Bangladesh Economics Olympiad (BDEO) - 2024
Team Selection Exam
Instructions:
 DO NOT write any “common sense” answers.
 YOU MUST LIMIT your answers within the space allowed following each question.
 TRY TO USE your knowledge of economics in crafting the logic and prose of your responses.
Question 1
Let, in the fictional universe of the Dune series, Paul Atreides has consolidated complete victory over his inter-planetary
empire. Eventually he plans to build an inter-galactic civilization. To accomplish this, he employs a team of advisers who
are experts in mathematical economics. The advisers are building a set of mathematical models to predict future courses
of stability and growth of this planned inter-galactic civilization.
The advisers note that the models that they have built so far works reasonably well for historical data only under the
following assumptions:
a.
b.
c.
d.
e.
f.
The population whose behavior was modelled should be sufficiently large to represent the entire galaxy.
The population should remain unaware of the models describing their behavior.
There should be no fundamental change in the human societies.
The rate of change in human reactions to any external change should remain constant.
Humans should be the only sentient intelligence in the galaxy.
Sentient races develop extremely rarely, such that in one randomly chosen galaxy, it appears probable that only
one sentient race would develop.
g. Subsets of humanity should not alter themselves so significantly from ‘baseline’ humans that they could be
considered “aliens” i.e. non-humans.
Evaluate each of these assumptions closely and answer the following questions:
1. Which are the two most vital of the assumptions? Why? Consider them in terms of necessity and sufficiency. [15
points]
2. Which are the two least vital of the assumptions? Why? Consider them in terms of necessity and sufficiency. [15
points]
3. How do you interpret ‘fundamental change’ in the society (assumption ‘c’)? Can you find an economic analogue?
[10 points]
4. Consider assumption ‘b’ and assumption ‘g’. What may be the underlying intent of each of these two
assumptions? [20 points]
Question 2
The following statements may not be logically valid according to the principles of economics. Read carefully and analyze
the structure of the arguments in each case. Evaluate the argumentative error, if any, in each of the cases and respond by
pointing it out with your knowledge of economics. (You don’t need to “solve” the logical fallacies, you just need to detect
them.) [3 points each] [30 points]
1. Should one farmer augment their crop production, they will subsequently increase their profitability.
Consequently, should all farmers undertake such augmentation, a collective rise in profitability would logically
ensue.
2. The act of acquiring a new automobile mirrors the complexities inherent in stock market investments, given that
both actions necessitate astute financial deliberation.
3. Historically, the imposition of elevated tariffs served as a protective measure for domestic industries. It follows,
then, that such tariffs must wield comparable efficacy in fostering contemporary economic growth.
4. Should a 10% increment in minimum wage transpire, enterprises would inevitably confront escalated operational
expenditures. This, in turn, portends potential layoffs, diminished consumer spending, and, ultimately, an
impending economic downturn.
5. The favorable indication of high corporate profits reverberates positively throughout the broader economy,
serving as a definitive hallmark of formidable economic health and vitality.
6. In times of economic downturn, the steadfast recourse to government-backed stimulus initiatives traditionally
engenders an eventual economic rebound. Therefore, a contemporaneous surge in governmental expenditure
undeniably promises substantial economic rejuvenation.
7. An enduring period of low unemployment inherently predicates an eventual correction, whereby a forthcoming
rise in joblessness looms as an inevitable counterbalance.
8. The prevailing discourse on economic policy should decisively pivot towards the reduction of taxation burdens,
dismissing any ancillary deliberations pertaining to environmental regulatory measures, which hold minimal
relevance to the core imperatives of economic expansion.
9. The imperative mandate to adopt an innovative trade policy derives from its purported capacity to substantially
augment national prosperity and fortify the collective economic welfare.
10. The pivotal endorsement of an ambitious infrastructure initiative is underscored by its unparalleled potential to
generate gainful employment for a vast contingent of presently disenfranchised laborers.
Question 3
Measuring economic inequality is complex and can be biased. Here’s a simple example to show one kind of difficulty:
Imagine there are only two people. If they split a cake evenly (50-50), the distribution is equal. If the split is 40-60, it’s
less equal, but still more equal than a 30-70 split.
However, with more than two people, judging fairness gets harder. How do you compare a 20-30-50 split to a 22-22-56
split? It becomes tricky to make comparisons and decisions.
To address this, economists have created four criteria for any unbiased inequality measurement. What follows is a simple
illustration of these concepts.
Let,
a.
b.
c.
d.
y is income
1, 2, …, n and 1, 2, …, m are indexes of populations of country n and country m.
(y1, y2, ... , yn) is an income distribution
I = f (y1, y2, ... , yn) is an inequality measure, defined as a function of the income distribution, such that I is a nonnegative real number.
e. z and D are the levels of income transfer (for example tax, subsidy, or welfare benefits etc.).
The four criteria to determine an unbiased measure of inequality are the following. Translate the intent and implication
of each of the four criteria by interpreting the mathematical statements into verbal concepts. (Think about what sort
of issues would’ve been addressed if each of these criteria were fulfilled.)
1. If I1 = f (y1 ≤ y2 ≤ ... ≤ yn) and I2 = f (y2 ≤ y1 ≤ ... ≤ yn) then I1 = I2 [10 points]
2. For any n ≤ m if I1 = f (y1, y2, ... , yn) and I2 = f (y1, y2, ... , ym) then I1 = I2 [10 points]
3. If I1 = f (y1, y2, ... , yn) and I2 = f (zy1, zy2, ... , zyn) then I1 = I2, such that z is non-negative. [10 points]
4. If I1 = f (y1, y2, … yi, yj , ..., yn) = and I2 = f (y1, y2, … yi - D, yj + D, ..., yn) then I1 < I2, such that yi ≤ yj and D is
non-negative [10 points]
Question 4
A concert venue regularly holds events that generate loud music, which disturbs the nearby residents, reducing their
quality of life and property values. This creates a conflict between the venue and the residents due to the negative
externality of noise pollution. If the concert venue has the right to play loud music, the residents might negotiate with the
venue to reduce the noise by offering to pay for soundproofing. Conversely, if the residents have the right to a quiet
environment, the concert venue would need to compensate them for the disturbance, potentially finding it cheaper to
install soundproofing than to pay ongoing compensation.
The Coase theorem, proposed by economist Ronald Coase, says that when property rights are clear and transaction costs
are low, people can negotiate and trade to use resources efficiently, no matter who originally owns the rights. Suggest how
the Coase theorem can be applied to this problem. [20 points]
Question 5
Two drivers are driving towards each other on a narrow bridge. Each driver has two choices: to swerve (avoid collision)
or to stay on course (maintain speed). If one driver swerves first, the other gets the bridge. But if neither swerves, they
might end up stuck or crash into each other, which could be fatal. Each driver wants the other to back down, but they both
know a crash would be the worst result for both. So, they are in a tough spot where trying to get the best outcome for
themselves also puts them at risk of the worst outcome. The outcomes depend on the combination of their choices, and
each driver must decide without knowing what the other will do.
Create a pay-off table and mention if there exists any Nash equilibrium. [20 points]
Question 6
In a city, there is a competitive market for used iPhones. Sellers want to sell their iPhones, but only they know the true
quality of their phones, which can be either excellent or poor. Buyers, on the other hand, can only judge the iPhones based
on looks and limited tests.
In this market, 60% of the iPhones are excellent, and 40% are poor. An excellent iPhone is worth $800 to a buyer, while a
poor one is worth $200. Because buyers can't be sure about the quality, they are cautious and will only pay a price that
reflects the average value of the iPhones.
Sellers have different reasons for selling their iPhones. Some need money quickly and will accept lower offers, while
others are willing to wait for higher prices. Each seller has a minimum price they are willing to accept, which they keep
private.
Assume there are more buyers than sellers in the market. What challenges do buyers and sellers face? How does the
market equilibrium unfold? [20 points]
Question 7
Social choice theory, also known as voting theory, is a part of welfare economics that looks at how groups make decisions
together. It brings together ideas from economics, mathematics, and game theory to figure out how to blend everyone’s
opinions or preferences into one overall measure of what’s best. This measure is called a social welfare function.
Essentially, social choice theory explores the methods and rules for collective decision-making, aiming to find fair ways
to reach agreements that reflect the diverse viewpoints of a community. To this end, the top 5 (five) electoral systems
prevalent in the world are:
Party-list proportional representation:
Parties create lists of candidates, and voters choose a party rather than individual candidates. Seats in the legislature are
given to parties based on their share of the total vote, ensuring that each party gets representation proportional to its
popularity among voters.
First-past-the-post (FPTP) voting:
In each area, the candidate with the most votes wins, even if they don't have more than half of the votes. This method
tends to benefit larger parties and can lead to smaller parties not getting as much representation as they might deserve
based on their overall support.
Plurality block voting:
Voters have multiple votes equal to the number of positions available. They can give these votes to different candidates.
Candidates who receive the most votes win the positions, which can sometimes lead to outcomes where some groups or
viewpoints are underrepresented.
Two-round (runoff) system:
If no candidate gets more than half of the votes in the first round, the top two candidates compete in a second round. The
candidate with the most votes in this runoff election wins. This system ensures that the winning candidate has majority
support among voters.
Ranked voting (STV or Instant-runoff voting):
Voters rank candidates in order of preference. If no candidate initially gets a majority of first-choice votes, the candidate
with the fewest votes is eliminated, and their votes are reassigned based on the voters' next preferences. This continues
until a candidate receives a majority, ensuring that the winner has broad support among voters who have multiple favorite
candidates.
List the most important limitation of each method (write ONE limitation per method) according to your understanding of
economics. [30 points]
Question 8
The foundations of international trade theory rely on four fundamental results.
Heckscher–Ohlin theorem:
The relative abundance in capital will cause the capital-abundant country to produce the capital-intensive good cheaper
than the labor-abundant country and vice versa.
Factor price equalization theorem:
The relative prices for two identical factors of production will eventually be equalized across countries because of
international trade.
Stolper-Samuelson theorem:
A rise in the relative price of a good will lead to a rise in the return to that factor which is used most intensively in the
production of the good, and conversely, to a fall in the return to the other factor.
Rybczynski theorem:
When only one of two factors of production is increased there is a relative increase in the production of the good using
more of that factor. This leads to a corresponding decline in that good's relative price as well as a decline in the production
of the good that uses the other factor more intensively.
Now use these four results to explain the problems of emigration (leaving a resident country) and immigration (entering a
place of residence to settle) as it happens across the world. Use relevant diagrams if possible. [20 points]
Question 9
In a small village, households are endowed with labor and vegetables, which they sell to a restaurant. The restaurant
produces meals, which households can purchase for consumption.
1. Formulate the optimization model for the household and the restaurant.
2. How could the optimization be done? (Show the functional forms of the mathematical derivation) [25 points]
Question 10
Draw the AD-SRAS-LRAS diagram for the U.S. economy starting in a long-run equilibrium. A boom occurs in the stock
market. Use your diagram to determine the SR and LR effects on U.S. GDP, the price level, and unemployment.
[25 points]
-End of the Question-