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Homework 1 Fall 2024

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24 views2 pages

Homework 1 Fall 2024

Uploaded by

ahmedyousifssjballer
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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K Re¤ett

Homework 1
ECN 312
Fall 2024

Directions: This homework is due September 16 at 5pm.

1. Draw a picture of a (a) convex set, (b) a strictly convex set, (c) a non-
convex set. Now, for a function f (x); de…ne the level set, upper level set, and
lower level set of the function f (x) where f : R2+ ! R; carefully when f (x) is
(d.1) convex, but not strictly convex, (d.2) strictly convex, (d.3) not convex,
(d.4) concave, (d.5) strictly concave.

2. Budget sets. Say we have 2 goods, and that the absolute price of good 1
is 5, and of good 2 is 10 (so the absolute price vector is P = (P1 ; P2 ) = (5; 10),
and income m is 100).
a. De…ne the consumption set, and then plot the budget set at this P:
b. In class, I discussed the "set inclusion" ordering on the subsets of the
n
consumption set C = R+ (that is the set inclusion ordering of 2C n?): Show
in the above setting the budget sets get "smaller" under set inclusion partial
ordering assuming either component of P increases, or m decreases.
c. Show that the imposition of positive sale tax of good 1 (not good 2) has
the same impact as a rise in the P1 :
d. Say the price of good 1 increases from 5 to 10 whenever more than 1 unit
of good 1 is purchases. Draw the new budget set, and show its convex. Is the
new budget set strictly convex? Explain.
e. In general, show the budget correspondence B(p; m) = fx 0jp1 x1 +
p2 x2 mg is convex-valued (i.e., is convex for each (p; m)) for all p = (p1 ; p2 ) >>
0; and m > 0:

3. Preferences. Let denote the consumer’s preference relation on C = R2+ :


Answer the following:
a. Say is re‡exive, complete, but not transitive. Show that the consumer’s
preferences could "cycle" (i.e., if for j = 1; 2; 3; :::; n; and consumption bundles
xn we could have
xj xj 1
and x0 xn :
b. Say is re‡exive, complete, and transitive (i.e., is a complete preorder).
(i) Can indi¤erence curves "cross" in this case? Actually, show this assump-
tion does not rule out crossing indi¤erence curves.
(ii) what is the additional assumption on the preference relation rules out
indi¤erence curves crossing. In answering, show that this added assumptions
does rule this out.
(iii) Show the consumer cannot "cycle" (i.a., part (a) cannot happen) if
is just a complete preorder.

1
(iv) Show that under "strictly monotonic" preferences, indi¤erence sets can-
not be "thick".In doing so, draw a picture of a typical indi¤erence curve at a
point x 2 X = R2+ for strictly monotonic preferences.

4. Convex Preferences and optimal solutions. Let denote the consumer’s


preference relation on C =R2+ : We say a preference relation is convex (re-
spectively, strictly convex) if for any two bundles x and y such that x~y (i.e.,
x and y indi¤erent), then for any 2 [0; 1] (respectively, 2 (0; 1)), and z =
x + (1 )y; z x~y (respectively, z x~y): We say a preference relation is
continuous if the two sets: weakly less preferred: LP (x) = fy 2 Cjx y; x 2 Cg
and weakly preferred: W P (x) = fy 2 Cjy x; x 2 Cg are "closed" (i.e., contain
their boundaries. See discussion in class.
Answer the following questions. Let the consumption set be C = R2+ :
(a) Show if the preferences are convex, the set LP (x) can be convex.
(b) Show in (a) that LP (x) is not generally not convex.
Consider a consumer facing a budget set B(p; m) = fx 2 Cjp x mg
for p >> 0: De…ne the best choice set X (p:m) = fx 2 Cjx x for all
x 2 B(p; m)g
(c) Show if is convex and strictly monotonic, the demand mapping X (p; m)
might have many elements (i.e., many optimal demand choices and be a demand
correspondence, not demand function).
(d) Show if is strictly convex and strictly monotonic, then argue that
X (p; m) is a unique for each price-income pair.

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