Econ 415/615 Mathematics for Economists Lau

Problem Set V Fall 2021

Marshallian Demand Functions and Hicksian Demand Functions

1) Let U ( X , Y ) = XY 3
X * X *
a) Find the Marshallian demand functions of X and Y and calculate and .
PX M
X h Y h
b) Find the Hicksian demand functions X and Y and calculate and .
PX PX
[Be sure to check the second order conditions.]

2) For each of the following utility function, find the Marshallian demand functions and the
Hicksian demand functions.
a) U ( X , Y ) = X 2Y 2
b) U ( X , Y ) = 3ln X + 2ln Y
[Be sure to check the second order conditions.]

3) Let U ( X ,Y ) = X aY 1−a 1>a  0

X * Y * X *
Find the Marshallian demand functions of X and Y . Calculate , , .
PX PX M
[Be sure to check the second order conditions.]

4) Let U ( X ,Y ) = X aY 1−a 1>a  0

X h Y h
Find the Hicksian demand functions of X and Y . Calculate , .
PX PX
[Be sure to check the second order conditions.]

5) Let U ( X ,Y , Z ) = 2ln X + ln Y + ln Z
a) Find the Marshallian demand functions.
b) Find the Hicksian demand functions.
c) Check the second order conditions.

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Econ 415/615 Mathematics for Economists Lau
Problem Set V: Solution

1a) Perform a monotonic transformation

max ln X + 3ln Y s.t. M = PX X + PY Y Perform a monotonic
X ,Y
transformation of the
L = ln X + 3ln Y + [M − PX X − PY Y ] original utility function

FONC:
L 1
LX = = −  PX = 0 (1)
X X
L 3
LY = = −  PY = 0 (2)
Y Y
L
L = = M − PX X − PY Y = 0 (3)

1 3
(1) and (2)  = =  PY Y = 3PX X (4)
XPX YPY
→ (3) : M − PX X − PY Y = 0  M − PX X − (3PX X ) = 0  M − 4 PX X = 0
M
 X* =  Marshallian demand functions
4 PX
3PX X 3PX M 3M
 Y* = = ( )=  Marshallian demand functions
PY PY 4 PX 4 PY

SOSC:
L L X LY 0 − PX − PY
−2 PY2 3PX2
H = LX  LXX LXY = − PX −X 0 = +  0( fulfilled )
X2 Y2
LY  LYX LYY − PY 0 −3Y −2

X * M X * 1
=− and =
PX 4 PX
2
M 4PX

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1b) min PX X + PY Y s.t. U = XY 3
X ,Y Cannot transform
L = PX X + PY Y + [U − XY 3 ] the constraint!!!

FONC:
L
LX = = PX − Y 3 = 0 (5)
X
L
LY = = PY − 3 XY 2 = 0 (6)
Y
L
L = = U − XY 3 = 0 (7)

P P PY
(5) and (6)  X3 =  = Y 2  3PX X = PY Y  X = Y (8)
Y 3 XY 3PX
PY Y 3 P 3UPX 14
(8) → (7) : U − ( )Y = 0  U − Y Y 4 = 0  Y h = ( )  Hicksian demand function
3PX 3PX PY
3/ 4
PY P 3UPX 14  P 
X = Y = Y (
h
) = U 1/ 4  Y   Hicksian demand function
3PX 3PX PY  3PX 

SOSC:
L L X LY 0 −Y 3 −3 XY 2
H = LX  LXX LXY = −Y 3 0 −3Y 2 = −12 XY 7  0( fulfilled )
LY  LYX LYY −3 XY 2 −3Y 2 −6 XY

−1/ 4
X h 3 P   PY  −2 1 1/ 4 3 / 4 −7 / 4
= U 1/ 4  Y    (− PX ) = − (3U ) PY PX  0
PX 4  3PX  3  4
−3 / 4 1/ 4
Y h 1  3UPX   3U  1  3U 
=    =   PX−3 / 4
PX 4  PY   PY  4  PY 

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2a) Marshallian demand
max 2ln X + 2ln Y s.t. M = PX X + PY Y Perform a monotonic
X ,Y transformation of the
L = 2ln X + 2ln Y + [ M − PX X − PY Y ] original utility function

FONC:
L 2
LX = = −  PX = 0 (1)
X X
L 2
LY = = −  PY = 0 (2)
Y Y
L
L = = M − PX X − PY Y = 0 (3)

2 2
(1) and (2)  ==  PX X = PY Y (4)
PX X PY Y
M M
→ (3) : M − PX X − PX X = 0  X * = ,Y * =  Marshallian demand function
2 PX 2 PY
SOSC:
L L X LY 0 − PX − PY
H = LX  LXX LXY = − PX −2 X −2 0 = 2 PY2 X −2 + 2 PX2Y −2  0( fulfilled )
LY  LYX LYY − PY 0 −2Y −2

Hicksian demand
min PX X + PY Y s.t. U = X 2Y 2 Cannot transform
X ,Y
the constraint!!!
L = PX X + PY Y + [U − X 2Y 2 ]

FONC:
L
LX = = PX − 2 XY 2 = 0 (5)
X
L
LY = = PY − 2 X 2Y = 0 (6)
Y
L
L = = U − X 2Y 2 = 0 (7)

P P P X
(5) and (6)  X 2 =  = Y2  Y = X (8)
2 XY 2X Y PY
1/ 4 1/ 4
 UPX2   UPY2 
(8) → (7): Y =  2 
h
,X = 2 
h
 Hicksian demand function
 PY   PX 

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SOSC:
L L X LY 0 −2 XY 2 −2 X 2Y
H = LX  LXX LXY = −2 XY 2 −2Y 2 −4 XY = −16 X 4Y 4  0( fulfilled )
LY  LYX LYY −2 X 2Y −4 XY −2 X 2

2b) Marshallian demand

max 3ln X + 2ln Y s.t. M = PX X + PY Y
X ,Y

L = 3ln X + 2ln Y + [M − PX X − PY Y ]

FONC:
L 3
LX = = −  PX = 0 (1)
X X
L 2
LY = = −  PY = 0 (2)
Y Y
L
L = = M − PX X − PY Y = 0 (3)

3 2 2P X
(1) and (2)  = =  PY Y = X (4)
PX X PY Y 3
2P X 5P X
→ (3) : M − PX X − PY Y = 0  M − PX X − X = 0  M − X = 0
3 3
3M 2M
 X* =  Y* =  Marshallian demand function
5 PX 5 PY

SOSC:
L L X LY 0 − PX − PY
−2
H = LX  LXX LXY = − PX −3 X 0 = 3PY2 X −2 + 2 PX2Y −2  0( fulfilled )
LY  LYX LYY − PY 0 −2Y −2

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Hicksian demand
min PX X + PY Y s.t. U = 3ln X + 2 ln Y
X ,Y

L = PX X + PY Y + [U − 3ln X − 2ln Y ]

FONC:
L 3
LX = = PX − =0 (5)
X X
L 2
LY = = PY − =0 (6)
Y Y
L
L = = U − 3ln X − 2 ln Y = 0 (7)

P X PY 3P Y
(5) and (6)  X =  = Y  X = Y (8)
3 2 2 PX
3P Y 3P
→ (7)  U − 3ln( Y ) − 2 ln Y = 0  U − 5ln Y − 3ln( Y ) = 0
2 PX 2 PX
U 3 3PY U 3PY 53 U
2 PX 53
 ln Y = − ln( ) = − ln( ) = ln[e (
5
) ]
5 5 2 PX 5 2 PX 3PY
U
2 PX 53
Yh = e5 ( )  Hicksian demand function
3PY
3PY Y 3PY U5 2 PX 53 U
3PY 52
X = h
= e ( ) =e (
5
)  Hicksian demand function
2 PX 2 PX 3PY 2 PX

SOSC:
L L X LY 0 −3 X −1 −2Y −1
H = LX  LXX LXY = −3 X −1 +3 X −2 0 = −30 X −2Y −2  0( fulfilled )
LY  LYX LYY −2Y −1 0 +2Y −2

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3) max U ( X , Y ) = a ln X + (1 − a) ln Y monotonic transformation
X ,Y

s.t. M − PX X − PY Y = 0

L = a ln X + (1 − a)ln Y + [ M − PX X − PY Y ]

FONC:
L a
= −  PX = 0 (1)
X X
L 1 − a
= −  PY = 0 (2)
Y Y
L
= M − PX X − PY Y = 0 (3)


a 1− a aP Y
(1) and (2)  =  PX X = Y
PX X PY Y 1− a
aP Y a PY (1 − a) M aM
→ (3)  M − Y − PY Y = 0  M − ( + 1) PY Y = 0  M − Y = 0  Y * =  X*=
1− a 1− a 1− a PY PX
X * aM
=− 2 0
PX PX
Y *
=0
PX
X * a
=
M PX

SOSC:

0 − PX − PY
L L X LY
a aPY2 (1 − a) PX2
H = LX  LXX LXY = − PX − 2 0 = 0 + 0 + 0 − (− ) − ( − )−0
X X2 Y2
LY  LYX LYY
1− a
− PY 0 −
Y2
aPY2 (1 − a) PX2
= +  0 (fulfilled)
X2 Y2

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4) min PX X + PY Y
X ,Y

s.t. U − X aY 1−a = 0

L = PX X + PY Y + [U − X aY 1−a ]

FONC:
L
= PX −  aX a −1Y 1−a = 0 (1)
X
L
= PY −  (1 − a) X aY − a = 0 (2)
Y
L
= U − X aY 1−a = 0 (3)


(1)  PX =  aX a −1Y 1−a (4)

(2)  PY =  (1 − a) X Y a −a
(5)
(4) P  aX Y aYa −1 1− a
aPY Y
 X = = X= (6)
(5) PY  (1 − a) X Y
a −a
(1 − a) X (1 − a) PX

aPY Y a 1−a aPY (1 − a) PX a

→ (3)  U − [ ] Y = 0  U −[ ]a Y = 0  Y h = U [ ]
(1 − a) PX (1 − a) PX aPY
aPY Y aPY (1 − a ) PX a aPY
→ (6)  X h = = U[ ] = U[ ]1−a
(1 − a) PX (1 − a) PX aPY (1 − a ) PX

X h aPY 1−a −2+ a

= U (a − 1)[ ] PX  0
PX (1 − a )
Y h (1 − a ) a a −1
= Ua[ ] PX  0
PX aPY

SOSC:

L L X LY 0 −aX a −1Y 1−a −(1 − a ) X aY − a

H = LX  LXX LXY = −aX a −1Y 1−a − a (a − 1) X a −2Y 1−a − a (1 − a ) X a −1Y − a
LY  LYX LYY −(1 − a ) X aY − a − (1 − a )aX a −1Y − a − (1 − a ) X a ( −a )Y − a −1
= 0 + [− a 2 (1 − a) 2  X 3a −2Y 1−3a ] + [− a 2 (1 − a ) 2  X 3a −2Y 1−3a ] − [a (1 − a )3  X 3a −2Y 1−3a ]
− [a 3 (1 − a) X 3a −2Y 1−3a ] − 0
= −[2a 2 (1 − a ) 2 + a (1 − a )3 + a 3 (1 − a)] X 3a −2Y 1−3a  0 (fulfilled)

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5) max U ( X , Y , Z ) = 2ln X + ln Y + ln Z s.t. M − PX X − PY Y − PZ Z = 0
X ,Y , Z

L = 2ln X + ln Y + ln Z + [ M − PX X − PY Y − PZ Z ]

FONC:
L = M − PX X − PY Y − PZ Z = 0 (1)
2
LX = −  PX = 0 (2)
X
1
LY = −  PY = 0 (3)
Y
1
LZ = −  PZ = 0 (4)
Z
2 1 1 P X
(2), (3) and (4)  = = =  PY Y = PZ Z = X
PX X PY Y PZ Z 2
P X P X M M M
→ (1) : M − PX X − X − X = 0  X * = ,Y* = , Z* =  Marshallian demand fucntions
2 2 2 PX 4 PY 4 PZ
SOSC:
0 − PX − PY − PZ
L L X1 L X 2 L X 3 2
− PX − 2 0 0
LX1 LX1 X1 LX1 X 2 LX1 X 3 X
( X *) = = 1
L X 2  L X 2 X 1 LX 2 X 2 LX 2 X 3 − PY 0 − 2 0
Y
LX 3  LX 3 X 1 LX 3 X 2 LX 3 X 3 1
− PZ 0 0 − 2
Z

L L X1 L X 2 0 − PX − PY
2 2 PY 2 PX 2
 2 ( X *) = LX1 LX1 X1 LX1 X 2 = − PX − 0 = + 2 0
X2 X2 Y
LX 2 LX 2 X1 LX 2 X 2 1
− PY 0 −
Y2

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 0 − PX − PY − PZ
2
− PX − 0 0
X2
 3 ( X *) = 1
− PY 0 − 0
Y2
1
− PZ 0 0 −
Z2

− PX 0 0 0 − PY − PZ
1 2 1
= (−1)1+ 2 (− PX ) − PY − 0 + (−1) 2+ 2 (− ) − PY − 0
Y2 X2 Y2
1 1
− PZ 0 − − PZ 0 −
Z2 Z2
PX 2 PZ 2 PY 2
= (−1)1+ 2 (− PX )(− ) + ( −1) 2+ 2
( − )( + + )
Y 2Z 2 X2 Y2 Z2
P2 2 P2 P2
= − 2X 2 − 2 (+ Z2 + Y2 )  0
Y Z X Y Z

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5b) min PX X + PY Y + PZ Z s.t. U − 2 ln X − ln Y − ln Z = 0
X ,Y , Z

L = PX X + PY Y + PZ Z + [U − 2ln X − ln Y − ln Z ]

FONC:
L = U − 2 ln X − ln Y − ln Z = 0 (1)
2
LX = PX − =0 (2)
X

LY = PY − =0 (3)
Y

LZ = PZ − =0 (4)
Z
PX X P X P X
(2), (3) and (4)  =  = PY Y = PZ Z  Y = X , Z = X
2 2 PY 2 PZ
P X P X P P
→ (1) : U − 2 ln X − ln( X ) − ln( X ) = 0  U − 4 ln X − ln( X ) − ln( X ) = 0
2 PY 2 PZ 2 PY 2 PZ
P P 2 P 2 PZ 4P P
 4 ln X = U − ln( X ) − ln( X ) = ln[eU Y ] = ln(eU Y 2 Z )
2 PY 2 PZ PX PX PX
4 PY PZ 14
 ln X = ln(e )U

PX 2
4 PY PZ 14
 X = (e
h
)U

PX 2
1
P 4P P 1  P 4  4 4P P 1 P 2P 1
 Y h = X (eU Y 2 Z ) 4 =  X 4  (eU Y 2 Z ) 4 = (eU X 3Z ) 4
2 PY PX  16 PY  PX 4 PY
1
PX U 4 PY PZ 1
 PX 4  4 U 4 PY PZ 14 2
U PX PY 4
1
Z = h
(e ) =
4
4 
(e ) = (e )
2 PZ PX 2  16 PZ  PX 2 4 PZ 3
SOSC:
2 1 1
0 − − −
X Y Z
L L X1 L X 2 L X 3 2 2
LX1 LX1 X1 LX1 X 2 LX1 X 3 − + 2 0 0
X X
( X *) = =
LX 2  L X 2 X 1 L X 2 X 2 LX 2 X 3 1 
− 0 + 2 0
LX 3 LX 3 X1 LX 3 X 2 LX 3 X 3 Y Y
1 
− 0 0
Z Z2

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 2 1
0 − −
L L X1 L X 2 X Y
2
2 2 4 6
 2 ( X *) = LX1 LX1 X1 LX1 X 2 = − + 2 0 =− 2 2 − 2 2
=− 2 2 0
X
X X Y X Y X Y
LX 2 LX 2 X1 LX 2 X 2
1 
− 0 + 2
Y Y
2 1 1
0 − − −
X Y Z
2 2
− + 2 0 0
X X
 3 ( X *) =
1 
− 0 + 2 0
Y Y
1 
− 0 0
Z Z2
2 1 1 1 1
− − − 0 − −
X Y Z Y Z
2  2 1 
= (−1) 2+1 (− ) 0 + 2 0 + ( −1) 2+ 2 ( + 2 ) − + 2 0
X Y X Y Y
 1 
0 0 + 2 − 0 +
Z Z Z2
2 2 2 2  
= (−1) 2+1 (−
)(− 2 2
) + (−1) 2+ 2 ( + 2 )( − 2 2 − 2 2 )
X XY Z X Y Z Y Z
4 2
4 2
8 2
=− 2 2 2 − 2 2 2 =− 2 2 2 0
X Y Z X Y Z X Y Z

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