I

(a) Explain, using a two-period indifference curve framework (with income arising in both periods, namely, present and future), how an individual may respond (rationally) to an increase in the interest rate by increasing or decreasing savings (or neither). Please include references to the substitution effect, the income effect, present consumption, future consumption and savings in your answer.

(b) Is a saver/lender necessarily worse off as a result of a decrease in the interest rate? Explain your answer. Is a borrower necessarily better off as a result of a decrease in the interest rate? Explain your answer (using the concept of revealed preference).

II

(a) Would a producer prefer a general subsidy to both factors of production over a subsidy, involving equal cost to the government, to one factor of production only? Explain your answer.

(b) Discuss why a government might decide to use a subsidy to one factor of production only.

III

(a) Describe the concept of a Nash equilibrium. Within the context of oligopoly, describe the difference(s) between a Cournot-Nash equilibrium and a Bertrand-Nash equilibrium. In particular, as a seller/producer or a buyer/consumer, might you prefer one over the other? Explain your answer(s).

(b) In terms of expected output, price, consumer surplus, profits and societal welfare, contrast the standard Cournot-Nash equilibrium (for the case of 2 firms), the monopoly equilibrium and the perfectly competitive equilibrium.

IV

(a) Within the context of a simple exchange economy, describe the construction of the appropriate Edgeworth-Bowley box diagram.

(b) What is meant by a Pareto-efficient allocation of resources? In an Edgeworth-Bowley box diagram, indicate a Pareto-efficient allocation of resources and a Pareto-inefficient allocation of resources. Explain your positioning/labelling in each case.

(c) Describe the relationship between the firm's demand curve for labour in the short-run and the market demand curve for labour in the short-run. In particular, is one curve likely to be more or less elastic than the other? Explain your answer.