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You are on page 1of 6

November 7, 2011

Answer Question 1 and any 4 of the other 6 questions. Good luck.

1) Let f be a real-valued concave function whose domain is a convex subset of

<n . Let g be a function from the reals to the reals and define the composite

function h(x) = g (f (x)).

State whether each of the following claims about the function h is true or

false. If true, give a proof, justifying each claim made in your proof. If false,

give a counterexample and prove that your counterexample is a counterexample.

A) If g is a strictly increasing function, then h is a concave function.

2) Rocky consumes two goods. He prefers any bundle such that x1 > 0 and

x2 > 1 to any bundle for which these two inequalities are not satisfied. His

preferences over bundles such that x1 > 0 and x2 > 1 can be represented by the

utility function

u(x1 , x2 ) = ln (x1 + 1) + ln (x2 1)

for all (x1 , x2 ) .

A) For what price-income combinations does Rocky choose positive amounts

of both goods?

there are n people, i = 1, . . . n. Person i has a utility function of the form

ui (x1 , x2 ) = Ai ln (x1 + bi ) + ln (x2 1).

What restrictions, if any, do we need to put on the parameters Ai and bi so that

aggregate demands for goods 1 and 2 are determined by prices and the sum of

incomes and do not depend on the distribution of income? Relate your answer

to the Gorman polar form.

legitimate indirect utility function? Explain.

1 2

v(p1 , p2 , y) = f (y)p

1 p2

B) What restrictions must the functions w(p1 , p2 ) and z(p1 , p2 ) satisfy for the

following to be a legitimate indirect utility function? Explain.

v(p1 , p2 , y) = w(p1 , p2 ) + z(p1 , p2 )y

2

1/2

1/2

.

u(x1 , x2 ) = x1 + 2x2

A) How is the ratio x1 /x2 in which this consumer consumes the two goods

related to the ratio of the prices of goods 1 and 2?

4

properties does the lexicographic ordering have? Completeness, transitivity,

strict monotonicity, strict convexity, continuity. Explain your answers.

7) A consumer buys two goods. The more of a good that the consumer buys the

higher the price per unit he must pay. (Resale of the good is impossible-think

of haircuts and other services.) The cost of buying x1 units of 1 is p1 x21 and

the cost of buying x2 units of good 2 is p2 x22 . The consumers income is m.

Suppose this consumers utility function is u(x1 , x2 ) = xa1 + xa2 . For what values

of a does this consumer buy positive amounts of both goods? (Hint: You may

want to draw a diagram.) Find the demand functions xi (p1 , p2 , m) showing

quantities that he will buy given p1 , p2 , and m and indirect utility function

v(p1 , p2 , m) , showing his utility for what he buys. Does Roys law still apply?

Justify your answer.

For Extra Credit: Suppose that there are n goods.

P A consumer has utility

function u(x) and a budget constraint of the form i pi gi (xi ) = m, where the

gi s are all strictly increasing functions. Where x(p, m) is the bundle that solves

this constrained maximization problem with parameters p and m, let v(p, m) =

u(x(p, m)) be the corresponding indirect utility function. Show that you can

use a rule that is similar to Roys Law to recover the demand functions (over

the range of interior solutions) from the indirect utility function v.

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