AW. St! (Corsemphin) 1, Assume a consumer's utility function is: e yaylea cael) U(x Xp) = de. (a) Derive the uncompensated (Marshallian) demand functions and indirect utility function. Verify Roy's identity. (b) Verify the symmetry restriction of the Slutsky substitution matrix, (c) Derive the expenditure function and compensated demand functions, Verify Shephard's Lemma. (4) The monotonicity condition is 2h ovis. (here hy is the Hicksian, or 3; * compensated, demand function.) Is it satisfied also? 2 Veviom, preblem F:, fart Le) is mich to hsid. fr tu tht gucchions 3, Voride, problem eA. 4, Vovitn, problem F./4, S. Vein, problem 8. IG.ag “Commodities i and J are gross substitutes or gross complenents according to whether the total effect q,/ap, is positive or negative" (J. M. Henderson and R. E. Quandt, Microeceonomic Theory, third edition, p. 32). Let commodities 1 and 2 be food and drink respectively end let the consumer's utility function take the following form: ¥ 1 eo. u(a,s4,) = log a, + 2(a, Ceorme dss in bog Assume the consumer allocates a fixed total expenditure, y, on food and drink to maximize U(a),q9) where the prices of food and drink, py and pp, are independent of the consumer's purchases. With the utility function defined above, first derive the expression for the effect of an increase in the price of food on the consumption of drink and determine whether food and drink are gross complements according to the definition given ty Henderson and Quandt. Second, consider the effect of an increase in the price of drink on the consumption of food and again state whether food and drink are gross complements. You should find that, in one case, food and drink appear to be gross substitutes while, in the other case, food and drink are independent in consumption. Explain why this contradiction is fully consistent with the constrained maximization of any well-behaved utility function. (Helpful hint: do not try to obtain the demand functions in explicit form Write each demand function in implicit form, then differentiate with respect to qj and to py, and then form 9a, /p,-)Apsuaa lo He. St a ka Men X, Xo 5. t. HP em ety Lay edn pr pr) 22 no fem R722 (he) & -dpy wore my a = a Pa mop (Te %) ERM Re = CRAY EAE ratay 4A 4 nae =) ta UR) = av/am de 2 He al gw a ys 8) Pn? in fe) (FJ om ale (eal Be UR) ar Del Ope _ tie (eee oe Felam 7 BM Aw bX. 1 the Sltaly siden mtr e [ Fer eny SE]: [By 23 ai OK, ™ | 2, X %y che —am aw a (kale & [2 Om Ip am roo Pr + rh Pi aXe ay, Ae ey . amie (-4) =, om oe fi ee -('2% fm ba apr x Dm oF. tm Or On B, Pe Ce bo ROA > Pe Pefa veel 2s spanehse, alm (et) sa) P Pa he = Sy phn ef | *] /be can aboreity the ctl prpeties whch ta mehr airppereal h larg ') de nesedie rene: deflate +) be spemebie Caleedy done J 3) have wenperfhive dee ponel-terms [cee lotlon of oes pe fen Toe ee, ° ca) neyetre Sema hefuctarerg Sale a (lee) m &mle-) éll-e)my 6 rr PP " RE Bt ee Be O& : Teo gaye ff] 208 87] 4, as 2 ie rR OR ap St eS, aw (4-) a all- a), 4 (I> am alam oF pot ee og 4 them 5 : ot FR re te ee poe a aR gt = am (4-1) | i 4] ak zam(e-l) (ho EY SOL M &,5, ema 220, nr0, e120 ,(-)°70 (Gnd 55 chanel bok he Reo)©) Ne Fésy Wey. (Tix 12 poss ble 24 if yer hae corked put (a) sheedy.) (Py elpa) ek Gotm ed, cm) Se alprmd= (4 cay Bs, lpr elguad = (FE) (FY lpia) =e a es. Arthas hersad torre vies Shephard Lemme A, Algae sere (By pete on "ey vas a st. . nates ey" Cte)""* (re) * (ee RY Alpes tne GB) a = (es Bye. oe m= (eed p” (re) (2) Hicksie, Lntad coves vite Sectm #4 (sf pat (al hes eleady beentnvhed ) ; el pin) = % (p, eC.) elpeleve os [eee yee ined Avlpn) = % (pepe) = ; elpu) = (& ) Sc “1G Shaplaed's An(pye) 2¥, Cp, efpis)) = Fee) eS (s ea) Leama ovihed - tehoo dhetleds ob dy He A's apehe Herd ee, UH yor hove rot verted pact le] aheedy, Hayl, if yeasree by he Hag Hab toork pula) fost.) el, u) a dehred be mn pry st Ux)2u,, Se pnt prt Mui Ke) ox, OF Pit hay Ox. ae 4 Tae Phe dy, 7 OF fat Lee) 5a i " A bee Se OK Kn ok we lar s = Ih Bt» ve (ES B)*us = da lp.) we (K ae 2d, (piss) Ma impacts east factins, (Capre vt Defend ede of pe 7), ten elpia) = p x lee x sohes te bore manuctatin prblen Pye spetep nt = (cafe) te th (Ep) =p pe] (a) 4 (ES) “fe. Me fom behets 75 a pest, seayt watt — 4 tha te = (tz) + (GAY™ ere ge 7 a eps ete aaa * (BYE). noted)9) sled of doy jut tli, Cb ivaty Het He eabre Sty slehbnm wehrg npr sepa hI DP, 94.9 pL Slijap, Ihelap | + de (ER) a does Be (Be hI Sus Bp = (Se By he Cad op 7 Foo ke absect vtth fred (p.1), Ug » CE) (Sym So ad, Ira a p= ea eal Cea). (126) rn spf! (i) ae and Te aoe Roepe. Gm) ebm) ara) es - Ts Bh I a * 7* wea HD) “te fl oop lea « za a (9! fea)*. (ea) el og “PB a all-a)n SNe om = alla RM RROde fun ye op op * (et) Me oR oI te me = (tea) * fra) ant gta PS po - aa oe a (l- BT toa)e (ealegiinye ode Gq a & nope - a. a (I-<) » Pept m = lieada hp we an S GA = [Ay ak alla)» 4) eM = LOM ag le ae alan 2 7 Z | Pi a Yop, Map. alhalm cea, | Ceaeth com pe. PP re2. Vanian, pordblen. 2x, v(PRm) ©) Roy's Mandi yp x. Sv/ap: Bx 4 arom ~ Hee, an? we Gnd. ee fe FHL tee fh on™ » vlp, CRW) Bu CLechim BY) See lp, mn) > og! « frren, vlp,e) = Fam and repels 4 > ia aa eG) *Pdu. ©) Fim SelB 6, bil hp 29, Mle) emo wlP) *. pox 2d (em) om wp) st. poy Pe S = ee ER sé. PAR, = / Pp u—.—_— seh pel Re possible pres a i m % Strasght bine, #pro = a 4 xy Shin Te y= am =o, : . x BON Pt UE Tay at fax, = Mim ARK H xex, Hess ram Tt 50 fa aaa and ULe) =, If x (2,1). When prices are (6,3) he seme 1, At these prices he could afford the bundle (1,2) but rejects it; thenfor, (1) > 0,2) 4, 84a This is an ordinary Cobb-Douglas demand: §, = = apy. S.ld.b In this case the utility function The L term Just a constant, aoe (CS 2) Sey and 785008 Bee *° applying the standard Cobb-Douglas - c > : if 2° ary (Y-L) feed 5, 88a True, With the grant, the consumer wil maximize u(zy 2) subject fo a1 +22 < m+ 9, and 21 > gy. We know that when he maximizes his utility subject to 2: +22 gi. Since +, is a normal 00d, the amount of good 1 that he will choose if given an unconstrained Srant of 91 is some number 21 > z} > g,. Since this choice satisfies the Constraint 2} > gi, it is also the choice he would make when forced to spend gi on good 1. 8.16.b False. Suppose for example that g: = z{. Then if he gets an unconstrained grant of gy, since good 1 is inferior, he will choose to reduce his consumption to less than zj = g1. But with the constrained grant, he ‘must consume at least gi units of good 1. Incidentally, he will accept the rant, since with the grant he can always consume at least as much of both goods as without the grant. 8.16. If he got an unconstrained grant of g1, he would spend (48 + 91)/4 on good 1. This is exactly what he will spend if g: < (48 +9)4. But if 9, > (48+91)/4, he will spend g; on good 1. The curve therefore has slope 1/4 if g1 < 16 and slope 1 if g; > 16. Kink is at g: = 16. % 'e W Un tasty bated ©, 4%, = or x W rite de das 9 prlcen tee Lowelede, Se 423% tad Xj4 3%, 7 mag WARW AE, 4, 21M Bt de Cashind ts 4,74) 10 244, fora, 32 Fala sreelo ‘ Olguged= Ay, s2vqe as Ay, +205, + A (m- Pg fags) az. ape = BO => $2” Ye ft Boe -) ak re 3 OUR? ie a So f2= UpGil” MA me gta (Be) mp (FG) Roe "PEAR ER we PNB TP fhe ; a mplmctlem er tool | mo pge bg feast te bridally Touelar pede, te purchases of fo Ore fected ' ely by wend fe, bot Pe Affected by chase mPa, el Mache *B/op, =o. Mga svete idl vopact batt the eudogpems voithlig (a Phas tore : ob fi) tad WAL werpect fo the teojtans yereble of Ahact (a thes case 1 P) (s0 Ame dp,z0) Ordm= Rd Blog ay. aye de 2 fi 42 ape tg? dy fait eb ef elt, > Gul 55 ap hearer |ade OL ay cheat Sime uh tells tat on i ; Asay wathry ch Meshellee, dawsal arts, whack ive whe were » ther pre lew. 4