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# ALLAMA IQBAL OPEN UNIVERSITY, ISLAMABAD

(Department of Economics)

WARNING
1. PLAGIARISM OR HIRING OF GHOST WRITER(S) FOR SOLVING
THE ASSIGNMENT(S) WILL DEBAR THE STUDENT FROM AWARD
OF DEGREE/CERTIFICATE, IF FOUND AT ANY STAGE.
2. SUBMITTING ASSIGNMENTS BORROWED OR STOLEN FROM
OTHER(S) AS ONE’S OWN WILL BE PENALIZED AS DEFINED IN
“AIOU PLAGIARISM POLICY”.

ASSIGNMENT No. 1
(Units 1–4)
Course: Advance Microeconomics (2700) Semester: Spring, 2010
Level: M. Phil Total Marks: 100
Q.1 (a) Show the equilibrium position of a consumer if,
U = ( x1 + 2) ( x 2 + 1)
Px1 = 4 and Px2 = 6 and Income ( Y ) of the consumer =130 . What are
the income and price elasticities
(b) Derive the compensated demand curve if U = XY and Px = 1 and Y
(income) = 200. Show consumer gain in terms of CV if P falls from 1 to 0.5 (20)
Q.2 Using the following CES production function

[
Q = 0.6 K − 2 + 0.4 L− 2 ] −1
2

## (a)Derive the elasticity of substitution. If ρ = −1 , what would be general

shape of isoquants for positive K and L?
1
(b) Show the relative the relative income share when K = 1 and L =
2
(c) What if L now rises to 1. Is this consistent with your finding about σLK .
(20)
Q.3 Given the following production function
K = Q −Q2 +Q3
Where K is capital per period and q is output per period.
Derive the firm’s supply curve if wK =1
1
How much will it produce per period of P = 1? And if P =
2
1
How much profit is made if P = 1 and P = (20)
2
Q.4 Give the following demand function of a firm
P = 6 − 0.20 X
And average cost function
6
AC = + 2 − 0.3 X + 0.06 X 2
x
Where X output of the firm and P is the price of output (X). Find the equilibrium
output (X) which gives
(a) Maximum total revenue
(b) Minimum marginal cost
(c) Maximum profit (20)
Q.5 Define cartels. Also discuss the problem which may be faced by the firms in the
cartels. Let there are large number of firms which can provide platinum with the
following cost function
C = 500 +100 X + 5 X 2
The competitive demand for platinum is
1
P = 250 − X
10
What would be the competitive equilibrium of this industry? What is the
equilibrium number of firms? Suppose cartel wished to use revenue pooling as a
method of restricting output. What fraction of revenue would they require firms to
put into the pool? (20)

ASSIGNMENT No. 2
(Units 5–9)
Q.1 (a) Define and illustrate with an example the importance of calculating discount
rate and present value in the evaluation of a project. (10)
(b) In a certain five years plan, it is decided that the investment should increase
from 12 billion to 20 billion. Calculate the required annual rate of investment
to achieve this target. (10)
Q.2 (a) Discuss the expected utility approach in studying the uncertainty problem in
microeconomics. (10)
(b) Give the following payoff matrix and probabilities. (10)
Plan State 1 State 2
A 100 100
B 200 50
Probability 0.30 0.70
Show the expected value of income in both decisions
Draw a diagram to show that if u(x) is concave (downward) then
E (u I A) > E (u I B)
Q.3 Discuss in detail the possibility of general equilibrium in both production and
consumption simultaneously. (20)
Q.4 (a) Discuss how an economy can reach to social justice and social optimum. (10)
(b) Give x 2 + y 2 = 80 , u A = x A y A uB = xB yB w = u A u B w = uAuB
How much x and y should be produced and how should it be distributed? (10)
2
Q.5 Enlist and elaborate different criteria for welfare improvement of a society in detail.
(20)