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This document contains 6 problems related to microeconomics and consumer theory. Problem 1 asks to show that Walrasian demand is continuous and calculate demand for two utility functions. Problem 2 examines properties of demand and indirect utility when utility is homogeneous of degree one. Problem 3 relates to quasilinear preferences and properties of demand and indirect utility. Problem 4 asks whether certain choice functions can be rationalized. Problem 5 covers properties of the expenditure function. Problem 6 asks for examples where aggregate demand does not represent a single representative consumer.

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46 views

Sxaaca

This document contains 6 problems related to microeconomics and consumer theory. Problem 1 asks to show that Walrasian demand is continuous and calculate demand for two utility functions. Problem 2 examines properties of demand and indirect utility when utility is homogeneous of degree one. Problem 3 relates to quasilinear preferences and properties of demand and indirect utility. Problem 4 asks whether certain choice functions can be rationalized. Problem 5 covers properties of the expenditure function. Problem 6 asks for examples where aggregate demand does not represent a single representative consumer.

Uploaded by

Viti Soto Irux
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Bocconi University Prof. M.

Messner
PhD in Economics - Microeconomics I Problem Set 3

Problem 1:

i) Suppose that the preference  is continuous and that the Walrasian demand which it
generates is single valued for all admissible price-wealth pairs (i.e. it is a function). Show
that the Walrasian demand x(·, ·) is continuous.

ii) Calculate and compare the Walrasian demand for two consumers whose preferences are
represented by the utility functions u(x) = Πl xα
P
l and ũ(x) = l αl ln(xl ).
l

Problem 2: Suppose that the utility function u is differentiable and strictly quasiconcave
and that the Walrasian demand x(·, ·) generated by u is a differentiable function. Show the
following:

i) If u is homogeneous of degree one, then the Walrasian demand function x and the indirect
utility function v are homogeneous of degree one in w.

ii) If u is strictly quasiconcave and v is homogeneous of degree one in w, then u must be


homogeneous of degree one.

Problem 3: Let X = R × RL−1


+ (i.e. assume that the first commodity may be consumed
also in negative quantities) and assume that preferences are continuous, strictly convex and
quasilinear wrt commodity one. Normalize p1 = 1.

i) Show that the Walrasian demand function for commidity l, l = 2, ..., L, is independent of
wealth.

ii) Argue that the indirect utility function can be written in the form v(p, w) = w + φ(p) for
some function φ.

iii) Now let X = R2+ (that is there are only two commodities and good one can no longer be
consumed in negative quantities) and let preferences be represented by the utility function
u(x) = x1 +η(x2 ). Fix prices p and examine how the Walrasian demand changes as wealth
changes. When is the non-negativity constraint on commodity one irrelevant?

Problem 4: Assume that L = 2. Determine whether the choice functions (which describe
choices from budget sets) given below can be rationalized (i.e. determine whether they might
be generated by preference maximization).

i) x(p, w) = (2w/(2p1 + p2 ), w/(2p1 + p2 ))


(
(w/p1 , 0) if w/p1 ≤ 1
ii) x(p, w) =
(1, (w − p1 )/p2 ) else
iii) x(p, w) is a function which satisfies Walras’ law and p2 x1 (p, w) = p1 x2 (p, w)

1
Problem 5:

a) Unlike in the problem U M P (p, w) the feasible set of EM P (p, u) (i.e. the set {x ∈ RL+ :
u(x) ≥ u}) is typically not compact. Prove that EM P (p, u) must have nonetheless a
solution if preferences are continuous and {x ∈ RL+ : u(x) ≥ u} is nonempty (remember
also that we assumed that pl > 0 for all l = 1, ..., L).

b) Show that convexity of the preference  implies that h(p, u) is convex; moreover prove
that h(p, u) must be a singleton if preferences are strictly convex.

c) Show that if the utility function u(·) is homogeneous of degree one, then the Hicksian
demand h and the expenditure function e are homogeneous of degree one in u.

Problem 6: A common practice in economics is to view aggregate demand as being derived


from the behavior of a so called ’representative’ consumer. Give two examples of ’well-behaved’
consumer preference relations that can induce average behavior that is not consistent with the
behavior of a preference maximizing representative consumer. That is, construct two consumers,
1 and 2, who choose the bundles x1 and x2 out of some budget set B and the bundles y 1 and
y2 out of another budget set B 0 so that the choice of the bundle (x1 + x2 )/2 from B and of
the bundle (y 1 + y 2 )/2 from the budget set B 0 is inconsistent with the model of the rational
consumer.

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