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Midterm Exam Details & Advice

ECON6001, S2 2022

Exam Logistics. You will receive an email from the Exams Oﬃce with details of the Canvas site

explicitly set up for the Exam. This is not the usual course Canvas site. The following is a “cut-and-paste” of the instructions you will see on the Exam:

Instructions

1. Answer all the questions and upload handwritten answers as a single PDF ﬁle on Canvas.

2. Do not write long essays — clearly write the steps and working involved in reaching the conclusion.

3. Exam Duration: 2 hrs (includes reading and writing time) Submission Deadline: See Exam Canvas site.

Notes:

It is your responsibility to manage your time carefully. Submission deadline is

shown on Exam Canvas site, which includes a small time buﬀer submission process. Private email submissions cannot be accepted.

Your percentage score in this exam is worth 30% of the ﬁnal grade.

Exam Format

Question 1 (20 points) Problem on Basic Consumer Theory. Does not even require calculus, but tests an understanding of the basic principles.

Question 2 (20 points) Problem, covers everything (including Endowment economies), like what you have been seeing in Problem sets.

Question 3 (10 points) There are two statements. You are required to comment on each of those statements. Answer in few sentences. You may even present your argument as a list of bullet points or make your point with a simple picture/example/counter example. Anything written over half an A4 page will be ignored.

1). Sample Question. Condtion a and Condition p already identify what is needed for a choice function to be rationalizable via a preference relation. Why then is Afriat's Theorem so important? (5 points)

Sample Answer. Condition a and p are indeed suﬃcient to rationalize a choice function, but require that we are able to observe choice amongst all choice sets that have exactly two or three elements. On the other hand, in market data, we only have information about how an agent chooses from a budget set . This is highly coarse data. Afriat's Theorem, on revealed preference oﬀers via the Weak Axiom and Generalized Axiom necessary and suﬃcient conditions under which data is consistent with utilty maximizing consumer.

2). Another question of the above type. (5 points).

Preparation

Surely, each of you will have your own preparation style for exams. In this case, the questions in the various Problem Sets and the Quiz 1 are good predictors for the style of questions. You need to know the concepts, and a few formula for taking derivatives - of the sort we would have seen often in class/problem sets in the past weeks. There are hardly any complicated numerical

calculations. Do and Re-do the problem sets and make sure you understand the provided answers. Below is a list of keywords/glossary of terms that you should be hitting upon.

Keywords/Topics

1. Choice Theory: Choice Rules, Condition a, Condition p , Independence of Irrelevant Alter- antives, Weak Axiom of Revealed Preference, Connections to Preference Relations.

Various properties of preference relations: non-satiation, continuity, convexity, monoto- nicity, homotheticity etc. covered in class. Implications/equivalence of those properties for corresponding utility representations.

Lexicographic preferences, optimal choices, continuity and WARP.

2. Classical Consumer Theory:

Utility Maximization, Derivation of Marshallian Demand, Expenditure Minimization, Hick- sian Demand, Slutsky Matrix, Indirect Utility Functions. Roy's Identity, Shephard's Lemma,

All aspects of Duality implicit in the diagram given on Page 3, Lecture 4 slides. (Q1 Problem Set 3 works through this).

Weak Axiom vs. Generalized Axiom of Revealed Preferences, Importance of Afriat's The- orem.

3. Measuring Consumer Welfare:

Consumer Surplus, Money Metric Utility Functions, Compensating Variation (CV), Equiv- alent Variation (EV) and how they are related to Hicksian Demands, Expenditure Functions etc.

4. Exchange Economies:

Deﬁnition of Competitive Equilibrium, Demonstrating diﬃculties with existence (via Edge- worth Box diagrams). Walras Law. Pareto Principle, First Welfare Theorem, Second Welfare Theorem and connections to Competitive Equilibrium.