This is intermediate micro ecnonomic

This is intermediate micro ecnonomic

Question

Intermediate
Microeconomic The
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This is intermediate micro ecnonomic

Question

Intermediate
Microeconomic Theory Fall 2013

Homework #1 - Part B

Choice:

Exercise 7:

Assume
preferences can be represented by the following utility function:

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u(x1; x2) = 3 ln (x1) + ln (x2)

a.
Is the utility function
monotonic? Justify.

b. How can this person be better o¤than by consuming the bundle (x1; x2) = (10; 10)?

c.
Set up the utility maximization
problem for the consumer, when facing

prices p1 = 6; p2 = 2 and income m = 32:

d.
Solve the problem by …nding (x1; x2) :

e.
Graph the budget set, a couple of
indi¤erence curves and the optimal

choice.

Exercise 8:

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Assume preferences can be represented by the
following utility function: u(x1; x2) = x12 + 150x1 2x22 + 100x2 + x1 x2

a.
Is the utility function
monotonic? Justify.

b. How can this person be better o¤than by consuming the bundle (x1; x2) = (100; 100)?

c.
Set up the utility maximization
problem for the consumer, when facing:

prices p1 = 2; p2 = 1 and income m = 30:

d. Solve the problem by

…nding (x1; x2) :

Exercise 9:

Assume
preferences can be represented by the following utility function:

u(x1; x2) = 4 ln (x1) + x2

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a.
Is the utility function
monotonic? Justify.

b. Set up the consumer’s utility maximization problem for prices p1; p2 and income m (the
general case)

c. Solve the problem. You will obtain solutions x1 (p1; p2; m) ; x2 (p1; p2; m) in terms of the
parameters
of the model (p1; p2; m) :

Demand:

Exercise 10:

You are the owner of a supermarket that wants

to understand your client’s preferences so that you can optimally price your
products. You record a client’s purchases of two products x1 and x2 in 8 di¤erent occasions. The
following table summarizes the results (for a similar exercise see Varian,
ch.5, sec.4):

Obs. p1 p2 m x1 x2

1 3 2 94 12 29

2 2 2 106 15 38
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3 2 3 95 10 25

4 1 3 170 20 50

5 3 1 83 15 38

6 2 1 135 30 75

7 4 1 143 22 55

8 1 2 168 28 70

a. Notice observations number 2 and 5. Quantities purchased are the

same but prices are not. What does this mean in terms of the marginal rate of
substitution at those quantities?

b.
Plot the 8 bundles purchased by
the individual in a graph.

c. Which type of preferences comes closer to describing this

individual’s behavior (Cobb-Douglas, Perfect Complements or Perfect
Substitutes)?

d. Write down
a utility function that represents these preferences fairly well.

Exercise 11:

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You record a client’s purchases of two
products x1 and x2 in 8 di¤erent occasions. The
following table summarizes the results:

Obs. p1 p2 m x1 x2

1 2 2 20 4 6

2 2 2 40 4 16

3 2 2 30 4 11

4 1 3 51 12 13

5 1 3 48 12 12

6 1 3 63 12 17

7 2 1 70 2 66

8 2 1 50 2 46

Notice that for observations 1,2 and 3 even though prices did not
change for di¤erent amounts of income spent by the client, he/she still
purchased the same amount of good one in all three occasions. The same can be
said for observations 4,5 and 6 and observations 7 and 8.

a. Draw the Engel curves for good 1 and the

income expansion paths for the three sets of prices in the table.

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2

b.
The preferences underlying this
individual’s behavior can be represented by one of the three utility functions
in Exercises 7,8 and 9. Find which one it is and explain why.

c.
Based on your answer to part b,
complete the following table with your predictions on the client’s purchases
for the given prices and income:

Obs. p1 p2 m x1 x2

9 2 2 50

10 2 4 100

11 3 3 45

12 4 1 20

Slutsky Equation:

Exercise 12:

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Assume
preferences can be represented by the following utility function:

u(x1; x2) = x1 x22

a.
Is the utility function
monotonic? Justify.

b.
Set up the consumer’s utility
maximization problem for prices p1; p2 and income m (the general case)

c. Solve the problem. You will obtain demand functions x1 (p1; p2; m) ; x2 (p1; p2; m) in terms of
the parameters
(p1; p2; m) : Obtain price elasticity of
demand for

good one. Obtain income elasticity of demand for good 2.

d.
Assume that, originally, the
consumer faces:

prices p1 = 2; p2 = 5 and income m = 180:

Then, the price of good 1

increases to p;1 = 3: Obtain the income and
substi-tution e¤ects for good 1 with Slutsky compensation (that is,
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compensating the individual so that it can still buy the old bundle at the new
prices).

e.
Find the amount of compensation
needed for Hicks compensation (that is, compensating the individual so that he
is indi¤erent to his old bundle). To do this plug the old bundle into the
utility function to obtain the level of utility you want to acheive. Then plug
the demand functions into the utility function. Then replace prices with new
prices and equate the two utilities. By now you should have a function of
income equal to a number. Solve for the appropriate income level. That is the
compensation needed to make the individual indi¤erent to the old bundle. The
amount of compensation needed should be lower than with Slutsky compensation,
but because the price change is very small, there should be barely any
di¤erence between the two.

f.
Graph your results in (e) by
plotting the old and new indi¤erence curves, the old, compensated and new
budget sets and the old, compensated and new choices (quantities demanded).

Exercise 13 :

For the following demand function: x1 (p1; p2; m) =

for values of m > 1:

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4

p1 (3 + m);

a.
Obtain Income elasticity of
demand. Plot the Engel curve for p1 = 1:

b.
Is this a normal good?

c. Assuming that preferences are monotonic (then the individual

always spends all its income), use the budget constraint to solve for x2 (p1; p2; m).

d.
The consumer faces the following
prices and income level:

prices p1 = 1; p2 = 1:5 and income m = 5:

Calculate the quantity demanded for goods 1

and 2 at these prices and this income level.

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e. Obtain income
and substitution e¤ects with Slutsky compensation when the price of good 1
drops to p;1 = 0:5

Exercise 14:

Assume
preferences can be represented by the following utility function:

u(x; y) = x12 + 100x1 + 20 x2

a.
Is the utility function
monotonic? Justify.

b. Set up the consumer’s utility maximization problem for prices p1; p2 and income m (the
general case)

c. Solve the problem. You will obtain demand functions x1 (p1; p2; m) and x2 (p1; p2; m) in terms
of the parameters
(p1; p2; m) :

d. Graph the demand function for good 1 when the price of good 2 is p2 = 2 and income is m =
200:

e. Obtain the change in consumer surplus when the price of good 1

goes from p1 = 2 to p1 = 4:

f.
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Again, assuming the price of good
1 increases to p;1
= 4: Find the

Compensating and the Equivalent Variations

g. For the same

price increase, obtain the income and substitution e¤ects on good 1, both with
Slutsky and Hicks compensations.

This is intermediate micro ecnonomic

Attachments
198178_51485_1_TM_C_micro-assignment-24Sept-Edit.docx (103.81 KB)

Preview: haveM xxxxxxxx 4/ x p2x2 = xxxxxxxxxxxxx from (9 xx we xxxxx xxxxxxxx 4p2 x p2x2
= xxxxx = M xxxxxxxx 4p2x2 x xxxx – x (9 4)Substituting xxxx (9 2) xxxx (9 xx xxxxx usx1 x
4p2/p1(9 5)Thus, xxxx [4p2/p1] and xxx = xxxxx xxxxxxxx 4]Exercise xxxxxx are the xxxxx of a
xxxxxxxxxxx that xxxxx xx understand xxxx client’s preferences xx that you xxx optimally
xxxxx xxxx products xxx record a xxxxxxxxxxxxxxx purchases of xxx products xx xxx x2 xx 8
different xxxxxxxxx The following xxxxx summarizes xxx xxxxxxx (for x similar exercise xxx
Varian, ch xx sec xxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxx Notice xxxxxxxxxxxx number 2 xxx 5 Quantities xxxxxxxxx are xxx
xxxx but xxxxxx are not xxxx does this xxxx in xxxxx xx the xxxxxxxx rate of xxxxxxxxxxxx at
those xxxxxxxxxxxx Plot xxx x bundles xxxxxxxxx by the xxxxxxxxxx in a xxxxx c xxxxx xxxx of
xxxxxxxxxxx comes closer xx describing this xxxxxxxxxxxxxxxxxxx behavior xxxxxxxxxxxxxx
xxxxxxx Complements xx Perfect Substitutes)?d xxxxx down a xxxxxxx function xxxx
xxxxxxxxxx these xxxxxxxxxxx fairly well xxxxxxxxxxxxxxxx the point xxxxxxx Under
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 xxxxxxxxxxx xx the xxxxx line with x slope of xxxxx = xxx x 1 xxxxx a solution, xxxxxxx under
observation x the xxxxx xxxx with x slope of xxxxx = 3/1 x 3 xxxxx x solution xxxx as per
xxxxxxxxxxx we know xxxxxx two xxxxxxxxxxx xxxxxx can xxxx through one xxxxxx andany
convex xxxxx cannot xxxx xxx different xxxxxx of its xxxxx for any xxxxx point xxxxx xxxxxx (a)
xxx (b) rule xxx convex indifferent xxxxxx for xxxx xxxxxxx function xxx therefore it xxxxxx be a
xxxx Douglas xxxx xx Indifferent xxxxx MRS cannot xx defined for xxxxxxxxxxxx curves xxxx
xxxx the xxxxxxxxxxx curves as xxx kinked This xxxxx out xxxxxxxxxxxxx xx perfect
xxxxxxxxxxxx as perfect xxxxxxxxxxx have straight xxxx Indifference xxxxxx xxx give xxxxxx
solutions The xxxxxxxxxxxx curve here xxxxx interior xxxxxxxxx xx is xxxxx evident from xxx
diagram above xxxx far xx xxx confirm xxxx the Indifference xxxxx is not x convex xxxxx xxx a
xxxxxx curvethere exists xxxxxxxx solutions These xxx conditions xxx xxxxxxx found xx cases
of xxxxxxx complements Thus, xxx indifference xxxxx xx question xx L shaped xxxxxx of the
xxxx found xxx xxxxxxx Complements xxxxxxxx 11:You record x client’s purchases xx two
xxxxxxxx xx and xx in 8 xxxxxxxxx occasions The xxxxxxxxx table xxxxxxxxxx xxx results:Obs
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx that
for xxxxxxxxxxxx 1, 2 xxx 3 xxxx xxxxxx prices xxx not change xxx different amounts xx income
xxxxx xx the xxxxxxx he/she still xxxxxxxxx the same xxxxxx of xxxx xxx in xxx three occasions
xxx same can xx said xxx xxxxxxxxxxxx 4, x and 6 xxx observations 7 xxx 8 x xxxx the xxxxx
curves for xxxx 1 and xxx income xxxxxxxxx xxxxx for xxx three sets xx prices in xxx table
xxxxxxxxxxxxx xxxxxxx maximizations, xxxxxxxxx for commodities xx and x2 xxx be xxxxxxxxx
xx functions xxx p1, p2) xx this case, xxxxxxxx the xxxxxx xx x1 xx just a xxxxxxxx of p1 xxx p2
xxxx xxx not xxxxxxxxx on the xxxxxx M Such xxxxxxxxx usually xxxxx xxx quasi- xxxxxx utility
functions xx the form x = xxxxx x x2 xx in Exercise x X2X2IC3
IC3IC2IC2IC1IC1X1X1MMX1X1MX2X1X1IC3In xxx above x xxx of xxxxxxxxx the upper xxxxxx
denote the xxxxxxxxxxx point xxxxxxx xxx Indifferent xxxxxx and the xxxxxx lines The xxxxx
panel xxxxx xxx interaction xxxxxxx the Demand xxx x1 and xxxxxx M xxx xxxxx black xxxx
denotes the xxxxxx Expansion Paths xxx the xxxxx xxx lines xxxxxx the Engel’s xxxxx b The
xxxxxxxxxxx underlying xxxx xxxxxxxxxxxxxxxxxxx behavior xxx be represented xx one of xxx
three xxxxxxx xxxxxxxxx in xxxxxxxxx 7,8 and x Find which xxx it xx xxx explain xxx c Based xx
your answer xx part

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