ECON 202: Microeconomic Theory I, Monsoon 2017

Sample Questions
Question 1
1.1 Check if the diminishing MRS property holds for the following utility function:

U (x1 , x2 ) = α ln x1 + (1 − α)x2

1.2 Form the Lagrange expression for utility maximization.

1.3 Now compute the demand functions, x∗1 (p1 , p2 , M ) and x∗2 (p1 , p2 , M ).

1.4 Compute the Hicksian demand functions, xc1 (p1 , p2 , Ū ) and xc2 (p1 , p2 , Ū ) by
forming the expenditure minimization problem.

1.5 Check if the Slutsky equation holds or not.

1.6 Show that the utility function V (x1 , x2 ) = xα1 x21−α is a monotonic transfor-
mation of the utility function U (x1 , x2 ) = α ln x1 + (1 − α)x2 .

Question 2
Repeat the parts [1.1]-[1.5] for the utility function

U (x1 , x2 ) = ln x1 + 3x2

Question 3
Repeat the parts [1.1]-[1.5] for the utility function

U (x1 , x2 ) = (x1 + 1)x22

Question 4
Repeat the parts [1.1]-[1.5] for the utility function

U (x1 , x2 ) = 10x1 − x31 + x2

Question 5
Suppose V (x1 , x2 ) is a monotonic transformation of U (x1 , x2 ). Is U (x1 , x2 ) then also
a monotonic transformation of V (x1 , x2 )? Can you prove your claim?

1
Question 6
Suppose the set all possible consumption bundles for a consumer is given by the set
X = {(x, x) : x ≥ 0}. This means that all possible bundles have the same amount
of both goods. Show that if the consumer’s preference satisfies monotonicity then
it automatically satisfies transitivity. [Hint: to prove that the preference ordering
satisfies transitivity property start with three bundles, say, (x, x), (y, y) and (z, z).
Assume that (x, x)P (y, y) and (y, y)P (z, z). Then argue using the monotonicity
property that we must get (x, x)P (z, z).]

Question 7
Suppose a consumer’s utility function over leisure and consumption is given by

U (c, h) = cβ h1−β .

7.1 Suppose the non-labor income is M . Form the Lagrange expression and com-
pute the leisure demand function h∗ (w, 1, M ).

7.2 Compute the labor supply function for this consumer.

7.3 What is the slope of the labor supply function with respect to the wage rate
w?

7.4 What is the slope of the labor supply function when the non-labor income M
is zero?

Questions 8-10
Serrano and Feldman: Chapter 19 questions 2, 3, 5.
[This covers the topic of Uncertainty for which we will not have any problem
set.]