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Problem Set 1

1 Excercise 1

Question:

For each of the following subsets of the <2 sketch the set, state whether it is open,

closed or neither, and justify your answer based on the corresponding definitions.

Answer:

Definition of a closed set: A set X is closed if for every sequence {(x1 , . . . , xi }i∈N

with xi ∈ N , converging against some limit x∗ then x∗ ∈ X.Consequently a set is

open if a converging sequence of points has its limits outside this set.

1

a) {(x, y) : −1 < x < +1, y = 0},

closed set

closed set because it is a set of integers.

c) {(x, y) : x + y = 1},

closed set

2

d) {(x, y) : x + y < 1}

open set

e) {(x, y) : x = 0 ∪ y = 0}.

closed set because set includes only the axis

2 Excercise 2

Question:

Prove that if is a preference relation, then the relation is transitive and the

relation v is transitive. Also show that if x1 v x2 x3 , then x1 x3 .

Answer:

then x1 x3

3

Accordingly, if x1 x2 and x2 x3 then transitivity holds if x1 x3 . Verbally,

if x is strictly prefered to x2 and x2 is strictly prefered to x3 then transitivity holds

1

transitive if x1 v x3 . Or in words if x1 is indifferent to x2 and x2 is indifferent to x3

then transitivity holds if x1 is indifferent to x3 .

3 Excercise 3

Question:

Sketch a map of indifference sets that are all parallel, negatively sloped straight

lines, with preference increasing northeasterly. We know that preferences such as

these satisfy Axioms 1, 2, 3 and 4 (strict monotonicity). Prove that they also satisfy

Axiom 50 (convexity). Prove that they do not satisfy Axiom 5 (strict convexity).

Answer:

The way we have drawn the lines i.e. parallel, negatiely sloped and straigth we

see that they are allways complete, transitive and continious (i.e. there are no prefe-

rence reversals). Since we drew slim lines we can assume local non-satiation because

there are no zones of indifference or more precicely, in the vicinity of any point there

will allways a point that the individual prefers.

The displayed indifference sets are also strictly monotonic because there every

indifference line (moving outwards i.e. with increasing quantities of one good or

4

another) is strictly better then the one before since it contains strictly more goods.

The displayed lines are convex but not strictly convex since a linear combination

of the two goods would not increase the individuals utility but the individual is

indifferent as to the extreme points of only one good or the other or the combination

of the two. Therefore we cannot say that these indifference sets rule out extreme

prefrences as does the strict convexity axiom.

4 Excercise 4

Question:

Sketch a map of indifference sets that are all parallel right angels that kink on

the line x1 = x2 . If preference increases northeasterly, these preferences will satisfy

Axioms 1, 2, 3 and 40 (local non-satiation). Prove that they also satisfy Axiom 50 .

Do they satisfy Axiom 4? Do they satisfy Axiom 5?

Answer:

This set of indifference curves is not strictly monotonic because we can increase

the amount of one good and remain at the same level with the other good. Thererfore

it does not satisfy axiom 4. But they are strictly convex since every combination of

the two goods is possible and would increase the individuals utility. Strict convexity

does imply weak convexity, therefore the indifference set does satisfy axiom 50 and

axiom 5.

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