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ECON681 Homework Question

The document contains homework questions about economics topics including: 1) Checking properties of preference relations for bundles of goods. 2) Explaining the differences between monotonicity and strong monotonicity in preference relations. 3) Showing that a utility function represents an individual's preferences if it satisfies two conditions. 4) Verifying rationality and transitivity properties for a preference relation. 5) Checking various properties of the Cobb-Douglas utility function.

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Frank Yin
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148 views5 pages

ECON681 Homework Question

The document contains homework questions about economics topics including: 1) Checking properties of preference relations for bundles of goods. 2) Explaining the differences between monotonicity and strong monotonicity in preference relations. 3) Showing that a utility function represents an individual's preferences if it satisfies two conditions. 4) Verifying rationality and transitivity properties for a preference relation. 5) Checking various properties of the Cobb-Douglas utility function.

Uploaded by

Frank Yin
Copyright
© © All Rights Reserved
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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Homework 1

Question 1
Checking properties of preference relations – I.
For each of the following preference relations in the consumption of two goods (1 and 2): describe
the upper contour set, the lower contour set, the indifference set of bundle (2, 1), and interpret
them. Then check whether these preference relations are rational (by separately examining whether
they are complete and transitive), monotone, and convex.

a. Bundle (𝑥1, 𝑥2 ) is weakly preferred to (𝑦1 , 𝑦2 ), that is (𝑥1 , 𝑥2 ) ≽ (𝑦1 , 𝑦2 ) if and only if 𝑥1 ≥
𝑦1 − 1.

b. Bundle (𝑥1, 𝑥2 ) is weakly preferred to (𝑦1 , 𝑦2 ), that is (𝑥1 , 𝑥2 ) ≽ (𝑦1 , 𝑦2 ) if 𝑥1 ≥ 𝑦1 − 1 and


𝑥2 ≥ 𝑦2 + 1.

c. Bundle (𝑥1, 𝑥2 ) is weakly preferred to (𝑦1 , 𝑦2 ), that is (𝑥1 , 𝑥2 ) ≽ (𝑦1 , 𝑦2 ) if and only if max
{𝑥1, 𝑥2 } ≥ max {𝑦1 , 𝑦2 }.

Question 3
Monotonicity and strong monotonicity.
Explain monotonicity and strong monotonicity in preference relations, and compare them. Provide
an example where a bundle x is (strictly) preferred to bundle y when preferences satisfy strong
monotonicity, but x is not necessarily preferred to y under monotonicity.
Homework 1

Question 4
Utility representation of preferences.
Consider an individual with a rational preference relation ≽, namely a preference relation that
satisfies completeness and transitivity. Show that if

𝑢(𝑥) = 𝑢(𝑦) 𝑖𝑚𝑝𝑙𝑖𝑒𝑠 𝑥 ≽ 𝑦 ,

and

𝑢(𝑥) = 𝑢(𝑦) 𝑖𝑚𝑝𝑙𝑖𝑒𝑠 𝑥 ≻ 𝑦,

then 𝑢(∙) is a utility function that represents this individual’s preference relation ≥.

Question 6
Rationality and transitivity
Show that, if a rational preference relation ≽ satisfies 𝑥 ≻ 𝑦 and 𝑦 ≽ 𝑧 , it must be that the
individual strictly prefers bundle x to z, that is, 𝑥 ≻ 𝑧.
Homework 2

Question 14
Checking properties of the Cobb-Douglas utility function.
Consider the utility function

𝑛
𝛼𝑖
𝑢 (𝑥 ) = ∏ 𝑥𝑖
𝑖−1

Where x denotes a vector of n different goods 𝑥 ∈ ℝ𝑛+ , and 1 > 𝛼𝑖 > 0. Check if this utility
function satisfies: additivity, homogeneity of degree k, and homotheticity.

Question 16
Testing more properties of the Cobb-Douglas utility function.
𝛽
Cobb-Douglas utility function 𝑢(𝑥1 , 𝑥2 ) = 𝑥𝑖𝛼 𝑥𝑖 , where 𝛼, 𝛽 > 0 , satisfies the following
properties:
a. Local Nonsatiation
b. Decreasing Marginal Utility for both goods 1 and 2
c. Quasi-Concavity
d. Homotheticity

Question 7
𝛽
Verify the duality identities for the Cobb-Douglas utility function 𝑢(𝑥1 , 𝑥2) = 𝑥1𝛼 𝑥2 .
(See Example 2.6 pg 136 of FMG for the answer to this question)

Question 9
Use the Walrasian and Hicksian demands associated with a Cobb-Douglas utility function
1⁄ 1⁄
𝑢(𝑥1, 𝑥2 ) = 𝑥1 2 𝑥2 2
to show the substitution and income effects across different goods.
Homework 2

Question 4
Checking Walras’s Law.
Consider the following demand functions for a consumer facing K goods, and where 𝑝𝑖 denotes
the price of good I, and 𝑝−𝑖 = (𝑝1 , 𝑝2 , … , 𝑝𝑖−1 , 𝑝𝑖+1 , 𝑝𝑘 ). State the conditions under which these
demand functions satisfy Walras’s law.
1
a. 𝑥𝑖 (𝑝𝑖 , 𝑝−𝑖 , w ) = [𝛼𝑖 + 𝛽𝑖 𝑤 + ∑𝐾
𝑗=1 𝛾𝑖𝑗 𝑃𝑗 ]
𝑝𝑖
𝑤
b. 𝑥𝑖 (𝑝𝑖 , 𝑝−𝑖 , w ) = 𝑝 [𝛼𝑖 + 𝛽𝑖 log 𝑤 + ∑𝐾
𝑖=1 𝛾𝑖𝑗 𝑃𝑗 ]
𝑖

1
c. 𝑥𝑖 (𝑝𝑖 , 𝑝−𝑖 , w ) = 𝑝 [𝛼𝑖 + 𝛽𝑖 𝑤 + 𝛾𝑖 𝑤 2 ]
𝑖

Question 19
Separable utility function.
Consider an individual with a separable utility function over L goods

𝑢(𝑥) = ∑ 𝛼𝑖 ln 𝑥𝑖
𝑖=1

Where ∑𝐿𝑖=1 𝛼𝑖 = 1 and 𝛼𝑖 > 0 for every good i. Assume that the consumer faces a strictly positive
price vector p >> 0, and his wealth is given by w > 0.
a. Find the Walrasian demands, and the shadow price of wealth.

b. Next find the shadow price of wealth using an alternative approach. First find the indirect
utility, v(p, w), resulting from the previous UMP. Then measure how it is affected by a
marginal increase in wealth, meaning find the derivative 𝜕𝑣(𝑝, 𝑤)/ 𝜕𝑤. Does your result
coincide with what you found in part a?
Homework 3

Question 1
A unique strategy profile surviving IDSDS must also be an NE.
Consider a n-player game of complete information in which we find that there is only one strategy
profile 𝑠 ∗ = (𝑠1∗ , 𝑠2∗ , … , 𝑠𝑛∗ ) surviving the iterative delection of strictly dominated strategies
(IDSDS). Show that such strategy profile must also be the unique Nash equilibrium of the game.

Question 2
An NE that survives IDSDS.
Consider the two-player game in the payoff matrix of table 8.10, where 𝑎𝑖 ≠ 𝑏𝑖 ≠ 𝑐𝑖 ≠ 𝑑𝑖 for
every player I = {1, 2}. If the game has a unique pure strategy Nash equilibrium (psNE), show that
it must be the unique strategy profile that survives IDSDS.

Question 24
Stackelberg competition.
In a duopoly market, let the inverse demand curve be
1
𝑝(𝑄) = 100 exp (− ( ) − √𝑄)
10

where 𝑄 = 𝑞1 + 𝑞2 denotes aggregate output. Let average and marginal costs be zero.

a. Find the best-response curves.


b. Find the equilibrium outputs.

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