Solutions Manual for Microeconomic Theory Mas-Colell, Whinston, and Green Prepared by: Chiaki Hara Cambridge University Tlya Segal University of California, Berkeley Steve Tadelis Harvard University New York Oxford OXFORD UNIVERSITY PRESS 1997INTRODUCTION. We could never overestimate the amount of work which needed to be done to complete this solution book, but the satisfaction in seeing the finished product more than makes up for the many hours of work. We have tried to be both concise and exhaustive, and we hope that these two objectives do not conflict too often in this solution book. On rare occasions, we refer the reader to a book or article containing a well-presented solution. Chiaki Hara has done a lion’s share of the work, preparing solutions for parts I and IV. Iya Segal has provided the solutions for chapters 10 and 22. Steve Tadelis has prepared the solutions for chapters Ul, 13, 14, 21 and 23, and has completed the work on part I. Finally, Iya and Steve have together prepared solutions for chapter 12. Some of the early work on the solutions had been done by Marc Nachman, and we thank him for laying down foundations for solutions for part II and chapter 12. We would like to thank Andreu Mas-Colell and Mike Whinston for many hours of discussions. We are also thankful to the many teaching fellows who taught Ec2010a/%, the Harvard graduate sequence in microeconomic theory, for their input over the years when earlier versions of the textbook had been used for instruction. The list of these teaching fellows is too long to include here. While some errors surely remain, we hope that both students and teachers will benefit from our solutions, which make an excellent textbook even more useful. Finally, some personal thanks: Chiaki Hara thanks his parents and colleagues at various places where he has spent the last four years. Iya ‘Segal thanks Olga, for her unwavering support during all times. Steve Tadelis thanks Init, for always being there to encourage and support. Chiaki Hara llya Segal Steve Tadelis June 1996CHAPTER 1 LB.l Since y > z implies y x 2, the transitivity implies that x > z. Suppose that 2 > x. Since y » z, the transitivity then implies that y » x. But this contradicts x > y. Thus we cannot have z > x. Hence x > 2. 1.B.2. By the completeness, x > x for every x € X. Hence there is no x « X such that x > x. Suppose that x > y and y > 2, then x > y > z._ By (iii) of Proposition 1.B.1, which was proved in Exercise 1.B.1, we have x > z. Hence > is transitive. Property (i) is now proved. As for (ii), since x » x for every x ¢ X, x ~ x for every x € X as well. Thus ~ is reflexive. Suppose that x ~ y and y~z. Then x ry, y yz, and z x y. By the transitivity, this implies that x yz and z > x. Thus x ~ 2. Hence ~ is transitive. Suppose x that ~ y. Then x x y andy yx. Thus y x x and x > y. Hence y ~ x. Thus ~ is symmetric Property (ii) is now proved, LB.3 Let x © X and y € X. Since u(-) represents x, x x y 1 aad only if u(x) = uly). Since f{-) is strictly increasing, u(x) = u(y) if and only if vix) = viy). Hence x xy if and only if v(x) = v(y). Therefore v(-) represents >. 1.B.4 Suppose first that x > y. If, furthermore, y » x, then x ~ y and hence u(x) = uly). If, on the contrary, we do not have y x x, then x > y, Hence u(x) > u(y). Thus, if x > y, then uGd = uly) Suppose conversely that u(x) = u(y). If, furthermore, u(x) = uly), thenx ~ y and hence x > y. If, on the contrary, u(x) > u(y), then x > y, and hence x x y. Thus, if u(x) = uly), then x x y. So ul-) represents >. LBS First, we shall prove by induction on the number N of the elements of X that, if there is no indifference between any two different elements of X, then there exists a utility function. If N = 1, there is nothing to prove: Just assign any number to the unique element. So let N > 1 and suppose thai the above assertion is true for N - 1. We will show that it is still true for N. Write X = (x, Xyap%yh BY the induction hypothesis, > can be represented by a utility function u(-) on the subset (x).....%)_,) - Without Joss of generality we can assume that u(x,) > ulx,) >... > ul%y_))- Consider the following three cases: Case 1: For every i X;. Case 2: For every i < N, x, > xy Case 3: There exist i < N and j Since there is no indifference between two different elements, these three cases are are exhaustive and mutually exclusive. We shall now show how the value of ube) should be deterinined, in each of the three cases, for u(-) to rept nt > on the whole X. If Case 1 applies, then take u(x.) to be larger than u(x,). If Case 2 applies, take u(x) to be smaller than u(xy_,). Suppose now that Case 3 N- 2): applies. Let I= (ie tl... N- Ih x > yyy) and d= Ge Completeness and the assumption that there is no indifference N - 1). The transitivity implies that both I and in the sense that if i ¢ 1 and i? < i, then it € 1; and if j¢Jand j' > j, then j' e J. Let it = max I, then it +1 = min J. Take 1-2ulxy) te Hie in the open interval (u(x;,,,),u(xje)). Then it is easy to see that u(+) represents x on the whole X. Suppose next that there may be indifference between some two elements of = (eX: x ~ x) Then, ‘a my ++ Xy)- For each n = by the reflexivity of ~ (Proposition 1.B.1(ii)), u X. Also, by the n’ transitivity of ~ (Proposition 1.B..(ii)), if X, * X,, then Xn X #0. So let M be a subset of (1), N) such that X = UoyX,, and X,, = X, for any me M and any n € M with m#n. Define an reia on (X_: m € M) by letting X_ x” X, if and only if x > x,. In fact, by the definition of M, there is no indifference between two different elements of (X,: mM). Thus, by the preceding result, there exists a utility function u*(-) that represents >*. Then define u: X 9 ® by ulx,) = uX(X)) if me M and x, € x is easy to show that, by the transitivity, u(-) represents >. LC.1 If y © Cl{x,y,z)), then the WA would imply that y € C((x,y}). But 2)). Thus contradicts the equality C(ix.y)) = (x). Hence y € Cl{(x, CUxy,20) © xd {2d.tx.20). 1.€.2. The property in the question are equivalent to the foliowing property: If Be B Be B xe B ye B, xe BY, y eB’, x © CiB), andy € lB’), w x € C(B') a € CIB). We shall thus prove the equivalence between this property and the Weak Axiom. Suppose first thet the Weak Axiom is satisfied. Assume tha: B € B, B' € Bx eB, y eB, xe BY, ye BY, x © C(B), and y € CIB’). If we apply the Weak Axiom twice, we obtain x € C(B') and y € C(B). ce the above proper is also satisfied. 13Suppose conversely that the above property is satisfied. Let Be 8. x € B, y © B, x € BY, and x € C(B). Furthermore, let B' « B, x € B', y € BY, and y © C(B'). Then the above condition implies that x € CIB’) (and y € C(B)) Thus the Weak Axiom is satisfied. 1.€.3. (a) Suppose that x >* y, then there is some B € B such that x € B, y € B, x © C(B), and y € C(B). Thus x >* y. Suppose that y >* x, then there exists B ¢ @ such that x ¢ B, y ¢ B and x € C(B). But the Weak Axiom implies that y € C(B), which is a contradiction. Hence if x >* y, then we cannot have yx" x. Hence x >" y. Converseiy, suppose that x >** y, then x x" y but not y >* x. Hence there is some B ¢ B such that x € B, y € B, x « C(B) and if x € B' and y « BY for any B’ € 8, then y € C(B'). In particular, x € C(B) and y ¢ C(B). Thus x >t y. ‘The equality of the two relation is not guaranteed without the WA. As can be seen from the above proof, the WA is not necessary to guarantee that if xo then x >* y. But the converse need not be true, as shown by the following example. Define X = (x,y.z}, B= (xy) (xy.zh), O(x.y)) = G0, and C((x,y.2}) = (y). Then x >* y and y >* x, But neither x >* y nor y >" x. (o) The relation >* need not be transitive, as shown by the following example. Define X = (x,y,z), B= (xyh(y.2)), Clxy)) = Ged and Cl{y.z)) = Cy). Then x >* y and y >" z. But we do not have x x* z (because neither of the two sets in B includes (x,z)} and hence we do not have x >* z either. (c) Acccrding to the proof of Proposition 1.D.2, if B includes all three- element subset of X, then >* is transitive, By Proposition 1.B.1(i), >** is 1-4transitive. Since >* is equal to >**, >" is also transitive. ‘An altemative proof is as follows: Let x € X, y €X, 2 €X, x >* y, and y »* z. Then (x,y,z) € B and, by (a), x >** y, and y >"* 2. Hence we have neither y x" xnor z >* y. Since »* rationalizes (B,C(-)), this implies that y¥ € Cl{x,y,2)) and z € Clix,y,z)). Since Cl(x,y,2)) # @, CUix,y,2)) = (x). ‘Thus x >* z. 1.D.1 The simplest example is X = {x,y B = (x),(y)}, Cx) = (x), Cy) = (y). Then asy rational preference relation of X rationalizes C(-). 1.D.2 By Exercise 1.8.5, let u(+) be a utility representation of . Since X is finite, for any B ¢ X with B # @, there exists x € B such that u(x) = uly) for all y € B. Then x € C*(B,z) and hence C*(B,x) # @. (A direct proof with no use of utility representation is possible, but it is essentially the same as the proof of Exercise 1.B.5.) 1,D.3. Suppose that the Weak Axiom holds. If x € G(X), then x € Cl(x,z)), ‘adicts the equality C({x,z)) = {z). If y © C(X), thea y € Clix.y)}, which contradicts Cl(x,y}) = Gd. If 2 € G(X), then 2 € Cl{y.z)), which contradits C({x,2)) = {y). Thus (B,C(-)) must violate the Weak Axiom. 1.D.4 Let » rationalize C{-) relative to B. Let x € C(B, u B,) and y € C(B,) v C(B,), then x > y because B, u B, > C(B)) v CIB,). Thus x € CIC(B,) v cB). Lez x C{C(B,) v CIB,)) and y € B, vB), then there are four cases: Case L x € C(B,), y eB. 1sCase 2. x-€ CIB), y € Bp. Case 3. x € CIB), y € By. Case 4. x € CIB), y € By. If either Case 1 or 4 is true, then x » y follows directly from rationalizability. If Case 2 is true, then pick any z € C(B)). Then z > y. Since x € C(C(B,) v C(B,)), x x 2 Hence, by the transitivity, x > y. If Case 3 is true, then pick any 2 € C(B,) and do the same argument as for Case 2. 1.D.S (a) Assign probability 1/6 to each of the six possible preferences, which are x >y>z,X>Z>YY>HX>BY>2Z>x, Z>X>yY, and Zmyr x. (b) If the given stochastic choice function were rationalizable, then the probability that at least one of x > y, y > z, and z > x holds would be at most 3 x (1/4) = 3/4. But, in fact, at least one of the three relations always holds, because, if the first two do not hold, then y > x and z > y. Hence the transitivity implies the third, Thus, the given stochastic choice function is not rationalizable. {c) The same argument as in (b) can be used to show that a = 1/3. Since CUx,y)) = CUy,z)) = CU(z.x)) = (a, 1 - a) is equivalent to C((y,xh) = Cliz,y)) = CUx,z)) = (1 - @, @), if we apply the same argument as in (b) to y »x, 2 > y, and x > z, then we can establish 1 - a = 1/3, that is, a = 2/3. Thus, in order for the given stochastic choice function is rationalizable, it is necessary that a € [1/3,2/3]. Moreover, this condition is actually sufficient: For any a € [1/3,2/3], assign probability a - 1/3 to each of x > 1-6y>zZy>z>x, and z> x > y; assign probability 2/3 - @ to each of x > 2 > y. y>x>z, and z>y> x. Then we obtain the given stochastic choice function.CHAPTER 2 2D. Let p, be the price of the consumption good in period 2, measured in units of the consumption good in period 1. Let x,, x, be the consumption levels in periods 1 and 2, respectively. Then his lifetime Walrasian budget set is equal to (x € Re 1 t PX = we 2.D.2 (xh) € Rh = 24, pe +h = 24). 2.0.3 (a) No. In fact, the budget set consists of the two points, each of which is the intersection of the budget line and an axis. (b) Let xe BL. x’ € By and A € [0,1]. Write x” = Ax + (1 - Ax’. Since X is convex, x" € X. Moreover, p-x" = A(p:x) + (1 - AMp:x') = Aw + (1 - Alw ew, Ths x"eB |. ‘p.w 2.D.4 It follows from a direct calculation that consumption level M can be attained by (8 + (M - 85)/s") hours of labor. It follows from the definition that (24,0) and (16 - (M - 8s)/s’, M) are in the budget set. But their convex combination of these two consumption vectors with ratio M - 85 8 —_ 1, —__— aia cm e+ Hae is not in the budget set: the amount of leisure of this combination equals to 16 (so the lador is eight hours), but the amount of the consumption good is 8 8 8 a Woes 7M mas * Mae = 8 e+ Mae a+ Me 2-12E1 The homogeneity can be checked as follows: ap, ew xlapaw) = 2 Py * op) * op, apy op, aw (apaw) = ———_2 ____ = 2 + =p, * oP, =P, op, aw x,(ap.aw) = &P,* ap * GP, =P, To see if the demand function satisfies Walras’ law, note that BP, + Py * Py vie ome pextp.w) = Hence p-xip,w) = w if and only if 6 Therefore the demand function satisfies Walras’ law if and only if B = 2.E.2 Multiply by Pw ‘both sides of (2.£.4), then we obtain Ln (P.¥1/w8x(p.1/0p,No,/xyl0.w)) + Boxy (PwW = 0. Hence Tp_,by(P.wlepy(p.w) + by(p.w) = 0. By (2-E.6), Dy ay(PpXqlP.wl/wil8xj(p,w)/awNw/xylp,w)) = 1. Hence ty bfP.wie,, (pw) = 1 2.E3 There are two ways to verify that p:D.x(p,wip = - w. One way is to post-multiply (2.£.5) by p, then p:D,x(p,w) p + w = 0 by Walras’ lew. The other way is to pre-multiply (2.£.1) by p’, then P-D,xtp.w)p + PD, xt.wiw = 0. By Proposition 2.E.3, this is equal to p:D_x(p,wip + w 4n interpretation is that, when all prices are doubled, in order for the consumer to stay at the same consumption, it is necessary to increase his wealth by w. 2-22.E.4 By differentiating the equation x(paw) = ax(p,w) with respect to « and evaluating at a = 1, we obtain wD, x(pw) = x(p.w). Hence D,x(p,w) = U/whxlp,w). Hence ¢,,, = (8x,(p.w)/aw)(w/x,(p,w)) = 1. This means that an one-percent increase in wealth will increase the consumption level for all goods by one percent. Since (1/w)x(p,w) = x(p,1) by the homogeneity assumption, D, x(p,w) is a function of p only. The assumption also implies that the wealth expansion path, E, = Gx(p,w): w > 0), is a ray going through x(p,1). 2.E.5 Since x(p,w) is homogeneous of degree one with respect to w, x(p,aw) = ax(p,w) for every @ > 0, Thus x;(pw) = x/(pillw. Since ax/(p,l)/ép, = ¢,(p)/ap, = O whenever k # 4, x,(p.l) is actually a function of p, alone. So we can write x)(p.w) = x,(p,)- Since x(p,w) is homogeneous of degree zero, xlPp) must be homogeneous of degree - 1 in p)). Hence there exists ay > 0 such that x,(p,) = @,/p,, By Walras’ law, S)p,(a,/p,)w = wa, = w. We must thus have Tyo, = 1 2.E.6 When a = 1, Walras’ law and homogeneity hold. Hence the conclusions of Propositions 2.E.1 - 2.E.3 hold. 2.E.7 By Walras' law, Xp = (W ~ P,x)/P, = W/P, - (py/P,Maw/p,) = (1 - aw/p,. 2 This demand function is thus homogeneous of degree zero.2.E.8 For the first part, note that In xq{pw) = In xplexplin p,),....exp(in p, J.exptln ¥)), Thus, by the chain rule, ax, ax atin x(p.w)) —BpyIPWIEXPUN Py) FEUD.) Py TE ee pT = Seg Similarly, 8x, 8x, 6(n xp(p,w)) gy (Pw) -explin w) Ba (Pewee ine = ew bl ape = &p,(PW). Since a, = dlin x,lp,w))/dlln p,), ay = dlin x,(p,w))/dlln p,), and a, d(in x,{p,w))/d(ln w), the assertion is established. 2.F.1 We proved in Exercise 1.C.2 that Definition 1.C.1 and the property in the exercise is equivalent. It is easy to see that the latter is equivalent to the following property: For every Be B and B’ eB, if C(B) n B' + © and B 9 C{B") = @, then C(B} 0 BY c C(B') and Bn C(B') ¢ CiB). If Cl) is this property is equivalent to the following one: For Be ® and 8' € B, if C(B) cB’ and Bc C(B'), then C(B) = C(B'). In th contex: of Walrasian demand functions, this can be restated as follows: For htferward to check that the Weak Axiom holds. In fact, if 1 2.7.2 It is strai plex! <8 and i= j, then pl-x! = 9. Since p*-x! = 8, x” is revealed 3 = 8, x! is revealed preferred to x°. preferred te x°. Similarly, since p! 2-4But, since p?-x2 = 8, x? is revealed preferred to x2. 2.F.3 (First printing errata: Add the sentence “Assume that the weak axiom is satisfied." in (b) and (c).] Denote the demand for good 2 in r 2 by y. (a) His behavior violates the weak axiom if 100-120 + 100y = 100-100 + 100-100 and 100-100 + 80-100 = 100-120 + Boy. ‘That is, the Weak Axiom is violated if y ¢ (75,801. (b) The bundle in year 1 is revealed preferred if 100-120 + 100y = 100-100 + 100-100 and 100-100 + 80-100 > 100-120 + 80y, that is, y < 75. (c) The bundle in year 2 is revealed preferred if 100-100 + 80-100 = 100-120 + Boy and 100-120 + 100y > 100-100 + 100-100, that is, y > 80. (a) For any value of y, we have sufficient information to justify exactly one of (a}, (od), and (c). (e) We shall prove that if y < 75, then good | is an inferior good. Sc suppose that y < 75. Then 2-5100-120 + 100y < 100-100 + 100-100 and 100-100 + 80-100 > 100+120 + g0y. Hence the real wealth decreases from year 1 to 2. Also the relative price of good 1 increases. But the demand for good 2, y, decreases because y < 75 < 100. This means that the wealth effect on good 1 must be negative. Hence it is an inferior good. (f) We shall prove that if 80 < y < 100, then good 2 is an inferior good. So suppose that 80 < y < 100. Then 100-100 + 80-100 = 100-120 + 80y and 100-120 + 100y > 100-100 + 100-100. Hence the reai wealth increases from year 1 to 2. Also the relative price of good 2 decreases. But the demand for good 2, y, decreases because y < 100. This means that 2 wealth effect on good 2 must be negative. Hence it is an inferior good. 2.F.4 (a) If Lg <1, then (Pg*%)1/(Po"%q) < I and hence Pg, < Po°Xq: Thus the consumer has a rev ied preference for x, over x,. (o) IF Pg > 4, then (p)-%,)/(Py-%p) > Land hence py-x, > Py: Thus the consumer has a revealed preference for x, over Xo. 1 (0) If p, = Ap, and W, = Aw,, and x, = x5, then Ey = A. Hence, by taking A ger or smaller than one, we can make EQ larger or smaller than one. But this obvious!y does not have any revealed preference relationship. 2-62.F.5 We shall first prove the discrete version. By the homogeneity of degree one with respect to wealth, it is enough to show that (p" = p)-Cx(p".1) - 2(p.1) $ 0 for every p and p’. Since xp.) = x(pl) = 1 ae i prety (et Pat) ~ xt.) + Gp, Sater) > xe), it is sufficient to show that (p’ - p)-(x(p’,p'-2(p,4)) ~ x(p,1)) = 0, and (p= piotelp, Srstegy) ~ (Pull) = 0. For the first inequality, note that (pt ~ p)-(xlp'sp'+x(p,1)) - xlp.1)) = - p-xtp'.p'-x(p.t)) + 1. If x(p',p'-x(p,1)) = x(p,1), then the value is equal to zero. If x(p',p'-x(p,1)) # x(p,1), then the weak axiom implies that p-x(p',p'-x(p,1)) > 1. Hence the above value is negative. As for the second inequality, ( ~ p-Gele, Stee) - xtpan L = piex(p, +h 5 i pio peel = Soya Poxp, 1 = 2 (pextell + Soyteay? 2 - 2 Vip xe. Step) 2-2=0. % The infinitesimal version goes as follows. By differentiating x(p,aw) = ax(p,w) with respect to a and evaluating at a = 1, we obtain Dy x(p,w)w = x(p,w). Hence 2-7Stp,w) = Dxtp.w) + Dy x(pywlxip.wi™ = Dyxtpow) + (1/wlxtp,w)xtp. we Thus Dex(p.w) = Stpyw) = (W/whx(pwhx(p,w)™, By Proposition 2.F.2, S(p,w) is negative semidefinite. Moreover, since v-Gelpwixtp,w) Wy = - (vectp.w))?, the matrix - (/wix(p,whx(p,w)" is also Regative semidefinite. Thus D,x(p,w) is negative semidefinit 2.F.6 Clearly the weak axiom implies that there exists w > O such that for every p, p', and w’, if p-x(p',w") s w and x(p',w’) = x(p,w), then p’-x(p,w) > Conversely, suppose that such a w > 0 exists and that p-x(p',w’) = w and x(p'.w') = x(pw). Let a = w'/w. Then x(p',w') = x(p',aw) = x(a" 'p',w) by the homogeneity assumption, and p-x(ap',w) = w and x(a /p’,w) # x{p,w). But this implies that (a/p')-x(p,w) > w, or, equivalently, p’-x{p,w) > aw ‘Thus the weak axiom hoids. 2.F.7 By Propositions 2.6.2 and 2.E.3, P:Sip.w) = pe x(pyw) + p-D,x(p.wix(p.w)T = PrDyxtp.w) + xip.w)? = 0 By Proposition 2.E.! and Walras’ law, Stp,wip = D,x(p.wip + D,x(p.whxtp,w)"p = Dax(p.wp + Dxipwlw = 0 P, a Kk 2.F8 S_(p.w) = Epler a) a ax, mK ax = Spey Opp PM) * ete wT Bw (hwy (Pw) 8x, PL, (p.w) =e, (pw) + a ip wy) txsPr xgip.w) aw PY = ey (P.w) + egy (P,wldy (pw) 2-82.F.9 (a) Since x"ATx = (x"Ax)™ = xTAx, a matrix A is negative definite if T,T, T,T, and only if x"Ax + x7a™x < 0 for every x € R"\(O). Since xTax + xTATx = xT(a + AT)x, this is equivalent to the negative definiteness of A+ A’. Thus A is negative definite if and only if so is A+ A’. The case of negative definiteness can be proved similarly. The following examples shows that the determinant condition is not sufficient for the nonsymmetric case. Let A = [ mee Ik then Ay == 1 and Aj, = 1. But (i, of Pass I] © 1. Hence A is not negative semidefinite. (b) Let S(p,w) be a substitution matrix. By Proposition 2.F.3, S(p,wlp = 0 and hence s,>(p,w) P)/Pp)51,(P,W). Also p-Stp,w) = 0 and hence s,(p,w) 2 2 = (- p)/Pp)s,,(p.w). Thus s5,{p,w) = (p}/p2)s,,(p,w). Thus, for every v = [3 or v-Sip,w)v ev? = (pe/peyt (WUT - (2p)/p_)vy¥q + (Pi 7PS)¥9) a 2 = 5, (P.witv, - (P,/p, 10) Now, suppose that S(p,w) is negative semidefinite and of rank one. According to (*), the negative emidefiniteness implies that s,,(pw) $ 0. Being of rank one impli that s,(p.w) # 0. Hence s,\(p.w) < 0. Thus s,o(p.w) < 0. Conversely, let s,,(p.w) < 0, then, by (*), v-S(p,wlv 0 for every v. 2.F.10 (a) If p = (11,1) and w = 1, then, by a straightforward caiculation, we obtain <1 10 Sip,w) = /3)} O -1 1 1Hence S(p,w) is not symmetric. Note that -1 01 Tf, 1 ep ela meee %. “| ooh Ik) = vit yyy - vb =~ ty - veal? - avdve. Hence [ ua ] is negative definite. Thus, by Proposition 2.F.3 and Theorem M.D.4(iil), S(p,w) is negative semidefinite. (b) Let p = (1,1se) and w = 1. Let Slp,w) be the 2 x 2 submatrix of S(p,w) obtained by deleting the last row and column. By a straightforward calculation, we obtain Stp.w! -2f-2-e 1+ 2c 2+ ef nent? } Thus, 1 - a4, oso 4 =4, a5tp.0| + ] = (2 + (2 - aie) > 0, o if © > 0 is sufficiently small. Then S(p,w) is not negative semidefinite and the Weak Axiom. hence the demand function in Exercise 2.F.1 does not satis‘: 2.F.11 By Proposition 2.F.3, S{p,wip = 0 and hence s,9(p,w) = : » ' 7 = w= le (- p/p, )5,(P,w). Also p:S(p,w) = 0 and hence s, (p,w) P//P2)51 (0. ¥). (We saw this in the answer for Exercise 2.F.9 as well.) Thus s, (pw) = 52,7.) 2.F.12 By applying Proposition 1.D.1 to the Walrasian choice structure, we know that x{p,w) satisfies the weak axiom in the sense of Definition 1.C.1. By Exercise 2.F.1, this implies that x(p,w) satisfies the weak axiom in the sense of Definition 2.F.1.2.F.13 [Einst printing errata: In the last part of condition (*) of (b), the inequality p-x > w should be p'-x > w'. Also, in the last part of (c), the relation x’ € x(p,w) should be x’ € x(p,w).) (a) We say that a Walrasian demand correspondence satisfies the weak axiom if the following condition is satisfied: For any (p.w) and (p',w"), if x € (pw), x? € x(p'yw'), px = w', and p-x’ = w, then x’ € x(p.w). Or equivalently, for any (p,w) and (p',w'), if x € x(p,w), x" € x(p'w'), pox! = w, and x’ € x(p,w), then px > w’. (b) If x © x(p,w), x’ € x(p'w"), and p-x’ < w, then x’ € x(p,w) by Walras’ law. Thus p'+x > w'. (c) If x € x(p,w), x! € x(p'.w'), and pr w', then (p’ = p(x’ - x) = w - p-x'. If, furthermore, x’ € x(p,w), then Walras' law implies that p-x' = w. Hence (p’ - p)-(x' - x) = 0. If, on the contrary, x’ € x(p,w), then the generalized weak axiom implies that p-x’ > w. Hence (p’ - p)+{x’ - x) < 0. (a) It can be shown in the same way as in the smali-type discussion of the proof of Proposition 2.F.1-that, in-order to verify the assertic:.. it is sufficient tc show that the generalized weak axiom holds fer all compensated So suppose that x € x(p,w), x" € x(p’,w'), p'°x = w', and p°x’ ice changes alized > 0, w= 0, and @ > 0. Since p-x(p,w) = w and {ap)-x(ap,aw) = aw, we have ap-xip,w) s aw and p-x(apaw) = w. The weak axiom now implies 2that x(p,w) = xlap,aw). 2.F.15 Since 6x,(p,w)/aw = 0 for both £ = 1,2, we have sp,(p.W) = ax/(p.w)/ép, for both € = 1,2 and k = 1,2. Hence, let Sip,w) be the 2x 2 submatrix of S(p,w) obtained by deleting the last row and column, then Sip,w) = ff ae i This matrix is negative definite because ° -1 1 df 1 2 hole Zima ee) (wy al na Jt = uy, == Oy - vysa? = avive. (We saw this in the answer to Exercise 2.F.10(a).) Hence, by Theorem M.D.4{iii), v-Slp.w)v < 0 for all v not proportional to p. Since Sip.w) is net symmetric, S(p,w) is not symmetric either. 2.F.16 (a) The homogeneity can be checked as follows: xyap.aw) = apy/ap, = p/P = %,{P.w), x, lap.cw) = - ap,/aps = - Py/Py = Xp(P.W), xg (epee) evr/up, = W/P, = x3{0,¥). As for Walras’ law, 2.x (Bw) + pyxylp.w) + pyxq(Pw) = (P,P, ~ (b) Let p = 0,2,.), w= 4, p' = (11), and w’ = 2, then x{pyw) = (2, - 1, D and x(p'w') =U, - 1, 2). Thus p'+x(p,w) = 2 pex(p',w') = 1 = w. Hence the Weak Axiom is violated. (c) Denote by Dx{p,w) the 2 x 2 submatrix of the Jacobian matrix Dx(p,w) obtained by deieting the last row and column, then cf = -1 1 Dxip,w) = org ae } Let Sip.w) be the 2 x 2 submatrix of S(p,w) obtained by deleting the last row 2-12and column, then Sip.w) = Dx(p.w) = oryf ane iF because Axy(p.wi/aw = axz(p.w)/aw = 0, Note that ¥-Sip,wlv = 0 for every R. Now let v € R Note that v = (v - (v3/p,)p) + (vg/P3)p and the third coordinate of v - (¥9/pghp 18 equal to zero. So denote its first two coordinates by ¥ € R* Then, by Proposition 2.F.3, v-Slp,w)v = ¥-S(p,wlv = 0. 2.F.AT (a) Yes. In fact, x,(apaw) = ew/(Zyapy) = W/(T,p,) = x, (pw). (b) Yes. In fact, p-x(p.w) = Tp, x,(p.w) = Dpyw/(D py) = Ww. (c) Suppose that p'-x(p,w) 5 w' and p-x(p',w’) Sw. The first inequality implies that (J,p))w/(D,p,) < w', that is, w/(D)p,) = w'/(,pj). The second inequality implies similarly that ([)p,)w'/(D,p)) $ w, that is, w'/(D)p)) = WAT,p)). Therefore w/(E,p,) = w'/(Sypi). Hence x(p,w) = x(p',w'). Thus the weak axiom holds. (d) By calculation, we obtain leeccg? W) = ie 5 Dato) = ( W/Eyp 7) eal Liu dk 1 D,x(P.w) = U/Dpp,) = x(p.w). 1 Hence S{p,w) = 0. It is symmetric, negative semidefinite, but not negative definite. 2-13CHAPTER 3 3.B.1 (a) Assume that » is strongly monotone and x >> y. Then x = y and x = y. Hence x > y. Thus > is monotone. (b) Assume that » is monotone, x € X, and £ > 0. Let e = (Iy..y1) € RU and y =x + (e/VDe. Then ily - x" = © and y > x. Thus » is locally nonsatiated. 3.B.2 Suppose that x >> y. Define € = Min (x, = y,, --- %, - yp} > 0, then, for every z € X, if iy - zi > z. By the local nonsatiation, there exists 2* ¢ X such that lly - 2° y. By x >> z® and the weak monotonicity, x x z*. By Proposition 1.B.1(iii) (which is implied by the transitivity), x > y. Thus > is monotone. 3.B.3 Foliowing is an example of a convex, locally nonsatiated preference relation that Is not monotone in 2. For example, x >> y but y > x 0 x Figure 3.3.3 a13.€.1 Let x be a lexicographic ordering. To prove the completeness, suppose that we do not have x > y. Then * and "x, # ¥, or yp > x)". Hence either "y, > x," or "y, = x, and y, > x". Thus y x x, To prove the transi ty, suppose that x x y and y yz, Then x, = y, and y, =z, Hence x, =z. If x, > 2, then x» z If x, Thus x, = yy and y) = z,. Hence x, =z). Thus x > z the en x =z, aie To show that the strong monotonicity, suppose that x = y and y * x. This implies either that x, > y, and x) @ ¥p, or that x, = y, and x» >y>. In 1 either case x > y. To show the strict convexity, suppose that y x x, 2> x, y #2, andae (0,1). Without loss of generality, assume that x * y. By the definition of the lexicographic ordering, we have either "y, > x," or "y, = x, and y, > x5". On the other hand, since 2 > x, we have either “z, > x," or "Z, and x, = "or “ay, + (1 lz, = x, Yr" Hence, we have either “ay, + (1 - az, > x, 1 1 a” Thus ay + (1 - alz > x. and ay, + (1 - alz, > x, 3.C.2 Take a sequence of pairs ((x" y"))P_, such that x" » y" for all n, x™ + and y" = y. Then ulx")"= uly") for all n, and the continuity of u(-) implies that u(x) = uly). Hence x > y. Thus is continuous. 3.6.3 01 way to prove the assertion is to assume that x is monotone and notice that the proof actually make use only of the closedness of upper and lower contour sets. Then the proposition is applicable to x, implying that it has a continuous utility function. Thus, by Exercise 3.C.2, x is continuous. A mere direct proof (without assuming monotonicity or using a utility function) goes as follows. Suppose that there exist two sequences (x"} andty") in X such that x” > y" for every n, x99 xX, yay eX, andy > x. Since (2: ¥ > 2) is open, there exists a positive integer N, such that y > x™ for every n > Since {z: z > x) is open there exists a positive integer 1 2 > x for every n > N,. Conceivably, there are two cases on the such that y’ sequence {y™}: Case 1: There exists a positive integer N such that y” > y for every n> Case 2: There exists a subsequence (y"")) such that y > y*'") for every n If Case 1 applies, then, by Proposition 1.B.Iliii), we have y” > x" for every n> Max (N,,N,). This is a contradiction. If Case 2 applies, then there exists a positive integer m such that k(m) > Nj. Since (2: 2 > yX™) is open, there exists a positive integer N, such that y° > yim for every n> N,- By x" » y" and Proposition 1.B.1(iii), x7 > y*!™ a Since (2: 2 x y*"™) is closed, x» yX™, for every n > Ny But, since k(m) > N,, this is a 3.C.4 We provide two examples. The first one is simpler, but the second o: satisfies monozonicity, which the first does not. Example 1. Let X = R, and define u(+): R, > R by letting u(x) = 0 for x < 1, u(x) = 1 for x > 1, and u(l) be any number in [0,1]. Denote by » the preference relation represented by u(-). We shall now prove thi continuous. In fact, if ull) > 0, then consider a sequence {x") with x" = In for every n. Although x" ~ 0 for every n and x" 41, we have 1 > 0. If u(t) <1, thea consider a 2 sequence {x} with x” = 1 + I/n for every n. Although x” ~ 2 for every n and x" 1, we have 2> 1. Note that if u(x) = 0, then all lower contour sets are closed. If u(1) ‘then all upper contour sets are closed.Example 2. Take X = R® and define a utility function u(-): R29 R by the following rule: Case l. If x +X = 2 and x # (1,1), then ux) = Xt XS Case 2. If minGxy.x,) = 1 and x # (1,1), then ulx) = mintx.x,) + 2 Case 3. If xt XS >2, mintx).x5} <1, and x > x then uGd = 3 = (= x,)/0y =D. Case 4. If x, + x, > 2, min(x,,x,) <1, and x, < x,, then ulx) = 3 - 1 - xx, -D Case 5. ull,1) € [2,3]. ‘The indifference curves of the preference relation » represented by ul+) are described in the following picture: 0 1 2 x Figure 3.C.4 It follows from this construction that u(-) is continuous at every x # (1,1). The preference » is convex and monotone. But, whatever the choice of the value of ufl,1) is, it cannot be continuous at (1,1). In fact, Q- vn, 1 - Va) > 0,1) and (1 + 1/n, 1 + 1/n) 9 1) as n> @, and ul = /n, b= In) = 2 - 2/n 9 2; 3-4ull +n, 1+ nde len +293. Hence, if 2 < ull,1), then (2,0) x (= 1/n, 1 = In) but (4) > (2,0); if u(t) <3, then + I/n, 1+ 1/n) x (2,2) but (2,0) > (0. If ul) = 3 then all upper contour sets of » are closed; if u(l,1) = 2, then all lower contour sets of » are closed. 3.C.5 (a) Suppose first that u(-) is homogeneous of degree one and let « = 0, xe Rt, ye Rt, and x ~y. Then u(x) = u(y) and hence au(x) = auly). By the homogeneity, ulex) = u(ay). Thus ax ~ ay. Suppose conversely that » is homothetic. We shall prove that the utility function constructed in the proof of Proposition 3.C.1 is homogeneous of degree one. Let x ¢ RL and a > 0, then u(xle ~ x and ulaxle ~ ax. Since » is homothetic, au(xJe ~ ax. By the transitivity of ~ (Proposition 1.B.1(ii)), ulaxle ~ au(x}e. Thus ulax) = aulx). {b) Suppose first that » is represented by a utility function of the form u(x) FX + OK um) Lea eR, xe Ry eR, and x ~ y. Then ulx) = uly) 7 and hence u(x) + @ = uly) + @. By the functional form, Ux) + a = (+ 21) + OXp a ,) = Ul + ae, uly) + @ = (a + yy) + MYo..u¥) = uly + ae)), L where e, = 0) € RY. Hence ulx + ae,) = uly + J, oF x + ae ~ y+ Suppose conversely that > is quasilinear with respect to the first commodity. The idea of the proof of this direction is the same as in (a) or Propositior 3.C.1, in that we reduce comparison of commodity bundles on a line by fining ovt indifferent bundles and then assigning utility levels along the line. But this procf turns out to exhibit more intricacies, partly because it 3-5depends crucially on the connectedness of RL', which appears in X = (- @, @) x Ril (connectedness was mentioned in the first small-type discussion in the proof of Proposition 3.C.1.) The proof will be done in a serie of steps. First, we show that comparison of bundles can be reduced to a line parallel to e,. Then we show that the quasilinearity of » implies the given functional form. 7 Let » be a quasilinear preference and a utility function u(-) represent The existence of such a u(-) is guaranteed by Proposition 3.C.1, but, of course, it need not be of the quasilinear form. For each x € RL’, define 160 = (uGx,) € Re x, €R), then 160 is a nonempty open interval, by the 1 continuity and the strong monotonicity of » along Step 1 For every x ¢ RE and y @ RE, if WGK) # 119), then 100) n 9) 2. Proof: Suppose that I(x) # I(y). Without loss of generality, we can assume that there exists u € I(x) such that u € I(y). Then either u = sup [(y) or u = infl(y). Suppose that u = supl(y). (The other case can be treated similarly.) Then let xf ¢ R satisfy u = Ulxt.n), then, for every ¥, € R, 1 Oxp.X) > Gig). In particular, for every x, © R and y, © R, (xx) > 1 GW, - xt xD Y). By the quasilinearity, this implies that (x,,%) > (pW) Thus Boxe) > Uly,.9). Hence 1G) 9 1G) = 2. For each x € RU, define E(x) = (y € RUT UGK) = 1G7)). Step 2: For every x € RL, E(x) ts open in RET, Proof: Lec xe RL x, eR, and u = Ox,x) © Ik) Let © > 0 satisfy (u - €, u +e} ¢ 1X). Since G{-) is continuous, there exists 6 > 0 such that Bnd bid =a if ye RL and x - $< 8 then Jlxyx) - Ex, yi (u- eu +e) nIG) *e. Thus, by Step 1, Itk) = 19), or 7 € EGD. Hence (Y € RE: nx - Su < 8) © E(x). Thus E(x) is open. » EG) = Step 3: For every xe RE Ll we Proof: It is sufficient to show that for every x ¢ RL and y € R have E(x) = E(j). Suppose not, then thére exist x ¢ AL andy € AL such that E(X) © E(y), then the complement RL”\E(X) is nonempty. By Step 1, “EG is equal to the union of those E(j) for which y « RENE). By Step 2, this implies that RL” \E(x) is open. Hence we have obtained a partition (EG),R7-NE(x)) of RL, both of whose elements are nonempty and open. This contradicts the connectedness of RL, Hence E(x) = E(¥) for every 8 and 5 « ALTE Lol Thus for every x € RL, there exists a unique « € R such that ae, ~ (0,3). Define ¢: at se by otx)e, - By Step 3, 1X) = (0) for every x € Ri (0,x) for every Xe RL! Define u: X > R by ulx) = x, + Ox, ) for every x € X. Step 4: The function ul+) represents >. Proof: Suppose that x € X, y € X, and x xy. By the quasilinearity, this is equivalent to (x, - ¥j, Xp. By the definition of (+), this is equivalent to (x, ~ Yy, Kye XL) x OW -n¥ ley Again by the quasilinearity, this is equivalent to (OR yrooe RIE PUige dp) + - HIE, Again by the definition of ¢(-), this is equivalent to Wp) +y, > xe that is, u(x) = uly). 37These properties of u(+) are cardinal, because they are not preserved under some monotone transformation, such as f(u(x)) = u(x)? 3.6.6 (a) For p = 1, we have u(x) = a,x, + @)x>. Thus the indifference curves are linear. (b) Since every monotonic ‘transformations of a utility function represents the same preference, we shall consider a i e, Gtx) = Inutx) = (U7plin(a x? + @x5). By L’Hopital’s rule, Lim u(x) p70 Pog ax?) Re (a,xfinx, + apxBlnx, Wax, + a5x5) (alnx, + alnx,)/(a, + 25) a a, Since expl(a, + a1)? = x)'x,“, we have obtained a Cobb-Douglas utility function. There is an alternative proof to this proposition: Since both the CES and the Cobb-Dougias utility functions are continuously differentiabie an¢ homothetic. it is sufficient to check the convergence of the marginal rate of substitution at every point. The marginal rate of substitution at (x,.x,) with respect te the CES utility function is equal to a x8 Vagx The marginal rate of substitution at (x,.x,) with respect to the Cobb-Dougias utility fu Plje xP7l sg utility funetion is equal to a,x)/a,x5. Note that x1 0/6,%5 > @)%)/a)X> as p>. (In fact, a,x0'/a,x8"! is well defined for every p and is equal to @,%,/#)X> when p = 1.) The proof is thus completed. Strictly speaking, there is a missing point in both proofs: We proved the convergence of preferences on the strictly positive orthant {x € R@: x >> 0),but we did not prove the convergence on the horizontal and vertical axes. In fact, the convergence on the axes are obtained in such a way that all vectors there tend to be indifferent. To be more specific, compare, for example, x = (x,,0) and y = (y,,0) with x, > y, > 0. According to the CES utili function, x is preferred to y, regardless of the values of p. But, according to the Cobb-Douglas utility function, x and y are indifferent.. Futhermore, the following is true: If x is in the strictly positive orthant and y is on an axis, then x is preferred to y for every p sufficiently close to 0. To see this, simply note that if x = (x,,0) with x, > 0 and y >> 0, then ax? > a and ay + ay >a, +), The implication of this fact is that, as p > 0, every vector in the strictly positive orthant becomes preferred to all vectors on the axes. That is, unconditional preference towards strictly positive vectors tends to hold, as it is true for the Cobb-Douglas utility function. (c) Suppose that x, + x5. We want to show that Lim (a,x° + «x81? 1 ee a * 82%2 Let p< 0. Since x, = 0 and x, = 0, we have a,x0 sa,x¢ + a)xd. Thus a, /Px, & (a,x? + apx8)/?. on'the other hand, since x, = x), ayxP + agxd sax) + ax? = (a, + ap)xh Hence (a,x? + ayxf)/P = (a, + @,)Px,. Therefore, Ve e pyl/e sal. oy Oy ® (ayy + aan) & (a, + aD) Letting p + - ©, we obtain Lim (a,x? + a,x8)/ = x,, because Lim oF pre pane Lim (@, + a)? ae 3.D.1 To check condition (i), x, Ap.Aw) = afdwi/(Ap,) = aw/p, = x,{p.¥). 39xp[ap.Aw) = (1 = a)Owi/(ap,) = (1 - @lw/p, (P.w). To check condition (ii), Pyx{(P.w) + Pyxplp.w) = pyew/p, + poll - @lw/p, = w. Condition (iii) is obvious. 3.D.2 To check condition (i), viAp,Aw) = ang + (1 - @)in(l - @) + maw - alnap, - (1 - adinap, = alna + (1 - @)in(1 - &) + mA + Inw > ind - alnp, = (1 - a@dina - (1 - @dinp, = alna + (1 @lin(i ~ @) + Inw - ainp, - (1 - ainp, = vip,w). To check condition (ii), v(p,w)/aw = I/w > 0, ev(p.wl/ap, = - a/p, < 0, av(p,w)/ap, = - (1 - al/p, <0. Condition (iv) follows the functional form of v(-). In order to verify (iii), by property (i), it is sufficient :: prove that, for any v € R and w > 0, the set {p € RU: v(p,w) = v) is convex. Since the logarithmic function is concave, the set {ip} € 2: ~ alnp, = (1 - @inp, = ¥) is convex for every v € R. Since the other terms, ain + (1 ~ @)in(1 - a) + Inw, do not depend on p, this implies that the set (p € RL: vip,w) = v) is convex 3.D.3. (a) We shall prove that for every pe RL,, w= 0,020, and x eR, if 3410x = x(p,w), then «x = x(p,aw). Note first that p:(ax) = aw, that is. ax is affordable at (paw). Let y € RL and p-y = aw. Then p-(a'y) = w. Hence ula y) = ux). Thus, by the homogeneity, uly) < ulax). Hence ax = x(p.aw). By this result, vip,aw) = ulxtpaw)) = ulax(p,w)) = aulx(p,w)) = avip.w). Thus the indirect utility function is homogeneous of degree one in w. Given the above results, we can write x(p,w) = wx(p,J) = wx(p) and v(p,w) = wo(p,l) = wv(p). Exercise 2.E.4 showed that the wealth expansion path (c(p,w): w > 0} is a ray going through x(p). The wealth elasticity of demand fqy, 18 equal to 1. (b) We first prove that for every p © RL, w= 0, and a = 0, we'have x(paw) = ax(p,w), In fact, since v{-,-) is homogeneous of degree one in w, Vivip.aw) = av vip.) and Dvipew) = Vyy(P,w)- Thus, by Roy's identity, x(p,aw) = ex(pw) Now let x © RE, x’ @ RL, ulx) = ulx'), and @ = 0. Since ul-) is strictly quasiconcave, by the supporting hyperplane theorem (Theorem M.G.3), there exist pe BL, pe RL, w 20, and w' =O such that x = x!p.w) and x’ = x(p'w'), Ther u(x) = vip.w) and u(x") = vip'w'). Hence vip,wi = v(p’,w') Thus, by the homogeneity, vip.aw) = vip',aw"). But as we saw above, x(p.aw) = ax and x(p',aw') = ax’. Hence vip,ew) = u(ax) and v(p’,aw') = ulax’). Thus ulax) = ulax’). Therefore u(x) is homogeneous of degree one. 1,0,. 3.D.4 (a) Le: ¢, » «RL, We shall prove that for every p © RL,, 1 weR aeR, andxe (oo) x RLY if x = x(p.w), then x + x(p, w + a). Note first that, by p, = 1, p-(ax + @) s aw, that is, x + as) is affordable at (p, w + ae). Let y € rl and pry = w +a. Then p-ly - 0@))sw. Hence’x yy - ae, Thus, by the quasilinearity, x + ae, x y. Hence x + ae, = xp, Wt a). 1 Therefore, for every £ € (2, dw eR, and w eR, x,(p,w) = L are x,(p.w'}. That is, the Walrasian demand functions for goods 2, independent of wealth. As for good 1, we have ax(p,w)/éw = 1 for every (p,w) That is, any additional amount of money is spent on good 1. (b) Define g(p) = ulx(p,0)). Since x(p,w) = x(p,0) + we, and the preference relation can be represented by a utility function of the quasilinear form u(x) = x, + Ulx,....%,) (Exercise 3.C.5), we have vip.w) = ulx(p,w)) = x (Pw) + Ula lp.wh, (pw). = W + x,(,0) + Ulxea(P,0),...1% (P.O) = w + ulx(p,0)) = w + 9p). (c) The non-1 ativity constraint is binding if and only if p)xp(p.0) > w. Note that x,(p,0) = (n' }, because p, = 1. Hence the constraint is binding if and only if pa(a!)""p,) > w. If so, the Walrasian demand is given by x(p.w) = (0,w/p,). Thus,.’as w changes, the consumption level of the first good is unchanged and the consumption of the second good changes at rate I/p, with w until the non-negativity constraint no longer binds. 3.D.5 (a) Since any monotone transformation of a utility functicn represents the same preference relation, we may as well choose Gtx) = pulxP = plxt + x8). By the first-order condition of the UMP with u(-), S-1 8-1, x(piw) = (wip? + pope p34,where 8 = p/(p - 1) € (- @ 1). Plug this into u(-), then we obtain vip.w) = wip? + pb)'. (b) To check the homogeneity of the demand function, xlap.aw) = (aw/tlap,)® + apy) Map, )°'lap.)°) = tara Va wip? + ever "po" = x(p,w). To check Walras’ law, 2 54 pyy5 pot Sl) ow, p-x(p.w) = (w/(p) + PDMP,"P) + Py*Py) = W. The uniqueness is obvious. To check the homogeneity of the indirect utility function, vlap,aw) = aw/((ap,)® + (ap,))7% = aw/ad M8 (p8 + p8)!/3 = wip? + p2)/% V 2 1 2 1 2 = vip,w) To check the monotonicity, evip,wvaw = vp + Pome 3 S 1/541 av(p,wi/ap, = - wpe” Mine + Pp) <0. ‘The continuity follows immediately from the derived functiona! form. In order to prove the quasiconvexity, by property the homogeneity, it is sufficient to prove that, for any v € R and w > 0, the set (p « R% vip,w) = v} is convex. If 6 = O, then the utility function is a Cobb-Douglas one, and the quasiconcavity was already established in Exercise 3.D.2, So we consider two cases, 8 € (0,1) and 8 <0. In either case, define f(p) = (p> + p8)'7?. 8 IF 8 © (0,1), then sip)® = p> + pe is a concave function. Hence (p ¢ ®: = (tp) = vy is convex for every v. Since vip,w) = w/fip), this implies that (p € R% v(p.w) = v) is convex for every v and w. 3133 8, 8, If & <0, then s(p)® = p® + pS is a convex function. Hence

Pye ((w/p 0, 1-A): A€ 10,1]} if Py = Poi v(p,w) = max(w/p,,w/p,). For the Leontief preference, x, (pw) = (wp + ppIGD: v(p.w) = w7(p,+ Pp). As for the limit argument with respect to p. First consider the case with p <1 and pl. Then 8 = p/p - 1) 9-@asprl Case 1. py < pp. ince Py/P, > 1, we have (p,/p,)° > 0. Thus i w/p tim pe twp? + pS) = Lim ———L_ b5-e Se-w 1+ (p2/P)) w/p). Since p/p <1, we have (p/pq)° 2 @. Thus wp, 2 tim po twp? + p8) = Lim ———2 done 35m (py/py)? +1 Thus the CES Walrasian demands converge to the Walrasian demand of the linear indifference curves. As for the indirect utility functions, we showed in the answer to Exercise 3.C.6(c) that (p> + pie +p, for p = py Hence the CES indirect utilities converge to the indirect utility of the linear indifference curves Case 2. p> Pp Do the same argument as in the Case 1.Case 3. py = Py. 3-1 3-1 In this case, (w/(p? + payipe pS") = (wtp? + peri B-1 8-1 pps 1 (w2p JUD. This consumption bundle belongs to the set of the Walrasian demands of the linear indifference curves when Py = Pa As for the indirect utility functions, we showed in the answer to Exercise 3.C.6(c) that (pe + po)? > py for py = Py Let's next consider the case p > - ©. Note that 8 = p/p - I) +1as p> i. So just plug 6 = | into the CES Walrasian demand functions and the indirect utility functions. We then get the Walrasian demand function and the (a) From the calculation of the Walrasian demand functions in (a) we get 3-1 x (B.WI7x,(P.W) = (p)/P)° 3-2 (x (,wI2x9(p.W)I(P)/p,) = (P,/PQ)° =(3- D1 ,/,)**. dle, (p.w)/xp(p.wil/alp, /P. Thus €,o(p.w) = - (6 - 1) = 1/1 ~ p). Hence, €)5(p,w) = © for the linear, £,2(P.) = 0 for the Leontief, and €,,(p,w) = 1 for the Cobb-Douglas utility functions. teepen) aes see 3.0.6 (a) Define ilx) = ulx) Oy = BI Oxy = b3)", with a’ = e/a +B +7) 8 = B/la+B +7), 7 =aWa+B+7). Tene’ +B" + y' = 1 and i(-) represents the same preferences as u(-), because the WasBer) function uw! is a monotone transformation. Thus we can assume without loss of generality that a + @ + 7 = 1. (b) Use another monotone transformation of the given utility function, Inu(x) = alatx, ~ 6) + Bln(x, - b,) + ginlx, - by). x15The first-order condition of the UMP yields the demand function x(p,w) = (by,boyb,) + (w - p-dMa/p,.B/P,.7/P4) where p-b = pb, + ppb, + Pyd,- Plug this demand function to u(-), then we obtain the indirect utility function vip.w) = tw ~ p-bila/p,)%B/pICa/pq)". {c) To check the homogeneity of the demand function, x(Ap,Aw) = (b,,by,by) + (Aw ~ Ap-b)(a/Ap.B/AP3.7/AP) = (oyby.by) + lw ~ p-bMa/p,.B/pp.7/P) = x(p,.w). To check Walras law, prxip.w) = p-b + (w - p-bi(p,0/p, + pA8/P, + P37/P3) = pb + (w- pba +B +7) = Ww. The uniqueness is obvious. To check the homogeneity of the indirect utility function, ViAp,Aw) = (w = Ap-bile/ap,*(/A,)Pa/Apy)? = ables, p-bNa/p,)°(B/p,} tap)” (w ~ p-bya/p,)*(8/p,Fa/pg)” = vip.w). To check the monotonicity, avipwl/ow = (a7p)(B/pPtz7p4)" > 0, avtp,w) 6p, vip.w) (= a/p,) <0, av(p.wlZep, = vip.w)-(~ B/P5) < 0, au(p,w)/ap, = vip,w):(- ¥/pq) < 0. The continuity follows directly from the given functional form. In order to prove the quasiconvexity, it is sufficient to prove that, for any v € R and w > 0, the set (p © R®: v(p,w) = v) is convex. Consider Invip,w) = ad a + Bins + ying + In(w - p-b) - alnp, - Blnp, - zinp,. Since the logarithmic function is concave, the set 3-16{p € B®: Intw ~ p-b) - alnp, - Blnp, - zinp, = ¥) is convex for every v € R. Since the other terms, alna + BIn8 + yInz, do not depend on p, this implies that the set {p ¢ R°: inv(p,w) = v) is conv. Hence so is {p « R*: v(p.w) = v) 3.D.7 (a) Since p!-x° < w! and x! « x°, the weak axiom implies p°-x! > w°. Thus x! has to be on the bold line in the following figure. o 2 4 8 x Figure 3.D.7(a) In the following four question, we assume the given preferen:e can be a differentiable utitity function u(-). (b) If the preference is quasilinear with respect to the first good, then we can take a utility function u(-) so that du(x)/éx, = 1 for every x (Exercise 3.C.5(b)}. Hence the first-order condition implies aux" ex} = p/p} for each t = 0,1. Since p/p? < p/P} and u(+) is concave, x9 > x3. Taus x has to be on the bold line in the following figure. 3-178 10 x Figure 3.7(b) (c) If the preference is quasilinear with respect to the second good, then then we can take a utility function u{-) so that du(x)/éx, = 1 for every x (Exercise 3.€.5(b)). Hence the first-order condition implies au(x")/6x; PI/P5 for each t = 0,1. Since Pope > pl/pp and u(-) is concave, we must have ° xo < xt © < xl. Thus x! has to be on the bold line in the following figure 0 2 4 8 x Figure 3.7(c) (a) Since p!-x° < w! and the relative price of good 1 decreased, x} has to 3-18increase if good 1 is normal. If good 2 is normal, then the wealth effect (positive) and the substitution effect (negative) go in opposite direction which gives us no additional information about x5. Thus x! has to be on the 7 bold line in the following figure. 0 204 8 x Figure 3.D.7(d) (e) If the preference is homothetic, the the marginal rates of substitution at all vectors on a ray are the same, and they becomes less steep as the ray becomes flatter. By the first-order conditions and Pye > P/P3y x) has to be on the right side of the ray that goes through x°. Thus x! has to be on the bold line in the following figure.0 2 °452 «8 a Figure 3.D.7(6) 3.D.8 By Proposition 3.D.3(i), vlap,aw) = vp,w) for alle > 0. By differentiating this equality with respect to « and evaluating at a © 1, we obtain Vvip.w)-p + wavip,w)/aw = 0. Thus wévlp,wi/aw = - Vvipiw)-p. 3.E.1 The EMP is equivalent to the following maximization probl Max - p-x s.t. u(x) = u and x = 0. The Kuhn-Tucker condition (Theorem M.K.2) implies that the first-order conditions are that there exists A > O and 4 € RL such that p = Aulx*) + and u-x* = 0. That is, for some A > 0, p = AVu(x*) and x*-(p - AVUCx*)) = 0. This is the same as that of the UMP. 3.E.2 To check the homogeneity of the expenditure function, e(p.ad = @ 8 - a Tapp fap.) a ea ae te = elp.v). To check the monotonicity, 3-20ae(p,u)/éu = a - a) pate > 0, de(p,ul/ép, = ah - a) tpt lbs > 0, delpul/ap, = all - a)*pips” > 0 To check the concavity, it is easy to actually calculate DZe(p.u) and then apply the condition in Exercise 2.F.9 to show that Deetp.u) is negative semidefinite. An alternative way is to only calculate aelp,u/apy = ~ ah 8 - alot pl < 0. Then note that the homogeneity implies that DEe(p.ulp 0. Hence we can apply Theorem M.D.4(iii) to conclude that Deetp.u) is negative semidefinite. The continuity follows from the functional form. To check the homogensity of the Hicksian demand function, re ha cap, ap, h,Qpu) = i us Si a = Ay(pu), ime (= eIXpy ep vee (1 = ap, )* (1 - ep, )* hype) = [a=] us [~] u = Ay(p.ud. To check the no excess utility, ; a ba yore aap, }* lee women « eg] Y (S29 (1-a)a-c(1-0) a oP. eel-a) T= ep, a i The uniqueness is cdvious, BEB Let Xe RE and ulZ) =u. Define A = (x € RU: prx = p-X and u(x) & ud. Then A = @ by x € A. Furthermore, A is compact: The closedness follows from that of (x € Rb: ulx) = u) and of RL; the boundedness follows from the inclusion i Ac (x € Rs O = x, = p-X/p, for every £ = 1, wold. 3-21Now consider the truncated EMP: Min px st. xe A Since p-x is a continuous function and A is a compact set, this problem has a solution, denoted by x* € A. We shall show that this is also a solution to the original EMP. Let x € RE and u(x) =u. If x € A, then px = p-x* because x* is a solution to the truncated EMP. If x ¢ A, then p-x > p-x and hence p-x > p-x*. Thus x is a solution of the original EMP. 3.E.4 Suppose first that x is convex and that x € h(p,u) and x’ € h(p,u). Then p:x = p-x' and u(x) = u, u(x’) = u. Let @ € [0,1] and define x" = ax + (1 - ax’, Then p-x" = ap-x + (1 - @lp:x’ = px = p:x’ and, by the convexity of x utx") =u. Thus x" € Alp,u). Suppo: next that > is strictly convex and that x € A(p,u), x’ € A(p,u), x # x’, and u(x) 2 u(x") 2 u. By the argument above, x" = ax + (1 - a)x’ with @ € (0,1) satisfies p-x" = p-x = p-x’ and, by the strict convexity of >, we have x" > x’. Since > is continuous, Bx" > x’ for any € (0,1) close enough to 1, But this implies that p:(@x") < p-x and u(Bx") > u(x’) = x, which contradicts the fact that x.is a solution of the EMP. Hence niz.u) must be a singieton. The equality h(p,u) = Alp)u should be hip,u) = 3.E.5 (First printing errata: uAlp), oecause u is a scalar and Alp) is a vector.) We shall first prove , for e) p>>0,u=0,a20, and x = 0, if x = Alp,u), then ax hlp.qu). In fact, note that ulax) = au(x) = au, that is, ax satisfies the ule*y) =u. constrain: of the EMP for au. Let ye Rt and uly) = au. Then Hence p-(a ly) = p-x. Thus p-y ® p-(ax). Hence ax = h(paul. Therefore 3-22h(p,u) is homogeneous of degree one in u. By this result, e(p,au) = p-h(p,au) = p-(oh(p,u)) = alp-hipu)) = ee(p,u). Thus the expenditure function is homogeneous of degree one in u. Now define ftp) = h(p,l) and @(p) = e(p,1), then A(p,u) = uhtp) and e(p,u) = ue(p). 3.E.6 Define 8 = p/(p ~ 1), then the expenditure function and the Hicksian demand function are derived from the first-order conditions of the EMP and they are as follows: 3-1 8 Alpwu) = ve 7 8 (8785 8 (p ) etpyu) = ulp> + p§ 178. To check the homogeneity of the expenditure function, eapiu) = ullap,)® + (ap,)1/% = a up? + p31! = aetpiud. To check the monotonicity, Se(p,ul/au = (p> + pS)” > 0, : 3-13 , (81/81 detp.ur/ep, = upg tp> + pF > o, tis a bit lengthy but easy to actuaily :aiculate Dfe(p.u) and then apply the condition in Exercise 2.F.9 to show that Deetp.u) is negative semidefinite. An alternative way is to only calculate a etpur/epe 8298 6 pF a ape hips 6 pF 25 - ap? = wld - py “(py + Po? sup (py + ” 78 - W8pt ee 828. MEN 7 = ut ~ 1p ip? + pail? pF - (9? + pn < 0, by 8 <1, Then note that the homogeneity implies that weetp.ulp = 0. Hence we can apply Theorem M.D.4(iii) to conclude that Déetp.u) is negative semidefinite. The continuity follows from the functional form. 3-23To cheek the homogeneity of the Hicksian demand function, rlep.w) = ullap,)® + (ap, )°)92”8 (ap 1° fap,i® ) alStS/8)H(E-Dyeas + patr8)/8 81 eh = h(p,u. To check no excess utility, uintpen = utp? + ee O88 plsLp , pheHeiWe (Py Since (8 - 1)/8 = - 1/p, we obtain u(h(p,u)) = u. The uniqueness is obvious. 3.£.7 In Exercise 3.C.5(b), we showed that every quasilinear preference with Tespect to good 1 can be represented by a utility function of the form u(x) = Let e; x, + lx, 41,0,...,0) € RY, We shall prove that for every ©) x RE}, it x = hipyu), then p >> O with p= 1, u eR, a©R and x € (- x + ae, = hip, u+ a). Note first that u(x + ae) = u+ a, that is, x + ae, satisfies the constraint of the EMP for (p, u +e). Let y © RL and uly) = ut @ Then uly - ae) =u. Hence p-(y ~ ee) = p-x. Thus p-y = pr(x + a: Hence x + ae, = Alp, u + @). erefore, for every £ € (2,...L), u€ R, and u' eR, hylpu) = L are rg(p.u'). That is, the Hicksian’ demand functions for goods 2... independent of utility levels. Thus, if we define A(p) = h(p,0), then Alp,u) = Ap) + ue,. Since nip, u + a) = hip.u) + ae, we have e(p, u+ a) = elp.u) + a Thus, if we define ep) = e(p,0), then e(p,u) = e(p) + v. 3.E.8 We use the utility function u(x) = x8), To prove (3.E.1), etp.v(p.w)) = FU = a *pSpho% - el! pips tw) & wy, (pre(pun) = a ~ a)! pp aM ~ al "pte, ud =u. 3-24To prove (3.E.3), x(pe(p.u)) = (au = a) *ptps ular, a - ap) « a | = Mpa, n(p,v(p,w)) = wla/p,, (1 = a)/p,) = x(p,w). i 2 3.E.9 First, we shall prove that Proposition 3.D.3 implies Proposition 3.£.2 via (3.E.1). Let p >> 0, p’ >> 0, ue Ru’ eR, and a= 0. (i) Homogeneity of degree one in p: Let a > 0. Define w = e(p,u), thet vip.w) by the second relation of (3.6.1). Hence elap,u) = elep,v(p,w)) = elap,vlap,aw)) = aw = ae(p,u), where the second equality follows from the homogeneity of v(+,+) and the third from the first relation of (3.E.1). (3) Monotonicity: Let u’ > u. Define w = e(p,u) and w’ = e(pju’), then u = vip.w) and u' = v(p,w'). By the monotonicity of v(-,-) in w, we must have w > w, that is, e(p'yu) > efpul. Next let p' = p. Define w = e(p,u) and w’ = e(p'u), then, by the second elation of (3.E.1), u = v(p,w) = v(p’,w'). By the monotonicity of vi-,-), we must have w’ = w, that is, e(p’,u) = e(p,u). (iD Concavity: Let @ € [0,1]. Define w = e(p,u) and w’ = e(p’,u), then u = vip.w) = vip'sw). Define p" = ap + (1 - a)p" and w" = aw + (1 - aw’, Then, by the quasiconvexity of v(-,-), v(p"sw") su. Hence, by the monotonicity of +) in w and the second relation of (3.E.1), w" = e(p’,u). that is, vey e(ap + (1 - a)p’, u) = ae(p,u) + (1 - ale(p'u). 325(iv) Continuity: It is sufficient to prove the following statement: For any sequence ((p"u")”_, with (p™.u") » (p,u) and any w, if e(p".u") = w for every n, then e(p,u) = w; if e(p"\u") = w for every n, then e(p,u) = w. Suppose that e(p",u") = w for every n. Then, by the monotonicity of v(-.-) in ¥, and the second relation of (3.E.1), we have u” = v(p",\w) for every n. By the continuity of v(-,-), u = v(p,w). By the second relation of (3.£.1) and the monotonicity of v(-,-) in w, we must have e(p,u) = w. The same argument can be applied for the case with e(p",u") 2 w for every n. Let's next prove that Proposition 3.E.2 implies Proposition 3.D.3 via (3.E.1). Let p >> 0, p' >> 0, weR, wR, andaz 0. (i) Homogeneity: Let @ > 0. Define u = v(p,w). Then, by the first relation of (3.E.2), e(p.u) = w. Hence v(ap,aw) = v(ap.ae(p,w)) = vlap,elap,u)) = u = v(p,w), where the second equality follows from the homogeneity of e(-,-) and the third from the second relation of (3.E.1). (i) Monotonicity: Let w’ > w. Define u = v(p,w) and u’ = vip,w’), then e(p.u) = w and e(p.u") = w'. By the monotonicity of e(-,-) and w’ > w, we must have u' > u, that is, vfp,w') > v(p,w). Next, assume that p’ =p. Define u = v(p,w) and u’ = vip',w), then e(p,u) = e(p',u') = w. By the monotonicity of e(+,-) and p’ = p, we must have ul su, that is, vip,w) = vipsw). (iti) Quasiconvexity: Let a € [0,1]. Define u = v(p,w) and u' = vip’,w'). e(p.u) = w and e(p,u’) = w’, Th Without loss of generality, assume that u’ =u. Define p" = ap + (1 - @)p’ and w = aw + (1 - aw’, Then e(p",u") = ae(p, ny + = aletp’= aelpu) + (1 - ade(p',u') = aw + (1 - aw’ = w", where the first inequality follows from the concavity of e(-,u), the second from the monotonicity of e(+,-) in u and u’ = u. We must thus have v(p",w") = v (iv) Continuity: It is sufficient to prove the following statement. For any sequence {(p",w"Ne_, with (p".w") » (p,w) and any u, if vip".w") = u for every n, then vip,w) < u; if v(p",w") = u for every n, then vip,w) = u. Suppose that v(p",w") = u for every n. Then, by the monotonicity of e(+,-) in u and the first relation of (3.E.1), we have ws e(p",u) for every n. By the continuity of e(-,-), ws e(p,u). We must thus have vip,w) su. The same argument can be applied for the case with vip",w") = u for every n. An alternative, simpler way to show the equivalence on the concavity/ quasiconvexity and the continuity uses what is sometimes called w epigraph. For the concavity/quasiconvexity, the concavity of e(+,u) is equivalent to the convexity of the set ((p,w):,e(p,u) = w) and the quasi-convexity of vi-} is equivalent to the convexity of the set {(p,wh v(p,w) = u) for every 1, But (3.E.1) and the monotonicity imply that v(p,w) = u if and only if elp,u) = w. Hence the two sets coincide and the quasiconvexity of vi-} is equivalent to the concavity of e(-,u). As for the continuity, the function e(-) is continuous if and only if both ((p.w,uk elp.u) = w) and {(p.w,uk e(p.u) = w) are closed sets. The function v(+) is continuous if and only if both {(p,w,u): vip,w) = u) and {(p.w,u): vip,w) = u) are closed sets. But, again by (3.£.1) and the monotonicity, 3-27{(p,w,ul? e(p.u) = w) = {(p,w,u): v(p.w) 2 ub; {(p,w,u): e(p,u) = w) = {(p,w,u): v(pyw) = ud, Hence the continuity of e(-) is equivalent to that of v(+). 3.E.10 [First printing errata: Proposition 3.£.4 should be Proposition 3.E.3.) Let's first prove that Proposition 3.D.2 implies Proposition 3.E.3 via the relations of (3.E.1) and (3.E.4). Let pe Rt, andue R i) Homogeneity: Let a > 0. Define w = efp,ul, then u = v(p,w) by the second relation of (3.E.1). Hence hlap.u) = x(ap,elep,u)) = xlop,ae(p,u)) = x(pre(p.u)) = Alp.ud, where the first equality follows from by the first relation of (3.E.4), the second from the homogeneity of e(-,u), the third from the homogeneity of x(+,-), and the last from by the first relation of (3.E.4). ii) No excess utility: Let (pu) be given and x € h(p,u). Then x € x(p,e(p,u)) by the first relation of (3.6.4). Thus u(x) = v(p.e(pw)) = u by the second relation of (3.E.1). Gii) Convexity/Uniqueness: Obvious. Let's first prove that Proposition 3.E.3 implies Proposition 3.D.2. via the relations of (3.6.1) and (3.5.4). Let pert, and w eR. (i) Homogeneity: Let « > 0 and define w = e(p,u), then vip,w) = u. Hence xlap,aw) = hlap,viap,aw)) = hlap.vip.w)) = Atp.vip,w)} = xi(p.w), where the first equality follows from the second relation of (3.£.4), the econd from the homogeneity of v(-), the third from the homogeneity of h(+) in . and the last from the first relation of (3.E.4). (ii) Walras’ law: Let (p,w) be given and x € x(p,w). Then x € h(p,v(p,wl) by 3-28the second relation of (3.E.4). Thus p-x = e(p,v(p,w)) = w by the definition of the Hicksian demand and the first relation of (3.E.1). (ii) Convexity/Uniqueness: Obvious. 3.F.1 Denote by A the intersection of the half spaces that includes K, then clearly A > K. To show the inverse inclusion, let x € K, then, since K is a closed convex set, the separating hyperplane theorem (Theorem M.G.2) implies that there exists a p # O and c, such that p-X << p-x for every x € K. Then (2 « RU: p-z = c) is a half space that includes K but does not contain x. Hence X € A. Thus K > A. 3.F.2 If K is not a convex set, then there exists x ¢ K and y © K such that Us2)x + (I/2)y € K, as depicted in the figure below. The intersection of all the half-spaces containing K (which also means containing x and y) will contain the point (1/2)x + (1/2)y, since half-spaces are convex and the intersection of convex sets is convex. Therefore, the point (1/2)x + (I/2)y cannot be separated from K. (12)x + (1/2)y Figure 3.F.2 3-29As for the second statement, if K is not convex, then there exist x € K, y €K, and a € [0,1] such that ax + (1 - aly € K. Since every half space that includes K also contains ox + (1 - aly, it cannot be separated from K. 3.G.1 Since the identity vip,e(p,u)) = u holds for all p, differentiation with respect to p yields V,vpelpwul) + (Bv(p,e(p.ud)/aw,e(p,u) = 0. By Roy's identity, (Cav(pye(pyu))/awNt- x(p,e(piudd + Vpelp.u)) © 0. By dv(p.e(p,u))/aw > 0 and hip,u) = x(pre(p,u)), we obtain hip.u) = Velp.u). 3.6.2. From Examples 3.D.1 and 3.£.1, for the utility function u(x) = Ea rua we obtain oP, PwelPw) = | - al/py ~ aw/p> ° Dix(p.w) = ; Uj 0 =~ aw/pS o af Py Yelpad = utp, /etingstt = ad] Gaye |: Dietp.u) = D_rtp,u) Pp P 2 - alt - alpy atl - @/p:P5 = ulp/al%py/a - a)'* 2 atl - al/p,p - all ~ al/Py The indirect utility function for u(x) = x¥x5—* is vip.w) = (p,7alp7tt = an! *w, (Note here that the indirect utility function obtained in Example 3.D.2 is for the utility function u(x) = alnx, + (1 - a@)inx,.) Thus Upvipow) = vip,wi(- a/p,, ~ (1 - @)/p), 3-30Vyv(p.w) = vip,wi/w. Hence: nlpwu) = Velpu), Pru) = U,elp, Dée(p.u) = D,hlp,ul, which is negative semidefinite and symmetric, DAlp,u)p = 0, Pulp D,A(pwu) = Dexx(p,w) + Dyetpwhelp.w)", x lp.w) = - (8v(p,u)/ap,)/(avip,u)/aw). 3.6.3 (a) Suppose that a + 8 + y = 1. Note that Inu(x) = aln(x, - b,) + Bln{x, - b,) + zinlx, - b). By the first-order condition of the EMP, AIp.U) = (bybyrbg) + ulp,/e)%(p,/Bip/2)"(a/P,.B/P19/P)- 1"P2" Plug this into p-h(p,u), then we obtain the expenditure function inne ea Bio. ra) cpu) = p-b + ulp/alip, fleas. where p-b = p,b, + Pb, + Pads. To check the homogeneity of the expenditure function, e(ap.ul = Ap-b + ulrp/al*ap,/aPiapy/a)* = Ap-b + Aulp,Za)(p,/BIP(pq/a)* = re(p.u) To check the monotonicity, assume b, = 0, b, = 0, and b, = 0. Then delp,u)/au = (p,/a)%(p,/BFipa/a)™ > 0, aelp.ul/ep, = b, + ulp,/a)(p,/Bipy/z)*a/p,) > 0. delp,ul/8p, = by + ulp,/a)(Py/BV(py/7)"(B/p5) > 0, Belp,ul/ép, = by + ulp,/a)(P,/BI (5/7) tz7pq) > 0. To check the concavity, we can show that Dee(p.u) is equal to 3-31ETE Tae atl alypf BYP a3/P,p, ulp/a(p,/8 1 (py/z)"| aB/pyp, BL ~ B)/p% Br/ v 2! 3 12 P2 meee 2 a7/P,P5 87/022 ~~ nA, and then apply the condition in Exercise 2.F.9 to show that Deetp.u) is legative semidefinite. An alternative way is to only calculate the 2 x 2 submatrix obtained from Die(p,u) by deleting the last row and the last eolumn and apply the condition in Exercise 2.F.9 to show that it is negative ite, Then note that the homogeneity implies that Deetp.ulp = 0. Hence we can apply Theorem M.D.4(iii) to conclude that Dee(p.u) is negative semidefinite. The continuity follows from the functional form. To check the homogeneity of the Hicksian demand function, AlApwu) = (0,,b5.b4) + ulap Za)" (ap,/8)(ap/7)" (a/Ap,B/APy.7/AP 3) at pry-1, a = (b),b),b,) + ur’ (py/a)*(py/B)"(p4/7)"(a/p,.8/P.7/P3) = Apu). To check no excess utility, utr(paud) = ulp,/al*tp,/8)°(P4/7I"l@/p,)"(8/P2)t7/p 4)” =u The uniqueness is obvious. (b) We calculated the derivatives de(p.u)/ép, in (a). If we compare them with Aylpwu), then we can immediately see de(p,u)/ap, = h,(p.u)- (c) By (b), Dyatp.u) = DZetp.u) In (a), we calculated Déetp.ul. In Exercise 3.0.6, we showed x(p.w) = (b,,, g1by) + (w - p-b)la/p,.B/Py.7/P3) 1 and hence D,x(p.w) = (@/p,.B/P,.7/p,) and 3-32a/pe nr) ap, v}ae -p- 2 a Doxtp.w) (w - p-b)] 0 B/P2 o : B/D, (b)4b3,b5)- 0 0 ¥P5 Py Using these results, we can verify the Slutsky equation. (a) Use D,Atp.u) = Deetp.u) and the explicit expression of DEetp.u) in (a). (e) This feliows from Sip.u) = D.Alp.u) = Detp.u) and (a), in which we showed that Detp.u) is negative semidefinite and has rank 2. 3.6.4 (a) Let a> 0 and be R. Define & RL > R by U(x) = aulx) + b and, for each 4, uy RR by ux) = au,(x,) + b/L. Then U(x) = aLyu,(x,) + b= Lylau,lx,) + b/L) = Lyis,x,) Thus any linear (to be exact, affine) transformation of a separable utility function is again separable. Next, we prove that if a monotone transformation of a separable utility function is again separable, then the monotone transformation. must be linear (affine). To do this, let's assume that each u,{-) is continuous and strongly val. So let monotone. Then, for each é, the range u,(R,) is a half-open i uf} = apy), where by may be + ©, Define cp = by - ay > 0, a= Tyay, b= Tybp, and c = Eycy (It some by is equal to + «, then b and c are + as well.) Then u(Z') = [a,b). Suppose that J: [a,b) + R is strongiy monotone y function U(+) defined by U(x) = flux) is separabie, To and the utili simplify the proof, let's assume that f(-) is differentiable. Define g: (0,c) Roby aly) = flv +a) - fla), 3-33then g(O) = 0, gl-) is differentiable, and glu(x) = u(0)) = Fluben = Futon) for every x e RL. Thus, in order to prove that f(+) is linear (affine), it is sufficient to prove that g(-) is linear. For this, it is sufficient tc show that the first-order derivatives g'{v) do not depend on the choice of v € [0,c). To this end, we shall first prove that if v, [0,c)) for each &, then g(Zyt,) = Tyg(v,)- For this, it is sufficient to prove that glulx) = U0) = Fygtuylx)) ~ u,(00) for every x € RL. In fact, by the separability assumption, for each , there exists a monotone utility function at) such that U(x) © Tpelxy) for every x e RL. Fix an x ¢ ®t and, for each 4, define ye RE by % = x, and yt = 0 for any k #4 Since uty”) = stuty, i,fx,) + Lagi Od = Flagly) + Tyg (O- Subtracting Teel = (0) = f(u(0)) from both sides and noticing that Ug p) + Tap) = uplxp) = ugl0) + Feu, (0), we obtain Eylx,) - G0) = gluglxp) - won. Summing over 2, we obtain TyEplx,) - Tyl,l0) = Lygtujlx,) - u (00). Since Tplglxy) ~ Lp ylO) = Ga - Gor = Feu) ~ FlulOnd = gleixd - wlon), we have glulx) ~ ul0)) = Fygtuytx)) - u(00) We have thus proved that g(D,vj) = Tygtvy): To prove that the g'(v) do not depend on the choice of v € [0,c), note ) first that if v, € [0,c,) for each & and v = Jy¥, € [0,c), then g'(v) = g 334for each & This can be established by differentiating both sides of BCL ,%,) = Lpglv,) with respect to vy So let v € [0,c) and v' € [0,c), then, for each & there exist v, € lo, ‘p) and vj, € (0,c)) such that v = Jyv, and v' = Yy¥). Then g'(v) = g'(v,) and g’(v') = g'(v}). Now, for some ¥, € [0,c,), consider v, + ¥, € [0,c) and ¥} + ¥ € [0c). Then gv) = atly, + ¥) = B'¥) gy) = giv, + %) = ee). Thus g'(v,) = g'(s}) and hence g'(v) = g'(v'). Note that the above proof by means of derivatives is underlain by the cardinal property of additively separable utility function, which is that, when moving from one commodity vector to another, if the loss in utility from some commodity is exactly compensated by the gain in utility from another, then this must be the case for any of its monotone transformations resulting in another additively separable utility function. (This fact is often much more shortly put into as: utility differences matter.) For example, consider xe RU and x! © RE such that u(x) ~ u(x) = uy(5) - uylx,) > 0 and xp = x} for every 223. Since u(x) + up (x) = u(x) + ug(x,), the separability implies that u(x) = u(x’). By the equality ally) = Lys, = u,(0)). aly (x,) - u,(00) + glu Hence gluytx,) - u(O0) = glujxy) ~ uO) = gluy(x5) - up(0)) - glup(x,) - up (00). We have shown that, under the differentiability assumption, if this holds forfor those in’S are represented by 2, = (z,), T and the like, and the * leer © Ry commodity vectors for those outside S are represented by z) = (Ze, € RU*T and the like. We shall prove that for every z, ¢ RS", zi AST, 2, « pL#T, a L-#T . 7 u . soe and zy ¢ RUT, (24,25) x (225) if and only if (2.25) » (2}.25). In fact, since ul-) represents >, (2.25) y (21,z,) if and only if Leertelte) * LeertelZe) = Leerte!2y) * Leerttel2y)- Likewise, (2, 25) z (2.25) if and only if LeerteZe) * Leertely * Ueerte!22) * Teertel But both of these two inequalities are equivalent to Leertte!%y) * Lpertel@ Hence they are equivalent to each other. {c) Suppose that the wealth level w increases and all prices remain unchanged. Then the demand for at least one good (say, good £) has to increase by the Walras’ law, From (3.D.4) we know that u(xj(pw)) = (p,/py)uy(x,(P,w)) for k L. Since x,(p,w) increased and u,(-) is strictly concave, the right hand side will decrease. Hence, again since u,(-) is strictly concave, x,lP.W) will have to increase. “Thus all goods are normal. (a) Th first-order condition of the UMP can be written as Apswipy = U'Ce{lp.w), where the Lagrange multiplier A(p,w) is a differentiable function of (p.w!: This can be easily seen in the proof of the differentiability of Walrasian demand functions. which is contained in the Appendix. By differentiating the above first-order condition with respect to Py we obtain 3-36(artp,wi/app)py + Alp.w) = UrLey(p, 9M Bxylp.)/ep)- By differentiating the above first-order condition with respect to m tk ® 2), we obtain ) (Alp, w)/4p, Py = U*blP WIN Bx,p,w178P,)- Thus: aip-x(p,wil/ap, alS ppp. w)l/e, XlPow) + py (Bx,(P.WI/0P,) + Fp Ppl2xp(P.w)/P,)- (aAlp, w)/p,)Pe + Alp, wey x lP.w) + un (x, (P,w)) w)Py Xj(P.w) + —————*_ + (antp,wl/ap, JE, u"(x, (pew) By the first-order condition, A(p,w)p, = u'(y(p,w)) and hence this equals Exp (B,w)) 2, (P. wIU! Oxy (pW) Pe Ee 6 + entrant, <> — E(x, (pw) "(xy tp,w)) U"(xp (pew)? By Walras’ law, this equals zero. By the strong monotonicity and the strict 2 P <0 and Z-— <0. By the assumption on atx, (pw) Or elp.w) concavity, ——*——— a"Cxy(pw)) le WIE! Cay (pW) ul+), ——-—_——_———- + 1 > 0._ Hence u" Cey(p.w)) a Gey (p.w)) i XP, WI? (x, (pw) = +<0. ume, (pw) wu" (xy(p,w)) We must thus have dA(p,w)/ép, <0. Hence, by (*), dx,(p.w)/ap, > 0 3.G.5 (a) We shall show the following two statements: First, if (x*,z") is a solution to 3-37Maxi 2) Ulx,z) sit. p-x + az sw, then there exists y* such that q-y* = z* and (x*,y*) is a solution to Mari, y) UOuY) Site pix + (ago)-y = Ww second, if (x*,y*) is a solution to Maxey 9) UOGY) Sit. px + (oag)-y = W, then (x*.qo:y*) is a solution to Max, 9) WG) sit. pox + az 5 w. Suppose first that (x*,2*) is a solution to Max, 9) U(x.z) s.t. px + ez = w. Then, by the definition of U(-), there exists y* such that Q°9" = z® and ulx*,y" u(x®,z*). Let (xy) satisfy p-x + (ogg)y = w. Then ubuy) = Ulagy y) s ulxz") = ule y*) where the first inequality follows from the definition of U(-) and the second inequality follows from px + algg-y) = p:x + (aqo)-y = w and the definition of (x*,z*). The first statement is thus established. 4s for the second one, suppose that (x*,y*) is a solution to Max, y) ulxy) s.t. pex + lagg)-y Sw. For every y, if gg'y ¥ aq‘y" then ysw. pext + (agg)-y = ext + alggy) = pex* + alqy Hence u(x*,y) = u(x*,y"). Thos u(x*,y*) = alx®, Now let (x,z) satisfy +o) p*x + az w. Then there exists y such that qy-y =z and ulx,y) = Ulx,2}. Thus p-x + (aqq)-y = p-x + alqg*y) = p'x + az = w. Hence (x,2) = ubxy) = ulx*y*) = UOx".qg +"). (b) (c) Th are immediate consequences of the fact that the Walrasian demand functions and the Hicksian demand functions are derived in the standard way, by taking U(-) to be the (primitive) direct utility function. 3.G.6 (a) By applying Walras’ law, we obtain x. Tekst etl pesca: 3-38(b) Yes. In fact, for every A> 0, 100 - 5Ap,/Ap, + BAP,/AP, + BAW/AP, = 100 - 5P,/p, + BPy/Py + 8W/P5. @ + BAp,/APy + TAPL/AP, + BAW/AP, = a + BPL/Ps + 7P2/Py + BW/Py. (c) By Proposition 3.G.2 and 3.G.3, the Slutsky substitution matrix is symmetric. Thus B/p, + (8/p,Ma + BP\/P, + #P2/P4 + Sw/p,) = 8/P, + (87p,)100 - SP)/P3, + Bp,/P, + Sw/p,). Hence by putting P3 = 1 and rearranging terms, we obtain (B + 08) + B8p, + ¥8p, + Sw = (B+ 1008) - S8p, + Bop, + dw. Since this equality must hold for all py, py and w, we have B + a5 = 8B + 1008, BS = - 58, 48 = BS. Hence a = 100, B = - 5, and y =~ 5. Therefore, 1 7% = 100 - Sp\/p, + Spp/p, + 8¥/P. Recal! also that eli diagonal entries of the Slutsky matrix must be nonpositive. We shall now derive from this fact that 6 = 0. Let p. hen the first diagonal element is equal to ~ 5 + 1100 - Sp, + 5p) + ow. If 3 #0, ea w) such that the > 0 and hence we can always find (p,.p,, above value is positive. We must thus have 6 = 0. In conclusion, 1 =X = 100 - Sp)/p3 + Sp,/p3- (@) Since x, | = %5 for all prices, the consumer's indifference curves in the X,X,)-plane must be L-shaped ones, with kinks on the diagonal. (So the restricted preference is the Leontief one.) They are depicted in the following figure.Figure 3.G.6(d) (e) By (d), for a fixed x,, the preference for goods land 2 can be represented by min(x,,x,). Moreover, there is no wealth effect on the demands for goods 1 and 2. We must thus have Ul, Xe) = minG,.x,) + x5 or @ monotone transformation of this. 3.G.7 By the first-order condition of the UMP, there exists A > 0 such that Ag(x) = Vulx). Premultiply both sides by x, then Ax-g(x) = x-Uu(x). By Walras' law, x-g(x) = 1 and hence A = x-Vu(x). Thus atx) = TUG) = Sophy Yabo By Exercise 3.0.8, we have évip,1)/aw = - p-V,vipil). By Proposition - 1 - 1 3.6.4 xIP) = = SE Ty7Ew MPM) = Pyvpar "Pn 3.G.8 Differentiate the equality v(p,aw) = vip,w) + Ine with respect to @ and Hence avip,1)/aw = 1 evaluate at a = I, then we obtain (av(p,w)/aw)w By Proposition 3.6.4, x(p.l) = - U.v(p,t). 3-403.6.9 Let p >> 0 and w > 0. All the functions and derivatives below are evaluated at (p,w). By differentiating Roy's identity with respect to p,, we obtain i (8°v/ep yap, av/6w) - (av/ap,)(6"v/ap 86) ax,/ap, = ——++____,_+ (avsawy Or, in the matrix notation, Dix 2, LxL. VW vDiv - VvD Vv) e RO. woe we” pi pMw”) © w (Recall that Vy is a column veetor of RY, and Dy and D,v,v are row vectors of rb (Section M.A).) By differentiating Roy's identity with respect to w, we obtain (8?v/ap,BwIlav/aw) - ( 8v/8p,)(8°v/6w") ox,/ow = a (av/aw)™ in matrix notation, = 1 _ 9, L Dye = Te MAT = TaN € BE we" Hence (7, yD2v - VDL y - (Wwe vi Dy) + Vv OM wip)” Spepew wp ws Tv wr Op v2, 2, we (W,vD2v ~ (yD Vy + U0 yy) + 5 Dv. Tene TwiDBY ~ TpYDRMyy + UEUyrDpy) + py FHV) w It is noteworthy that we can know directly from Roy's identity and this equality that the Slutsky matrix S has all the properties stated in ) Proposition 3.0.2. To see this, note first that both V,v(p.w) and V,v(p, are homogeneous of degree - 1 (in (p,w)) by Theorem M.B.1. Hence x(p,w) is homogeneous of degree O (where we are regarding Roy's identity as defining xlp.w) from Vovip,w) and V,v(p.w)). Thus (2.£.2) follows, as proved in Proposition 2.E.1. On the other hand, by Exercise 3.D.8, p-x(p,w) = 3-41 Dv PpHence, as proved in Propositions 2.£.2 and 2.E.3, this implies (2.E.S) and (2.£.7). Now, as proved in Exercise 2.F.7, (2.E.2), (2.6.5), and (2.E.7) together imply that S(p,w)p = 0 and p-S(p,w) = 0. The mi u 7 2. Slp. is tric becat D’v, V vD_V. +00 ix Stp.w) is symmetric because Div, V.vD.0,v + ¥.0,,¥D.¥, and V,vD,v are symmetric. The negative semidefiniteness can be shown in the following way. Since v(+) is quasiconvex, for every price-wealth pair (q,b), if Daya + V,vb = 0, then (q,b)-D*v (q,b) = 0 (Theorem M.C.4). But Divg + Vv = 0 if and only if b= - D.ve/V,v. Plug this into (qb)-D*viq,b), then Diva + 2b(D,V,, va) + 92 vee oh 2 20,7 y¥4 ae (Dyva) Ywy P ww) « oN ‘s 3 ’ 2 (oval? = ae na: De iva) - 21D, Vy,vallD,va) + V, "a the quasiconvexity of v(-) implies that the above expression is nonnegative for every q. On the other hand, 2 (D3 v9) pd a:Sipwiq = - +5 liv,vilqrD eva ~ 2D, 9, vaD,va) + vey 2 wy) (9,9) Thus q-Sip,wiq = 0. Therefore’ S(p,w) is negative semidefinite. 3.G.10 We shall prove that a(p) is a constant function and b(p) is homogeneous of degree - 1, quasiconvex, and satisfies b(p) = O and Vb(p) = 0 for every p >> 0. We shall first prove that a(p) must be homogeneous of degree zero. Since vip.w) is homogeneity of degree zero, we must have a(Ap) + b(Ap)AW = a(p) + dlplw for all p >> 0, w= 0, and A> 0, If there are p and A for which a(Ap} a(p), then this constitutes an immediate contradiction with w = 0. Thus 3-42a(p) is homogeneous of degree zero. ‘ext, we show by contradiction that Va(p) = O for every p >> 0. Since vip.w) is nonincreasing in p, we must have Va(p) + Vb(plw = 0 for every p >> 0 and w 20. If there are p >> 0 and & for which da(p)/ép, > 0, then this constitutes an immediate contradiction with w = Thus alp) = 0 for every p > 0. We shall now prove that the only function a(p) that is homogeneous of degree zero and satisfies Va(p) = 0 for every p >> 0 is a constant function. In fact, by differentiating both sides of a(ap) = a(p) with respect to A and evaluating them at A = 1, we obtain Va(p)p = 0. Since p >> 0 and Va(p) = 0, Hence a(p) must be constant. we must have Va(p) Given this result, the homogeneity of vip.w) implies that b(p) is homogeneous of degree - 1. Since v(p,w) is quasiconvex, so is a(p) as a function of p. Finally, since V_v(p,w) = Ub(plw = 0 and V,,v(p.w) = B(p), we must have b(p) = © and Vb(p) = 0 for every p >> 0. This result impiies that, up to a constant, v(p,w = b(plw and ence, if the underlying utility function is quasiconcave, then it must be homogeneous ff the On the other hand, according to Exercise 3.D.4(b), underlying utility function is quasilinear with respect to good 1, ti all w and p >> 0 with p, = 1, vip,w) can be written in the form op. P 1 2 w. You will thus wonder why we have ended up excluding this quasilinear case The reason is that, when we derived v(p,w) = ¢(p) + w, we assumed that the consumption set is (- =, ©) x RE. Thus x(p,w) can be negative and, if so, then av(p,w)/ép, is positive, which we excluded at the beginning of our analysis, foltowing Proposition 3.0.3. (Note that, when we established 4v(p.w)/ap, = 0 in Proposition 3.D.3, we assumed that the consumption set is 3-43L F . RY.) As x,(p.w) is positive for sufficiently large w > 0, the quasilinea: case could be accommodated in our analysis if we assume that the inequality av(p,w)/ap, = 0 applies only for sufficiently large w > 0. (In this case, we can show that a(p) is homogeneous of degree zero, and bip) is homogeneous of degree - 1, quasiconvex, and satisfies bp) = 0, and Vb(p) = 0 for every p >> 0.) 3.G.11 Suppose that v(p,w) = a(p) + b(plw. By Roy's identity, x(p.w) = ~ (17b(p)V,atp) ~ (w70(p)T, b(P). ‘Thus the wealth expansion path is linear in the direction of V,bip) and intercept (- 1/b(p))V at). 3.G.12 Note first that, according to Exercise 3.G.ll, the wealth expansion path is linear in the direction of v,b(P) and intercept (- Vetp) IV a(p). If the underlying preference is homothetic, then (- 1/b(p)IV,a(p) = 0. Hence a(p) must be a constant function. If the underlying utility function is homogeneous cf degree one in w, then v(p,w) must be homogeneous of degree one in w by Exercise 3.D.3(a). “Hence alp) = 0 for every p >> 0. If the preference is quasilinear in good 1, then please first go back to the proviso given at the end of the answer to Exercise 3.6.10. After doing so, note that, since the demand for goods 2,...,L do not depend on w, (= Vo(p,b(P) = (= 17; ,0,--.10), or (8b(p}/&p. )/b| = vp, and 8b(p)/ Sp, = 0 for every 2> 1. Hence o(p) = apo + x for some B #0, p +0, andy ER. But, by Exercise 3.6 10, o(p) must be homogeneous of degree - 1, positive, and nonincreasing. Hence p =~ 1, 7 = 0, and @ > 0. That is, b(p) = B/p, with 8 > 0. If the underlying utility 3-44function is in the quasilinear form x, + itx,,.. i)» then, by Exercise 3.D.4(b), v(p,w) must be written in the form #(pp. “PL) + w for all p >> 0 with p, = 1. Thus B= 1. 3.G.13 For each i € {0,1,...,n}, let a be a differentiable function defined on the strictly positive orthant (p € RU: p >> 0). Let v(p,w) = Tr igaytpwt be an indirect utility function. Denoting the corresponding Walrasian demand function by x(p.w). By Roy's identity, Als 1 x(p.w) = Tres v(p.w) - ———s wi i2,tpet P) = Diag va,(p). Tapia j (pret ist Hence, for any fixed p, the wealth expansion path is contained the linear subspace of RU that is spanned by Vap(p).....0a,(p)- As for the interpretation, recall from Exercise 3.G.11 that, an indirect utility function in the Gorman form exhibits linear wealth expansion curves. But the Gorman form is a polynomial of degree one on w and a linear wealth expansion curve is contained’ in a linear subspace of dimension two. Hence the above result implies that the indirect utility functions that are polynomials on w is a natural extension of the Gorman form. 3.G.14 Define a, b, ¢ d, e, and f so that -10 a b c 74a 3 ef Since the substitution matrix is symmetric, we know b = 3, a=, ande= a. By Propositions 2.F.3, p-S(p,w) = 0. Hence p,(- 10) + pc + p,3 = 0. Thus ¢ =-4anda = - 4 For the second column, p,(- 4) + pa(- 4) + pat = 0 3-45Hence ¢ = 2 and d= e = 2: Finally, for the third column, we have p,3 + p,2 + gf 20. Thus =~ 7/6. Hence we have -10 -4 3 -4 -4 2 30 2 -1% The matrix has all the properties of a substitution matrix, which are symmetry, negative semidefiniteness, Slp,w)p = 0, and p-S(p,w) = 0. (For negative semidefiniteness, apply the determinant test of Exercise 2.F.10 and Theorem M.D.4(iii).) 4p 3.6.15 (a) x(p,,P2.W 2 2 PyP2 + AP) APPZ * PD (b) Ap Pau) = (©) e(p.pp.u) = It is then easy to show that V,e(p,,P,.t) = Alp Pp.) (2) vip,.Py.¥) = 2w/p,.+ 4w/py)”. To verify Roy's identity, ve av(pPy.W/Ep, = (w/p, + 4w/p) 1 wep, 142, 5 dvips Py,W)/ep, = (w/p, + 4w/p,) 7 V2 4 av(py.Py,w)/Ow = (w/p, + 4w/p)“U/p, + 4/P,). 3.G.16 (a) It is easy to check that 8 g, del(p.u)/apy, = elp.udlay, + UB, (Typ, “D/P. Since e(p,u) is nondecreasing in p, this must be nonnegative for all (p,u). But, if a, < 0 and lp! is sufficiently small, then this becomes negative. Also, if 8, < 0 and Ilpll is sufficiently big, then this becomes negative. k 3-46Therefore w @, = 0 and B, = 0 for all k It is a little bit manipulation to show that Tay Bo Pe etapa) = A lexpliZyeyinp,) +a futnp, 4), 8 Ae(p.u) = AexpllTyeyinp,) + ullt,p, oy. Since e(p,u) is homogeneous of degree one with respect to p, they must be equal for every (p,u) and A >0. Take, for example, p = (1, 1) and u Then log e(p,u) = (Lyx, )loga + A Jog Ae(p,u) = logk + 1. ‘They must be equal for every A> 0. Therefore (2 Typ = 1s TyBy = 0. Thus Lgy = bs @ = 0, 8, = 0. ee the expenditure function now takes the simplified form: Typ = 1 a = 0. This is increasing with respect to u and concave in p. 3) e(p.u) = Cexpultttyp, q, (b) By equation (3.E.1), w = (exp vip,w))(I,py Hence 3) vip.w) = logw - Sycslogp,. (c) By differentiating e(p,u) with respect to p, we obtain Aipyu) = eP.UNey/Pjo- oe /PL) Since x(p,w) = hip,vip,w)) and e(p,vip,w)) = w, , /p,)- Use equations (3), (4), and (5) and follows the same method as in the answer co) x(p.w) = wla,/p,, 3-47