Microeconomics Answers

Give an example of a principal-agent problem in Ethiopia and suggest a resolution? Design

an incentive contract to address the principal-agent problem you identified?

Sealed-bid auction and cournot game involves a new comer firm (2) and incumbent firm

operated for a year are can be an example of a game with incomplete information. Explain

using practical examples how each of these games can be games with incomplete

information?

Consider technology adoption decisions of two firms. Firm A has two possible types, either

high or low costs, with associated probabilities 2/3 and 1/3. Firm A observes its own type,

but firm B cannot observe it. Graphically, firm A knows which payoff matrix firms are

playing, while firm B can only assign a probability 2/3 or1/3 to playing the left-hand (right hand) matrix

a) Identify the strategy space of each firm?

b) Construct the Bayesian normal-form representation of the incomplete information game

and determine the Bayesian Nash equilibrium?

4. Given are the following equations for lentils:

Q_{s} = 2P

and Qd = 300 - P

a. Government imposes a price ceiling of Rs.50 on lentils. Calculate the consumer and producer surplus at the ceiled price?

b. Calculate the dead weight loss.

Given are the following equations for lentils:

Qs = 2P and Qd=300-P

a. Government imposes a price ceiling of Rs.50 on lentils. Calculate the consumer and producer 

surplus at the ceiled price?

b. Calculate the dead weight loss. 

a. What kind of market structure has evolved in the market of mobile handsets? Discuss the 

characteristics of the market structure. 

. A firm with a given fixed level of capital, decides to increase its output by adding labor. 

However, if it experiences a fall in its output instead, what could be the reason for the same?

Consider a lottery with two equally likely outcomes, $ 25 and $ 144, with associated utility

function of individuals A, ua (m) = √100m and individual B, ub (m)= 5 meter square

a) Determine expected utility and utility of expected value of the lottery for each

individual?

b) Define and compare certainty equivalent of individual A and B?

c) Compare risk premium of individuals A and B? Why risk premium of individual A is

higher?

d) Compare and interpret the absolute risk aversion, ra (m) of the two persons?

Consider a farmer in a rural village and a business man in an urban area that adopt various

risk reduction strategies in Ethiopia. Assume also that most farmers in Ethiopia do not

insure for crop and livestock failure and businessmen also hardly insured against property

loss.

A) Suggest at least two strategies adopted to reduce risk by each agent?

B) Explain concisely how each strategy can reduce risk by agents?

Geoffrey has an income of $3000. Wine costs $3 per glass, and cheese costs $6 per pound. Draw the consumer’s budget constraint. What is the slope of this budget constraint? What is the MRS of the two goods? How is the MRS related to the slope of consumer’s budget constraint?