such a regression?
(a) The coefficient of determination R2 is always equal to the squared
correlation coefficient between y on x
(b) The coefficient of determination R2 is equal to the squared correlation
coefficient between y on x only if there is no intercept in the equation
(c) The coefficient of determination R2 is equal to the squared correlation
coefficient between y on x only if there is an intercept in the equation
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(d) There is no relationship between the coefficient of determination R2

and the squared correlation coefficient between y on x
Answer: (c)

Question 49. An analyst runs two least squares regressions: first, of y on a

single variable x, and second, of x on y. In both cases, she decides to include
an intercept term. Which of the following is true of what she finds?
(a) The slope coefficient of the first regression will be the inverse of the
slope coefficient of the second regression; this will also be true of the associ-
ated t-ratios
(b) The slope coefficients will be different, the associated t- ratios will also
be different, but the R2 from the two regressions will be the same
(c) The slope coefficients will be different, but the associated t-ratios and
the R2 from the two regressions will be the same
(d) The slope coefficients will be the inverse of each other, the associ-
ated t-ratios will also be the inverse of each other, but the R2 from the two
regressions will be the same.
Answer: (c)

Question 50. Consider the two regression models

(i) y = β0 + β1 X1 + β2 X2 + u
(ii) y = γ0 + γ1 Z1 + γ2 Z2 + v,
where variables Z1 and Z2 are distinct from X1 and X2 . Assume u ∼
N (0, σu2 ) and v ∼ N (0, σv2 ) and the models are estimated using ordinary least
squares. If the true model is (i) then which of the following is true?
(a) E[βˆ1 ] = E[γˆ1 ] = β1 and E[σ̂v2 ] = σu2 .
(b) E[σ̂v2 ] ≥ σu2 .
(c) E[σ̂v2 ] ≤ σu2 .
(d) None of the above as the two models cannot be compared
Answer: (b)
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The next Ten questions are based on the following information: Please
read them carefully before you proceed to answer.
Consider an economy consisting of N identical firms producing a single
final commodity to be used for consumption as well as investment purposes.
Each firm is endowed with a Cobb-Douglas production technology, such that
α  1−α
Yti = Kti Lit

; 0 < α < 1,
where Kti and Lit denote the amounts of capital and labour employed by the
i-th firm at time period t. The final commodity is the numeraire; wage rate
for labour (wt ) and the rental rate for capital (rt ) are measured in terms of
the final commodity. The firms are perfectly competitive and employ labour
and capital so as to maximize their profits - taking the factor prices as given.
The aggregate output produced is thus given by:
N  α  1−α
Kti Lit = (Kt )α (Lt )1−α ,
X
Yt =
i=1
Pn i
where Kt = i=1 Kt and Lt = ni=1 Lit are the total capital and labour em-
P

ployed in the aggregate economy in period t.

Labour and capital on the other hand are provided by the households.
There are H identical households, each endowed with kth units of capital and
1 unit of labour at the beginning of period t. Capital stock of the households
gets augmented over time due to the savings and investments made by the
households. In particular, each household saves and invests exactly half of its
total income yth - (which includes its labour as well as capital income) in every
h
period and consumes the rest, such that dkdtt = 12 yth (There is no depreciation
of capital).
The entire capital endowment at the beginning of every period is supplied
inelastically to the market at the given rental rate (rt ). Labour supply how-
ever is endogenous and responds to the market wage rate. Out of the total
endowment of 1 unit of labour, the households optimally supplies lth units so
as to maximise his utility:
δ
Uth = wt lth − lth ; δ > 1,


where the first term captures the (indirect) utility derived from labour earn-
ings while the second term captures the dis-utility of labour.
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Question 51. The labour demand schedule for the aggregate economy is
given by the following function:
1/α

1
(a) Lt = wt Kt
 1/α
(b) Lt = N 1−α wt Kt
 1/α
(c) Lt = 1−α
wt Kt
(d) None of the above.
Answer: (c)

Question 52. The aggregate labour supply schedule by the households is

given by the following function:
h i1/(δ−1)

(a) LSt =  H wt
δ for wt < w̄ ≡ (δ)1/(δ−1)
H for wt ≥ w̄

wt 1/(δ−1)
 h i
(b) LSt =  H

δ for wt < ŵ ≡ δ
H for wt ≥ ŵ

 Hwt 1/(δ−1)
 h i
(c) LSt = δ for wt < ŵ ≡ δ

1 for wt ≥ ŵ
(d) None of the above.
Answer: (b)

Question 53. The market clearing wage rate in the short run (period t) is
given by: 
" # α(δ−1)
1/α α+δ−1

K (1−α)

H
t
for Kt < ≡ K̂



H δ

(a) wt∗ = "
1/α
#α
K (1−α)

for Kt ≥ K̂

 t

H




" # α(δ−1)
1/α α+δ−1

Kt (1−α) δ 1/α
  
for K < H ≡ K̄


t

H 1−α

(b) wt∗ = "
1/α
#α
Kt (1−α)

for Kt ≥ K̄



H


EEE 2014 A 01 20

" # α(δ−1)
1/α 1/(δ−1) α+δ−1

K (1−α) (δ) δ 1/α
  
t
for K < H ≡ K̄


t

H 1−α

(c) wt∗ = "
1/α
#α
Kt (1−α)

for Kt ≥ K̄



H



(d) None of the above.

Answer: (c)

Question 54.
 Equilibrium output in the short run (period t) is given by:
 " # α(1−α)
 αδ (1−α)(δ−1) 1/α 1/(δ−1) α+δ−1
 (1−α) (δ)
(Kt ) α+δ−1 (H) α+δ−1


δ



(a) Yt∗ =  δ
 1/α


 for Kt < H 1−α ≡ K̄; and
α 1−α

(Kt ) (H) for Kt ≥ K̄





" # α(1−α)
1−α (1−α)1/α (δ)1/(δ−1) α+δ−1

α δ 1/α
  
(Kt ) (H) for Kt < H ≡ K̄


(b) Yt∗ = δ 1−α
(Kt )α (H)1−α for Kt ≥ K̄





" # α(1−α)
 αδ (1−α)(δ−1) 1/α 1/(δ−1) α+δ−1
(1−α) (δ)

H
(Kt ) (H) for Kt < ≡ K̂

 α+δ−1 α+δ−1
(c) Yt∗ = δ δ

(Kt )α (H) 1−α

for Kt ≥ K̂




(d) None of the above.

Answer: (a)

Question 55. The aggregate output in this economy

(a) initially increases until Kt < K̂, and then reaches a constant value
within finite time when Kt ≥ K̂.
(b) initially increases (until Kt < K̄) and then reaches a constant value
within finite time when Kt ≥ K̄.
(c) keep increasing at a decreasing rate and approaches a constant value
only in the long run (when t → ∞).
(d) increases at an increasing rate until Kt < K̂; increases at a decreasing
rate when Kt ≥ K̂ and approaches a constant value only in the very long run
(when t → ∞).
Answer: (c)
EEE 2014 A 01 21

Let us now change the labour supply behaviour of households in the above
question. Assume that producers’ side of the story remain exactly the same
as above. The household side story now changes as follows.
Labour supply is now determined by the following rule. Out of the total
endowment of 1 unit of labour, the households optimally supplies lth units
so as to maximise his utility, Uth : Uth = wt lth − D; (D > 0) for any lth > 0;
and Uth = 0 for any lth = 0. For the case lth > 0, the first term captures
the (indirect) utility derived from labour earnings while the constat term D
captures the dis-utility of labour - which is now independent of how much
labour is supplied.
Rest of the assumptions about household behaviour (their endowment,
savings and consumption behaviours; capital augmentation equation) remain
unchanged.
Question 56. The new aggregate labour supply schedule by the households
is given by the
 following function:
 0 for w < w ≡ D
S t H
(a) Lt = 
H for wt ≥ w

(b) LSt = H for all values of wt .


0 for wt < w̃ ≡ D

(c) LSt = 
H for wt ≥ w̃
(d) None of the above.
Answer: (b)
Question 57. The new market clearing wage rate in the short run (period
t) is given by:
D α
 h i
 D

 for K t < H 1−α ≡ K̃
∗ #α
(a) wt =  Kt (1−α)
"
1/α

 H for Kt ≥ K̃
(b) wt∗ = D
 for all values of Kt
" # α(δ−1)
1/α α+δ−1

K (1−α)

H
t
for Kt < ≡ K̂



H D

(c) wt∗ = "
1/α
#α
K (1−α)

for for Kt ≥ K̂

 t

H



(d) None of the above.

EEE 2014 A 01 22

Answer: (a)

Question 58. An increase in the number of firms (N )

(a) leaves the wage rate unchanged in the short run (until Kt < K̃) and
increases it thereafter
(b) increases the wage rate in the short run (until Kt < K̂) and leaves it
unchanged thereafter
(c) leaves the wage rate unchanged irrespective of Kt
(d) None of the above.
Answer: (a)

Question 59. The new equilibrium output in the short run (period t) is
given by:  " #
1/α 1−α
(1−α) D α
 h i
Kt for Kt < H ≡ K̃


(a) Yt∗ =  D 1−α
(Kt )α (H)1−α for Kt ≥ K̃



(b) Yt∗ = (Kt )α (H)1−α for all values of Kt .

 " #1−α
1/α
(1−α) H
≡ K̂

Kt for for Kt <


(c) Yt∗ =  D D

(Kt )α (H)1−α for Kt ≥ K̂




(d) None of the above.

Answer: (a)

Question 60. The aggregate output in this economy

(a) initially increases until Kt < K̃, and then reaches a constant value
within finite time when Kt ≥ K̃.
(b) initially increases (until Kt < K̂) and then reaches a constant value
within finite time when Kt ≥ K̂.
(c) increases at a constant rate until Kt < K̃; increases at a decreasing
rate when Kt ≥ K̃ and approaches a constant value only in the very long run
(when t → ∞).
(d) None of the above.
EEE 2014 A 01 23

Answer: (c)
End of Part II
EEE 2014 A 01 24

Rough Work
EEE 2014 A 01 25

Rough Work
EEE 2014 A 01 26

Rough Work
EEE 2014 A 01 27

Rough Work
EEE 2014 A 01 28

Rough Work
EEE 2014 A 01 29

Rough Work