Answer all the given problems. Section A to be answered in around 500 words each and Section B to be answered in around 300 words each.

Section A:

problem 1: Describe the concept of Nash equilibrium. How is it related to:

a) Dominant strategy equilibrium and
b) Sub-game perfection.

problem 2: What is indirect utility function? How will you derive an indirect utility function from a direct utility function? describe Roy’s identity.

Section B:

problem 3: Derive the elasticity of substitution for the Cobb-Douglas production function q = f (K, L) = AK^aL^b

problem 4: What are the recommendations of Coase to solve the problem of the externalities?

problem 5: Describe Arrow’s Impossibility Theorem.

problem 6: Discuss the concept of asymmetric information. Describe the relation among moral hazard, adverse selection and signaling, giving appropriate illustrations.

problem 7: 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.