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Homework2Fall 2024

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16 views3 pages

Homework2Fall 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 2
ECN 312
Fall 2024

Directions. This homework is due September 30, 2024 at 5pm. It covers


material in Chapters 3-5. The …rst two HWs will be an excellent study guide to
exam questions for the …rst term exam. So they will serve as the review sheet
for the …rst exam.

1. Say we have a utility function u(x) = x1 x12 for 2 (0; 1): x 2 C = R2+
(a) Construct marginal utilities for both goods. Show the marginal utilities
are strictly decreasing.
(b) now, construct the Marginal rate of substitution for these preferences.
Show the preferences are strictly convex (i.e., the set W P (x) = fy 2 Cjy x;
x 2 Cg for every point interior point x 2 C is strictly convex. What is we let
x = 0? Is W P (0) strictly convex?
(c) Now, let u(x) = x21 x22 : Show the marginal utilities do not diminish for
this consumer (i.e., the utility function is not concave).
(d) show both the utility function in part (c) represent a consumer preference
relation "ALAG" that is a complete preorder (i.e., re‡exive, transitive, and
complete) that is also strictly monotonic on the set int(C) = fx 2 Cjxi > 0 for
i = 1; 2g:
(e) For preferences in part c, show still that preferences are strictly convex.
(f) Discuss how the Marginal rate of substitution is related to the slope of
an indi¤erence curve at a point x >> 0 (i.e., each component of x is strictly
positive) for utility functions given.
(g) now let preferences be represented by u(x) = x1 +x2 : What is the MRS12
for these preferences? Graph the indi¤erence curves for these preferences. Are
the preferences strictly convex? Hint: please use the utility function given to
facilitate showing this. One idea is to construct a typical indi¤erence curve at
any point x 2 X; use its properties to graph it, and conclude that any strict
convex combination of any two bundles in W P (x) must be interior to this set.

2. Answer the following:


(i) Why is a utility function considered to be an "ordinal" concept?
(ii) Show that if u(x) represents a consumer’s preference relation, any u
^(x) =
10 u(x) represents that same utility function.
(1 )
(iii) Show that if u(x1 ; x2 )=x1 x2 for 2 (0; 1); the MRS between the
two goods for u^(x) is not impacted by this strictly increasing transformation.
That is,show if h(y) : R ! R is a strictly increasing continuously di¤erentiable
transformation, u^(x) = h(u(x)) represents that same preferences as u(x) when
consumption is strictly positive for both goods.
(iv) Show in part (iv) that the MRS at the same for both u ^(x) and u(x) when
consumption is strictly positive for both goods. (Btw, why do I keep saying that

1
consumption needs to be "strictly positive for both goods" in these statements
in part (ii) and (iv) for example).
(v) let h(y) = ln y: Show that when consumption is strictly positive for both
(1 )
goods, the MRS is the same for both u ^(x) and u(x) if u(x1 ; x2 )=x1 x2 for
2 (0; 1) when consumption is strictly positive for both goods.
(vi) Actually, show without appealing to the MRS that consumer preferences
represented by the utility function

u
^(x1 ; x2 ) = ln x1 + (1 ) ln x2 ; x >> 0

u
^(x1 ; x2 ) = ln x1 + (1 ) ln x2 = 1; else
where "x >> 0" means both components/dimensions of x are strictly posi-
tive, represents the exact same consumer preferences as a consumer that has
preferences represented by
(1 )
u(x1 ; x2 ) = x1 x2 for 2 (0; 1)

In doing so, de…ne what we mean when we say a utility function "represents" a
consumer’s preference relation :

3. Say that preferences are convex and C = R2+ . Then,


(a) explain why demand is usually a correspondence, and
(b) show that if preferences are strictly convex, demand is always a "single-
ton" (i.e, a demand function, not a demand correspondence).
(c) If preferences are convex, not strictly convex, can demand ever always
be unique?

4. De…ne the set inclusion partial ordering on the powersets of a set X:


(a) Show that budget correspondence B(p; m) = fx 0jp1 x1 + p2 x2 mg
is monotone increasing in m under set inclusion for …xed p >> 0:
(b) let the rational preferences of a consumer be represented by a utility
function u(c) that is continuous on C = R2+ : Consider the following Marshallian
demand problem: for p >> 0; m > 0; de…ne the value function v (p; m) in

v (p; m) = max u(c)


c2B(p:m)

where under our assumptions v (p; m) is well-de…ned. First assume preferences


are "strictly more is better". Show that under this assumption, v (p; m) must
be strictly increasing in m for each …xed p >> 0:
(c) Now, say preferences are not even monotone (let alone strictly monotone
as in part (c)). Show that v (p; m) is "non-decreasing" in m, but not necessarily
strictly increasing in m
(d) for the preferences

u
^(x1 ; x2 ) = ln x1 + (1 ) ln x2 ; x >> 0

u
^(x1 ; x2 ) = ln x1 + (1 ) ln x2 = 1; else

2
where again x >> 0 means both components/dimensions of x are strictly posi-
tive, construct the Marshallian demands.
(e) Now construct the Marshallian demands for the preferences represented
by
(1 )
u(x1 ; x2 ) = x1 x2 ; 2 (0; 1)
and show the demands are exactly the same as in part (d) of this question
(f) Now construct the Marshallian demands for a consumer with perfect
substitutes preferences u(x1 ; x2 ) = x1 + x2 :
(g) Now construct the Marshallian demands for a consumer with Leon-
tief/perfect complements preferences u(x1 ; x2 ) = minfx1 ; x2 g
(h) show in the cases of the preferences in parts (d), (e), and (g), both goods
are normal.
(i) What is the problem with showing demands in part (f) are normal?

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