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Question 1. p
f (x1 , x2 ) = max {x1 , x2 }
A. The function f is homogeneous of degree 1/2. To see this, note that for all
t > 0 and all (x1 , x2 )
p
f (tx1 , x2 ) = max {tx1 , tx2 }
p
= t max {x1 , x2 }
1/2
p
= t max {x1 , x2 } (1)
= t1/2 f (x1 , x2 )
1
Therefore if f (x) ≥ f (x0 ), then f (tx + (1 − t)x0 ) ≥ f (x0 ) which means that f is
quasiconcave.
Question 2. Ms Rodent’s utility function is
2
u(x1 , x2 ) = (min{x1 , x2 }) .
u(x1 , x2 ) = max{x1 , x2 }.
2
If p1 = p2 = p, then there are two bundles either of which would minimize
cost of achieving utility u. These are (m/p, 0) and (0, m/p).
C. The Slutsky substitution matrix for Ms Rodent is
0 0
0 0
The substitution effect of a price change is zero. If prices are changed, she
will continue to consume equal amounts of the two goods. If her income is
adjusted so that she is exactly as well off as before the price change, she will
consume exactly as much of each bundle as before the price change.
Question 3.
x21 x2
f (x1 , x2 ) = x1 + x2 + ax1 x2 − − 2
2 2
A. The gradient of f is the vector
(1 + ax2 − x1 , 1 + ax1 − x2 ).
3
If a < −1, then f (x, −x) = (−a − 1)x2 where −a − 1 > 0. Therefore f
can be made arbitrarily large by choosing x large enough. So again f has no
maximum.
We have one more case to worry about. What if a = −1? Here is one way
to dispose of this case. If a = −1, then f is concave, but not strictly concave.
If there is a global maximum, it must be at the point
0 1 1
x = , = (1/2, 1/2).
1−a 1−a
Consider the function F (t) = f (x0 + ty). Consider the Taylor’s series expansion
of F , which is
t2 00
F (t) = F (0) + tF 0 (0) + F (t) + multiples of higher derivatives of F.
2
0
Since the P
Hessian
P H(x ) of f is negative semidefinite when a = 1, 00we know that
00
F (t) = i j Hij yi yj ≤ 0 for all y. The second derivative F (t) does not
depend on t. So all higher derivatives are zero. Therefore
t2 00
F (t) = F (0) + tF 0 (0) + F (t) ≤ 0
2
. This means that for all y and all t, F (x0 + ty) ≤ F (0 ) which implies that f
achieves a global maximum at x0 = (1/2, 1/2) . At this point, f (x0 ) = 1/2.
Here is an alternative way to show the result for a = −1. This method has
the advantage of giving us a full description of all the points at which f takes a
global maximum. If a = −1, then
1 1
f (x1 , x2 ) = − (x1 + x2 − 1)2 + .
2 2
The first term of this expression is necessarily non-positive and is maximized
when x1 + x2 = 1. Therefore f (x1 , x2 ) is maximized whenever x1 + x2 = 1 and
at any such point takes a maximum value of 1/2.
Question 4.
A. Euler’s theorem on homogeneous functions is as follows:
If f is a real valued function of n variables and if f is homogenous of degree
k, then
n
X ∂f (x1 , . . . , xn )
xi = kf (x1 , . . . , xn ).
i=1
∂xi
4
for all t > 0 and all x in the domain of f . Therefore the derivative with respect
to t of the left side of this identity is equal to the derivative of the right side
with respect to t. This implies that
n
X ∂f (tx1 , . . . , txn )
xi = ktk−1 f (x1 , . . . , xn )
i=1
∂xi
for all t > 0. In particular, this equation holds when t = 1, which means that
n
X ∂f (x1 , . . . , xn )
xi = kf (x1 , . . . , xn ).
i=1
∂xi
for all t > 0 and all x in the domain of f . Differentiate both sides of this
equation with respect to xi . This gives us