Answer all the questions. Section A to be answered in about 500 words each and Section B to be answered in about 300 words each.
Section A:
Question 1: Describe the concept of dominant strategy equilibrium. Discuss the concept of Nash equilibrium. Is every dominant strategy equilibrium Nash equilibrium? What do you understand by subgame-perfect equilibrium?
Question 2: What is indirect utility function? Given a direct utility function, how will you derive the indirect utility function? Describe Roy’s identity.
Section B:
Question 3: Derive the elasticity of substitution for Cobb-Douglas production function q = f (K, L) = AKaL1-a
Question 4: What is meant by the term externalities? How can the problem of externalities be solved? Describe the Coase’s theorem.
Question 5: Describe Arrow’s Impossibility Theorem, giving the different assumptions.
Question 6: What is meant by the term asymmetric information? In what way does the presence of asymmetric information lead to a departure from the usual competitive equilibrium? Describe the relation among moral hazard, adverse selection and signaling, giving appropriate illustrations.
Question 7: What do you understand by the term actuarially fair insurance? Do you agree with the proposition that a risk-averse person will optimally buy full insurance if the insurance is actuarially fair? Provide reasons in support of your answer.