Economics: Ph.D.

Entrance Examination
MCQ A, May 16th , 10:00 - 11:00.

Instructions:

1. There are 20 questions in the exam.

2. Each question is worth 2 points making the maximum possible points 40.

3. Please submit your question paper with answers sheet.

4. The exam will start at 10:00 AM on May 16th and will end at 11:00 AM.

5. A question may have more than one correct answer. In such a case, select the best
answer, i.e., the one that implies the other one.

Seat Number:

Application Number:

1
1. Consider an economy that has no money market. Investment (I), Government spend-
ing (G) and taxes (T ) are all given. Let consumption be C = c0 + c1 (Y − T ). Assume
c0 = 100 and c1 = 0.25. What is the government spending multiplier in this economy?

(a) 1.20.

(b) 1.33.

(c) 1.25.

(d) 0.25.

2. Let X ∈ {0, 1, 2} be a discrete random variable with pmf


0.25

 if x = 0

f (x) = 0.5 if x = 1



0.25 if x = 2

The random variable Y = (X − 1)2 will

(a) follow a Discrete Uniform distribution.

(b) follow a Bernoulli distribution.

(c) Both A and B are correct answers.

(d) None of the options are correct.

3. In a random sample of 250 students at IIT Delhi, it is found that the students take
14.3 credit hours on average per semester. The corresponding standard deviation
for the same group is 1.7 credit hours. The 95% confidence interval for the mean is
14.3 ± 0.211. Interpret the interval.

(a) 95% of the students take between 14.089 to 14.511 credit hours per quarter.

(b) We are 95% confident that the average number of credit hours per quarter of
students at IIT Delhi falls in the interval 14.089 to 14.511 hours.

(c) We are 95% confident that the average number of credit hours per quarter of the
sampled students falls in the interval 14.089 to 14.511 hours.

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 (d) The probability that a student takes 14.089 to 14.511 credit hours in a quarter is
0.95.

4. Let f (x) be the production function for a firm with Constant returns to Scale tech-
nology. Suppose each factor xi is paid its value marginal product wi = p δfδx(x)
i
.

(a) The firm’s profit in this case is positive;

(b) The firm incurs a loss;

(c) The firm’s profit is zero;

(d) None of the above is true.

5. Because more capital in a country allows more output to be produced, it is always

better for a country to have more capital stock. The above statement is

(a) TRUE if capital stock is above the steady state.

(b) FALSE if capital stock is above the golden rule steady state.

(c) TRUE if capital stock is above the golden rule steady state.

(d) FALSE if capital stock is above the steady state.

6. For a production function y = f (x1 , x2 ) which is homogeneous of degree one in x1 and

x2 :

(a) if average product for x1 is increasing, it implies that the marginal product of the
other input x2 is negative;

(b) if marginal product for x1 is increasing, it implies that the average product of the
other input x2 is negative;

(c) if average product for x1 is decreasing, it implies that the marginal product of
the other input x2 is negative;

(d) if marginal product for x1 is increasing, it implies that the marginal product of
the other input x2 is negative;

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 7. More competition necessarily promotes economic growth and social welfare, since firms
are forced to produce more goods and extract less profits from consumers. The above
statement is

(a) TRUE since competition reduces price.

(b) FALSE since monopolistic market power is good for growth.

(c) TRUE since R&D is essential for growth and welfare and less competition is
desirable for financing R&D.

(d) FALSE since more competition cuts into the profits of firms and generates disin-
centives for doing R&D.

8. Lexicographic preferences cannot be represented by a continuous utility function be-

cause lexicographic preferences:

(a) do not satisfy completeness;

(b) are not continuous;

(c) are not well-defined;

(d) are not transitive.

9. The estimated female-male ratio at birth is higher than the Indian average in which
of the following states (in 2011)?

(a) Haryana.

(b) Tamil Nadu.

(c) Chhattisgarh.

(d) Tamil Nadu and Chhattisgarh.

10. Let X and Y be two independent random variables. Define [X ∧ Y ] = min(X, Y )

and [X ∨ Y ] = max(X, Y ). The sum of the expected values of the random variables,
E[X] + E[Y ] is given by

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 (a) E[X ∨ Y ] + E[X ∧ Y ]

(b) E[X ∨ Y ] − E[X ∧ Y ]

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(c) 2
[E[X ∨ Y ] + E[X ∧ Y ]]

(d) None of the above

11. The ‘impossible trinity’ in international economics refers to which of the following?

(a) Flexible exchange rate, Perfect capital mobility, independent monetary policy.

(b) Fixed exchange rate, Perfect capital mobility, independent monetary policy.

(c) Restrictions on capital flows, Fixed exchange rate, independent fiscal policy.

(d) None of the above.

12. There has been a reduction in SLR as part of the monetary policy announcements
made by the RBI. This implies that:

(a) Commercial banks can now reduce their deposits with the Central Bank.

(b) Commercial banks can now reduce their investments in government securities.

(c) Both A and B are correct options.

(d) Neither A nor B is correct.

13. The Central Limit Theorem is important in statistics because

(a) for any sample size n, it says the sampling distribution of the sample mean is
approximately normal

(b) for any population, it says the sampling distribution of the sample mean is ap-
proximately normal regardless of the sample size

(c) for a large sample size n, it says the sampling distribution of the sample mean is
approximately normal, regardless of the population

(d) for a large sample size n, it says the population is approximately normal
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14. Consider income (or output)–interest rate combinations along which the markets for
commodities (or goods and services) and money are in equilibrium. Suddenly there is
a rise in incomes while the money supply remains constant. To achieve equilibrium in
the money market:

(a) Interest rate has to fall.

(b) Interest rate has to rise.

(c) Speculative demand for money has to fall.

(d) Both B and C should happen.

15. Consider the following: ‘being healthy’, ‘being educated’, and ‘able to take part in
discussions’. According to Amartya Sen, each of the above-referred achievements may
be described as

(a) Commodity.

(b) Capability.

(c) Functioning.

(d) None of the above.

16. In a Nash equilibrium of any two-player normal form game,

(a) aggregate utility of the players is always maximized;

(b) Pareto efficiency is always achieved;

(c) at least one player chooses a dominant strategy;

(d) no player finds another strategy that yields better payoff for him, given the strat-
egy chosen by the other player.

17. An insurance company sets up a statistical test with a null hypothesis that the average
time for processing a claim is 7 days and an alternative hypothesis that the average
time for processing a claim is greater than 7 days. After completing the statistical
test, it is concluded that the average time exceeds 7 days. However, it is eventually
6
 learned that the mean process time is ac 7 days. What type of error occurred in the
statistical test?

(a) Type II error

(b) Sampling error

(c) Standard error

(d) Type I error

18. For a quasilinear utility with two commodities X, Y : u(x, y) = ϕ(x) + y:

(a) the income effect on X is always zero;

(b) the income effect on Y is always zero;

(c) the substitution effect on X is always zero;

(d) none of the above is correct.

Read the following question carefully and answer next two questions.
Think of an agent who lives for three periods: period t, t + 1 and t + 2. In period t,
the agent earns Rs. 20,000 in labour income. Earnings during the period t + 1 are
uncertain: there is a 50% chance that the agent will earn Rs. 40,000 and a 50% chance
that the agent earns rs. 1,00,000. In period t + 2, she does not earn anything new but
spends all the savings that is accumulated from the previous periods. Assume that
inflation, expected inflation, and the real interest rates are all equal to zero.

19. What is the present discounted value of the expected lifetime labour earnings in period
t?

(a) Rs. 1,00,000.

(b) Rs. 50,000.

(c) Rs. 90,000.

(d) Rs. 20,000.

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20. If the consumer wishes to maintain a constant expected consumption over her lifetime,
what will be her savings (or, borrowings) in period t?

(a) Rs. +30,000.

(b) Rs. 0.

(c) Rs. -10,000.

(d) Rs. +10,000.

Rough Work

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10
 Economics: Ph.D. Entrance Examination
Long, May 16th , 11:00 - 12:00

Instructions:

1. There are 4 questions in the exam. You are required to answer any three of
them.

2. Each question is worth 20 points making the maximum possible points 60.

3. Please answer in the space provided after each question.

4. You can use separate sheets provided for rough work before writing your an-
swer.

5. The exam will start at 11:00 on may 16th and will end at 12:00.

Seat Number:

Application Number:

1
1 Macroeconomics

Consider an economy where per capita income is growing over time. Time is discrete,
t = {0, 1, 2, ...} and there is no population growth. There is no exogenous techno-
logical change and there is perfect competition. The source of growth is productive
service that is provided by the government. The representative firm maximises profit
as given below.
Πt = Yt − rt Kt − wt Lt

subject to the production function,

Yt = At Ktα Lt1−α (1)

where α ∈ (0, 1) is the share of capital in total income, At is the productivity in

period t. All other notations are standard. Productivity increases in the level of
government spending per head, denoted by gt .

At = gt1−α . (2)

Individual firm takes At as exogenous but in the general equilibrium, At grows with
gt . The government imposes a tax, τ k , on income from capital and a tax, τ w , on
income from wages. The government budget constraint reads as

gt = τ k rt kt + τ w wt , (3)

Kt
where kt = Lt
is the capital per household. The preference of the representative
individual and her budget is given as follows.
∞
X
U= β t ln(ct ),
0

ct + kt+1 = (1 − τ k )rt kt + (1 − τ w )wt . (4)

Finally, the resource constraint in this economy is,

kt+1 = yt − ct − gt , (5)

where yt and ct are income and consumption per capita.

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1. Solve for rt and wt from the firms problem and then use (1), (2) and (3) to
express gt , yt rt and wt in terms of kt and (τ k , τ w ) alone.

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2. Write the resource constrain equation (5) in terms of (ct , kt and kt+1 ) and
(τ k , τ w ) alone.

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3. Explain why this economy is an example of an AK type economy. Explain
how do τ k and τ w affect yt and rt .

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2 Econometrics

The results from a simple linear regression and analysis of the variance of miles per
gallon (mpg) on price and a constant for 74 cars are below. Some results got omitted
by mistake. Answer the following questions.
(Please note that you must show your work and explain how you obtained the missing
statistics or estimates to receive full marks. Writing just the numbers would not
fetch full marks!)

. regress mpg price

Source | SS df MS Number of obs = 74
-------------+---------------------------------- F(1, 72) = 20.26
Model | 536.541807 1 536.541807 Prob > F = 0.0000
Residual | 1906.91765 72 26.4849674 R-squared =
-------------+---------------------------------- Adj R-squared = 0.2087
Total | 2443.45946 73 33.4720474 Root MSE = 5.1464
------------------------------------------------------------------------------
mpg | Coef. Std. Err. t P>|t| [95\% Conf. Interval]
-------------+----------------------------------------------------------------
price | -.0009192 .0002042 0.000
_cons | 26.96417 1.393952 0.000 24.18538 29.74297
------------------------------------------------------------------------------
SS: Sum of Squares
df: Degrees of Freedom

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1. Write down the empirical specification of the model being estimated where the
slope coefficient is β.

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2. Calculate the value of R2 for the regression.

3. Calculate the t-statistics for the estimated coefficient on price and constant.

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4. Calculate the upper- and lower bound of the 95% confidence interval for the
estimated coefficient on price.

5. Would you accept the following null hypothesis H0 : β = 0 against the alter-
native HA : β ̸= 0 ?

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6. What assumption(s) is(are) required to claim that β̂, the point estimate of β
is unbiased?

7. Define omitted variable bias. Is your model in part (a) suffering from omitted
variable bias? Explain in detail with an example.

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3 Development

Why has the female labour force participation rate in India fallen since the 1980s?
Discuss the gendered dimensions of unpaid work.

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Page 12
4 Microeconomics

A seller wants to sell an indivisible product and the market contains only one po-
tential buyer. The buyer has a von Neumann Morgenstern utility: if she gets to
purchase the product and pays a monetary transfer c to the seller is: θ − c, where
θ is the buyer’s maximum willingness to pay for the product (or “value”). In case
the product goes unsold, the buyer receives zero utility.

We assume that the value is known to the buyer but the seller only knows that θ
is drawn from a (subjective) probability distribution F with density function f . Let
[θ, θ̄] be the support, where 0 ≤ θ < θ̄1 . Suppose that the seller wants to maximize
his expected profit. The cost of production is assumed to be zero for the seller.

1. Suppose that the seller would like to design a “take it or leave it” offer – he
picks a price p and the buyer has to pay p and obtain the product or the good
remains unsold.

(a) What is the seller’s optimal offer in this case?

1
We assume that f (θ) > 0 for any θ ∈ [θ, θ̄]

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(b) Compare this with optimal monopoly pricing in a standard market with
a demand function satifying regular properties.

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(c) Formulate the seller’s problem if the commodity is divisible.

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2. The other option the seller considers is to design the following scheme – (i) he
asks the buyer to report his value θ; (ii) he commits to sell the product with
probability q(θ) while the buyer has to pay a (deterministic) price c(θ). The
seller consider the class of such schemes (call it S) where the buyer with any
value θ is willing to participate, i.e. it is Individually Rational (IR) scheme
and also the buyer with any value does not find any incentive to report a
false value, i.e. the scheme is Incentive Compatible (IC). Let u(θ) denote the
buyer’s expected utility from truth-telling conditional on the type being θ, i.e.
u(θ) = θq(θ) − c(θ).

(a) Is it possible to present this interaction between the seller and the buyer
in the form of an extensive form game?

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(b) Write down the conditions for IR and IC;

(c) Show that for any scheme in S, q must be increasing in θ;

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(d) Use envelope theorem to show that u′ (θ) = q(θ) and u(θ) = u(θ) +
Rθ
θ
q(x)dx, for any θ ∈ [θ, θ̄];

(e) Show that the payment function c satisfies the following:

Rθ
c(θ) = θq(θ) − θ
q(x)dx.

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(f) Provide an intuition behind the expression for c(.).

(g) Comment on the optimal scheme for the seller from S.

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