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Assignment 1

(1) If a utility function u represents a consumer's preferences and φ is any strictly increasing function, then the composition u' = φ o u also represents the consumer's preferences. (2) An economy with 2 consumers and 2 goods is considered, with each consumer having quasi-linear utility in good 1. The Edgeworth box is sketched showing the contract curve, core, and Walrasian equilibrium allocation(s). (3) The result is stated that all Walrasian equilibrium allocations are contained within the core of an economy. A detailed proof of this result is required.

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Jonny Vroobel
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45 views3 pages

Assignment 1

(1) If a utility function u represents a consumer's preferences and φ is any strictly increasing function, then the composition u' = φ o u also represents the consumer's preferences. (2) An economy with 2 consumers and 2 goods is considered, with each consumer having quasi-linear utility in good 1. The Edgeworth box is sketched showing the contract curve, core, and Walrasian equilibrium allocation(s). (3) The result is stated that all Walrasian equilibrium allocations are contained within the core of an economy. A detailed proof of this result is required.

Uploaded by

Jonny Vroobel
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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THE UNIVERSITY OF BIRMINGHAM Homework Assignment Degree of B.Sc.

Economics 320B (General Equilibrium and Welfare) 5/2/13, To be returned to the secretaries in JG Smith no later than noon on 25/2/13

Answer all questions. Your returned answer weights 20 % of the nal grade.

Dr. Martin Kaae Jensen, 2013.

Turn over...

1. Consider an economy with n goods and a consumer with preference relation and consumption set n . Explain and prove the following statement: + If u : n is a utility function which represents and : is any strictly (a.k.a. strongly) increasing function, then the composition u = u (this means that u (x ) = (u (x ))) also represents . Remark: The function is often called a monotone transformation. So what you just proved can also be expressed by saying that all monotone transformations of a utility function represent the same underlying preference relation. 2. Consider an exchange economy with I = 2 (two consumers) and n = 2 (two 1 1 2 2 goods), u 1 (x 1 ) = x 1 + (x 2 )0.5 and u 2 (x 2 ) = x 1 + (x 2 )0.5 , e 1 = (1, 1), and e 2 = (2, 0). a) Sketch the Edgeworth box of this economy. b) In the Edgeworth box, illustrate the economys contract curve. c) Also in the Edgeworth box, depict the core and the Walrasian equilibrium allocation(s) (you do not have to calculate these, a sketch will do!). Remark: A utility function u : n is quasi-linear in good 1 if it has the form u (x ) = x 1 + v (x 2 , . . . , x n ) where > 0 and v : n1 . Obviously, the utility functions considered above are both quasi-linear in good 1. 3. State and give a detailed proof of the result which says that All WEAs are in the core.

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