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Economics 202 - Midterm Exams: e (P, U) P U

1) The document provides the details of an economics midterm exam, including 3 questions. 2) Question 1 asks students to derive Hicksian and Marshallian demand curves from an indirect utility function. 3) Question 2 provides additional details about quasilinear preferences and asks students to define equivalent and compensating variations using money metric utilities for these preferences. 4) Question 3 provides information about a consumer consuming 3 goods and their observed choices, and asks students to determine values where revealed preference axioms hold or are violated.

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Christian Congson Pasion
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48 views5 pages

Economics 202 - Midterm Exams: e (P, U) P U

1) The document provides the details of an economics midterm exam, including 3 questions. 2) Question 1 asks students to derive Hicksian and Marshallian demand curves from an indirect utility function. 3) Question 2 provides additional details about quasilinear preferences and asks students to define equivalent and compensating variations using money metric utilities for these preferences. 4) Question 3 provides information about a consumer consuming 3 goods and their observed choices, and asks students to determine values where revealed preference axioms hold or are violated.

Uploaded by

Christian Congson Pasion
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Economics 202 Midterm Exams

Given the following indirect utility function:

1. Derive the Hicksian Demand Curves (10 pts.)


1
e( p,u)


=
u

e(
p,u)
=
p
+
p
u
1
2
1


p1 + p2

de # 1 &
= % ( p1 + p2
dp1 $ '
by symmetry

h1 ( p,u) =

h2 ( p,u) = p1 + p2

1
1

p1 1u = ( p1 + p2 )

p1 1u

p2 1u

2. Derive the Marshiallian Demand Curves (10 pts.)

by Roy's identity
# #
&
w
% %
( p 1
1
% %
( 1
1

% $ p1 + p2 '
= %
1
%
1
%
p1 + p2
%
$

dv
dp
x1 ( p, w) = 1
dv
dw

1
##

&
w p1 + p2 ( 1
= %%
p
1
%%
( 1
(
%
%$ $ p1 + p2
'

&
( = w p + p
1
2
(
('

&
(
(
(
(
(
(
(
'

) )( p )
1

1
1

by symmetry,

x1 ( p, w) = w p1 + p2

) )( p )
1

1
2

3. Suppose the price of good 1 doubles. Derive the equation for the compensating
variation (10 pts.)

v( p, w) =

p1 + p2

let v( p ', w) =

( p'

1

2

+p

be the utility level after the price change, then CV

can be defined as
w

v( p, w) = v( p ', w + CV )

(p

w p '1 + p2

(p

+p

w + CV

( p'

+ p2

1

2

+p

1

2

w = CV

Alternatively we can use the expenditure function we have obtained earlier


e( p ', w) w = CV

u p '1 + p2

w = CV

2. Quasilinear preferences are often represented by the following indirect utility


function:

v( p, w) = w + ( p)
where
w - represents the wealth level
p - is the price
(p) - is a function of prices
a. Define the EV and CV (using money metric utilities) for quasilinear
preferences

Given v( p, w) = w + ( p)
By duality:
u = e( p,u) + ( p) e( p,u) = u ( p)
Let p 0 and u 0 be the initial level of utility and prices respectively. While
p1 and u1 be the new level of prices and the corresponding change in utility,
respectively

) (

) (

) (

Thus, EV = e p 0 ,u1 e p 0 ,u 0 = u1 ( p 0 ) u 0 ( p 0 )

EV = u1 u 0

) (

) (

) (

Similarly CV = e p1 ,u1 e p1 ,u 0 = u1 ( p1 ) u 0 ( p1 )

CV = u1 u 0
b. Prove that the EV and CV are equal for quasilinear preferences
From the previous problem it is obvious that EV=CV for quasilinear preferences
3. Suppose a consumer consumes 3 goods and that the observed bundle of choices
at price vector
are:

Answer the following questions:


a. For what value(s) of

is

? (10 points)

b. For what value(s) of

is

? (10 points)

c. For what value(s) of

is WARP violated? (10 points)

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