### Previous Year Paper Solution | Indian Economic Service Exam 2012 | General Economics - I

#### Q. No. 1 (a) - Distinguish between Marshallian and Walrasian stability analysis.

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#### Q. No. 1 (b) - Discuss "Nash Equilibrium" for non-collusive firms.

Nash Equilibrium for non-collusive firm is likely to be a perfect competition price because all firms may fear that other firms will cut their prices to appropriate more market share. This price war will utlimately result in the lowest possible price which is obviously the perfect competition price.

#### Q. No. 1 (c) - What are the basic features and the limitations of Leontief's input-output model?

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#### Q. No. 1 (d) - How can you measure income inequality by using Lorenz curve method?

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#### Q. No. 1 (e) - Suppose you have a demand function for milk of the form $${x_1} = 100 + \frac{m}{{100{p_1}}}$$ and your weekly income (m) is ₹ 12,000 and the price of milk $$\left( {{p_1}} \right)$$ is ₹ 20 per litre. Now suppose the price of milk falls from ₹ 20 to ₹ 15 per litre, then what will be the substitution effect?

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#### Q. No. 1 (f) - Explain 'dead-weight' loss in a monopoly situation.

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#### Q. No. 1 (g) - Define the terms 'white noise' and 'random walk' in time series analysis.

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#### Q. No. 1 (h) - Show graphically on your answer-book that if a consumer buys only two goods, both cannot be inferior at the same time.

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#### Q. No. 1 (i) - Highlight the role of market signalling when there is asymmetric information.

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#### Q. No. 2 - Separate income effect from substitution effect for a price change using (i) Hicks' method (ii) Slutsky's method. Hence explain the difference between the two compensated demand curves.

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#### Q. No. 3 - Assume that the market demand is $$P = 100 - 0 \cdot 5({X_1} + {X_2})$$ and the two collusive firms have costs given by $${C_1} = 5{X_1}$$ and $${C_2} = 0 \cdot 5X_2^2$$. Calculate the joint profit of the firms.

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#### Q. No. 4 - Compare different methods of measuring risk aversion.

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#### Q. No. 5 - What are 'ridge lines'? What are their implications in the theory of the firm?

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#### Q. No. 6 - Distinguish between compensating variation and equivalent variation of the budget line. How can you measure consumer's surplus using these two concepts?

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#### Q. No. 7 - Derive an expression for elasticity of factor substitution for C.E.S. production function and use it to establish that Cobb-Douglas production function is a special case of C.E.S. production function.

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Solution video:

Solution video:

#### Q. No. 10 - Explain the relationship between slope and elasticity of a straight line demand curve.

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#### Q. No. 11 - "In the long run, a perfectly competitive firm will be earning just normal profit." Discuss.

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#### Q. No. 12 - What is 'Prisoner's Dilemma'? Discuss its importance and implications in Game theory.

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#### Q. No. 13 - What is 'moral hazard' problem? How does it lead to inefficient allocation of resources? Suggest remedial measures.

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#### Q. No. 14 - In a discriminating monopoly, the total demand function is P = 100 - 2X and demand function of segmented markets are ${P_1} = 80 - 2 \cdot 5{X_1}\,\,\,{\rm{and}}$ ${P_2} = 180 - 10{X_2}$ The cost function is $C = 50 + 40({X_1} + {X_2});\,\,\,{\rm{where}}\,\,\,\,\,{X_1} + {X_2} = X$ Calculate the profit of the monopolist; (i) with discrimination and (ii) without discrimination.

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#### Q. No. 15 - Compare and contrast the theories of social choice as propounded by PRofessor A.K. Sen and Professor K.J. Arrow.

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