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Winter 2015
Answers to Selected Exercises
Instructor: Kam Yu
The following questions are taken from Geoffrey A. Jehle above in u, that is, for some p 0, there exists M > 0
and Philip J. Reny (2011) Advanced Microeconomic The- such that M E(p, u) for all u in the domain of E.
ory, Third Edition, Harlow: Pearson Education Limited.
Let u = V (p, M ). Then
The updated version is available at the course web page:
E(p, u ) = E(p, V (p, M )) = M = pT x ,
http://flash.lakeheadu.ca/kyu/E5113/Main.html
where x is the optimal bundle. Since U is continuous,
there exists a bundle x0 in the neighbourhood of x such
Ex. 1.14 Let U be a continuous utility function that that U (x0 ) = u0 > u . Since U strictly increasing, E is
represents %. Then for all x, y Rn+ , x % y if and only strictly increasing in u, so that E(p, u0 ) > E(p, u ) =
if U (x) U (y).
M . This contradicts the assumption that M is an upper
First, suppose x, y Rn+ . Then U (x) U (y) or bound.
U (y) U (x), which means that x % y or y % x. Therefore % is complete.
Ex. 1.37 (a) Since x0 is the solution of the expenditure
Second, suppose x % y and y % z. Then U (x) U (y) minimization problem when the price is p0 and utility
and U (y) U (z). This implies that U (x) U (z) and level u0 , it must satisfy the constraint U (x0 ) u0 . Now
so x % z, which shows that % is transitive.
by definition E(p, u0 ) is the minimized expenditure when
Finally, let x Rn+ and U (x) = u. Then
price is p, it must be less than or equal to pT x0 since
x0 is in the feasible set, and by definition equal when
p = p0 .
= {z Rn+ : z % x}
(b) Since f (p) 0 for all p 0 and f (p0 ) = 0, it
= % (x).
must attain its maximum value at p = p0 .
(c) f (p0 ) = 0.
Since [u, ) is closed and U is continuous, % (x) is closed.
(d) We have
Similarly (I suggest you to try this), - (x) is also closed.
This shows that % is continuous.
f (p0 ) = p E(p0 , u0 ) x0 = 0,
U 1 ([u, ))
= {z Rn+ : U (z) u}
n
X
di (p, y)
j=1
pj
pj +
di (p, y)
y = 0.
y
(1)
(2)
x/u
= u min{pT z : U (z) 1}
z
(3)
= uE(p, 1)
= ue(p)
V (p, y) =
di (p, y) X
pj dj (p, y)
y
j=i
di (p, y)
di (p, y)
pj +
y
pj
y
(5)
(6)
pj
pj +
=0
y
= v(p)y,
e(p)
j=i
n
X
j=i
n
X
di (p, y)
The Lagrangian is
L = p
1 p2 (1 p1 x1 p2 x2 ),
p1
p2 + x1 = 0
1
E(p1 , u0 )
y1
>
y0
E(p0 , u0 )
and
1
+ x2 = 0.
p
1 p2
x1
p1 .
x2
p22
.
4p1
1
,
+ x1
p2 =
1
.
+ x2
and
(4)
p1 =
U (x) =
x
1 x2 ,
( + )+
u0 1/8
43
=
.
2u0 1
80
2
Ex. 3.2 Constant returns-to-scale means that f is linearly homogeneous. So by Eulers theorem
up1 p2
.
p1 + p2
x1 y/x1 + x2 y/x2 = y.
Rearranging gives
u
p1 + p2
p1 + p2
x1 +
x2
p2
p1
1
and
lim
x1
x2
+
=
(9)
x2
x1
+
= 0,
2
(1 )2
2 x2 = (1 )2 x1 .
x2
10 15q (J 1)
q 15q 2q = 0.
1/2
= (1 )x1 .
Rearranging gives
1/2
1/2
x1
1/2
x1
1/2
and
x2
1=
+ x2
1/2
x1
1/2
+ x2
It is clear that is indeed between 0 and 1. Putting Ex. 5.11 (a) The necessary condition for a Paretoand 1 into the objective function in (8) give the direct efficient allocation is that the consumers MRS are equal.
Therefore
utility function
U (x1 , x2 ) =
1/2
x1
1/2
x2
2
,
3
x2
x12
= 22 .
1
x1
2x1
y1
2p1
y1
x12 =
2p2
y2
x21 =
3p1
2y 2
x22 =
3p2
x11 =
(11)
x12
(12)
x22
e12
e22
= 4 + 6 = 10.
Express x21 in (11) and x22 in (12) in terms of x11 and x12
respectively, (10) becomes
x12
10 x12
=
,
1
x1
2(21 x11 )
or
x12 =
10x11
.
42 x11
p1 e11 + p2 e12
18p1 + 4
=
2p1
2p1
1
1
p1 e1 + p2 e2
18p1 + 4
=
=
2p2
2
2
2
p1 e1 + p2 e2
3p1 + 6
=
=
3p1
3p1
2
2
2(p1 e1 + p2 e2 )
2(3p1 + 6)
=
=
3p2
3
=
(13)
Eq. (13) with domain 0 x11 21, (11), and (12) com- which gives p1 = 4/11 (check that market 2 also clears).
pletely characterize the set of Pareto-efficient allocations The Walrasian equilibrium is p = (p1 , p2 ) = (4/11, 1).
From the demand functions above, the WEA is
A (contract curve). That is,
x = (x11 , x12 , x21 , x22 ) = (14.5, 5.27, 5.6, 4.73).
10x11
1
A = (x11 , x12 , x21 , x22 ) : x12 =
,
0
21,
1
42 x11
(d) It is easy to verify that x C(e).
x11 + x21 = 21, x12 + x22 = 10.
Ex. 5.23 Let Y Rn be a strongly convex production
(b) The core is the section of the curve in (13) be- set. For any p Rn , let y1 Y and y2 Y be two
++
tween the points of intersections with the consumers in- distinct profit-maximizing production plans. Therefore
difference curves passing through the endowment point. p y1 = p y2 p y for all y Y . Since Y is strongly
For example, in Figure 1, if G is the endowment point, convex, there exists a y
Y such that for all t (0, 1),
the core is the portion of the contract curve between
points W and Z. Consumer 1s indifference curve passing
> ty1 + (1 t)y2 .
y
through the endowment is
Thus
(x11 x12 )2 = (18 4)2 ,
> tp y1 + (1 t)p y2
py
1
1
or x2 = 72/x1 . Substituting this into (13) and rearrang= tp y1 + (1 t)p y1
ing give
= p y1 ,
5(x11 )2 + 36x11 1512 = 0.
4
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c
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