Professional Documents
Culture Documents
Ignacio Monzón
Collegio Carlo Alberto
Fall 2018
M ICROECONOMIC T HEORY - PS #5
Due date: 12 Nov 2018
(a) Provide an example for the preferences described above such that aggregate
demand cannot be written as a function of aggregate wealth.
(b) Restrict the utility functions of individuals A and B so that aggregate demand
can be written as a function of aggregate wealth. In other words, show that
under your restrictions x ( p, w) = ∑i= A,B xi ( p, wi ) for all (w A , w B ) with w A +
w B = w.
(c) Individual demand xi ( p, wi ) satisfies the uncompensated law of demand
(ULD) if:
p0 − p xi p0 , wi − xi ( p, wi ) ≤ 0
1
3. Varian 1.10. Let Y be a production set. We say the technology is additive if y ∈ Y
and y0 ∈ Y implies y + y0 ∈ Y. We say the technology is divisible if y ∈ Y and
0 ≤ t ≤ 1 implies ty ∈ Y. Show that if a technology is both additive and divisible,
then Y must be convex and exhibits constant returns to scale.
4. Varian 3.2. (modified and enlarged version). An output y is produced using only one
input x. The price of the output is p, while the price of the input is normalized to
w = 1. The production function is given by:
(
0 if x ≤ 1
f (x) =
ln( x ) if x > 1
5. Varian 4.6. (modified version). A firm has two plants. The production function in the
first plant is f 1 (l1 ) = (l1 /4)2 , whereas the production function in the second one is
f 2 (l2 ) = (l2 /2)2 . The price of the output is p, while the price of the input (labor) is
normalized to w = 1.
(a) Let y1 and y2 denote the quantities produced in plants 1 and 2 respectively.
Graph the technology sets Y1 and Y2 , one for each plant. To do so, have l1 (or
l2 ) in the x-axis and y1 (or y2 ) in the y-axis. Negative numbers indicate inputs.
(b) Find the cost functions ci (yi ) for each plant i = 1, 2.
(c) A firm owns both plants. Find the cost function c(y) for the firm.