The Australian National University

ECON8025: Semester One, 2024

Tutorial 4 Questions
Dr Damien S. Eldridge

To be Discussed in Week 5 Tutorials.

(Assignment Week)
(Due: 8:00 am on Monday 18 March 2024.)

Tutorial Assignment 2
This assignment involves submitting answers for each of the tutorial ques-
tions, but not for the additional practice questions, that are contained on
the tutorial 4 questions sheet (this document). You should submit your
answers on the Turnitin submissions link for Tutorial Assignment 2 that
is available on the Wattle site for this course (under the “In-Semester As-
sessment Items” block) by no later than 08:00:00 am on Monday 18 March
2024. If you have trouble accessing the Wattle site for this course or the
Turnitin submission link, please submit your assignment to the course email
address (ECON8025@anu.edu.au). One of the tutorial questions will be se-
lected for grading and your mark for this tutorial assignment will be based
on the quality and accuracy of your answer to that question. The identity
of the question that is selected for grading will not be revealed to students
until some point in time after the due date and time for submission of this
assignment.

A Note on Sources
These questions do not originate with me. They have either been influenced
by, or directly drawn from, other sources.

Key Concepts
Budget-Constrained Expenditure Maximisation, Uncompensated (or Mar-
shallian, or Walrasian, or Ordinary) Demand Functions (or Correspon-

1
dences), Indirect Utility Functions, Utility-Constrained Expenditure Min-
imisation, Compensated (or Hicksian) Demand Functions (or Correspon-
dences), Expenditure Functions, The Lagrangean Approach to Constrained
Optimisation (Maximisation or Minimisation) Problems, Interior Solutions,
Corner Solutions, The First-Order Conditions for am Interior Solution at
which the Budget Constraint Binds, The Kuhn-Tucker First-Order Condi-
tions, Choice Functions or Correspondences (“Arg Max”s and “Arg Min”s),
Value Functions (Maximum Value Functions and Minimum Value Func-
tions).

Tutorial Questions
Tutorial Question 1
Consider an individual whose preferences are defined over bundles of non-
negative amounts of each of two commodities. Suppose that this individ-
ual’s preferences can be represented by a utility function U : R2+ −→ R of
√
the form U (x1 , x2 ) = ln (x1 + 1) + 2 x2 , where x1 denotes the individual’s
consumption of commodity one, and x2 denotes the individual’s consump-
tion of commodity two. This individual is a price taker in both commodity
markets. The price of commodity one is p1 > 0, and the price of commodity
two is p2 > 0. This individual is endowed with an income of y > 0.

1. Does this individual have quasi-linear preferences? Justify your an-

swer.

2. Are this individual’s preferences locally non-satiated? Justify your

answer.

3. What is this individual’s budget-constrained utility maximisation

problem?

4. Suppose that the individual will optimally consume strictly positive

amounts of both commodities. What is the individual’s optimal con-
sumption bundle in this case? Under what circumstances, if any, will
this case occur?

5. Can it ever be optimal for this individual to choose to consume zero

units of commodity one? If so, what would be his or her optimal
consumption of commodity two? Under what circumstances, if any,
will this case occur?

6. Can it ever be optimal for this individual to choose to consume zero

units of commodity two? If so, what would be his or her optimal

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 consumption of commodity one? Under what circumstances, if any,
will this case occur?
7. What are the Marshallian demand functions (or possibly correspon-
dences) for commodity one and commodity two for this individual?1
8. What is this individual’s indirect utility function?

Tutorial Question 2
Consider a consumer that faces the following budget-constrained utility
maximisation problem:
Maximise U (q1 , q2 , q3 ) = q1 + ln (q2 q3 )

subject to p1 q1 + p2 q2 + p3 q3 6 y, q1 > 0, q2 > 0, and q3 > 0,

where p1 is the price of commodity one, p2 is the price of commodity two,
p3 is the price of commodity three, and y is the consumer’s income. The
choice variables in this problem are q1 , q2 , and q3 . You may assume that this
consumer will optimally choose to exhaust his or her budget throughout this
question. You may also assume that 0 < p1 < 2p1 < y < ∞, 0 < p2 < ∞,
and 0 < p3 < ∞. Note that these inequality restrictions on the economic
parameters of this problem ensure that it has a unique solution that involves
the consumer choosing to purchase strictly positive amounts of all three
commodities.
1. What conditions characterise an optimal consumption bundle for this
consumer? Justify your answer.
2. What are the consumer’s Marshallian demand functions (or corre-
spondences) for each of the three commodities?2 Justify your answer.
3. What is the consumer’s indirect utility function? Justify your an-
swer?

Tutorial Question 3
Consider a consumer whose preferences over bundles of strictly positive
amounts of each of three distinct commodities can be represented by a
utility function U : R3+ −→ R of the form
√
U (q1 , q2 , q3 ) = q1 + q2 q3 .
1
Marshallian demands are also known as Walrasian demands, ordinary demands, and
uncompensated demands.
2
Marshallian demands are also known as Walrasian demands, ordinary demands, and
uncompensated demands.

3
The constant per unit price of commodity one is p1 ∈ (0, ∞), the constant
per unit price of commodity two is p2 ∈ (0, ∞), and the constant per unit
price of commodity three is p3 ∈ (0, ∞). The consumer has an income of
y ∈ (0, ∞).

1. What is the consumer’s budget-constrained utility maximisation prob-

lem?

2. What is the Lagrangean function for the consumer’s budget-constrained

utility maximisation problem?

3. (What are the first-order conditions for the consumer’s budget-constrained

utility maximisation problem (assuming that a strictly positive amount
of each commodity will optimally be purchased)?

4. What are the consumer’s Marshallian demands3 for each of the com-
modities (assuming that a strictly positive amount of each commod-
ity is optimally purchased)? In the case of each commodity, identify
whether the Marshallian demand mapping is a function or a cor-
respondence. (You may assume that appropriate second-order con-
ditions for a maximum and constraint qualification conditions are
satisfied.)

5. What is the consumer’s indirect utility function (assuming that a

strictly positive amount of each commodity is optimally purchased)?

Tutorial Question 4
Consider a consumer whose preferences over consumption bundles of non-
negative amounts of each of three distinct commodities can be represented
by a modified Stone-Geary utility function of the form
α α 1−α −α

 (q1 − γ1 ) 1 (q2 − γ2 ) 2 (q3 − γ3 ) 1 2 if (q1 , q2 , q3 ) ∈ Q, b
U (q1 , q2 , q3 ) =
−∞ if (q1 , q2 , q3 ) 6∈ Q,
 b

where q1 is the quantity of commodity one, q2 is the quantity of commodity

two, q3 is the quantity of commodity three, and
b = (q1 , q2 , q3 ) ∈ R3+ : q1 > γ1 , q2 > γ2 , q3 > γ3 .

Q

Note that q1 , q2 , and q3 are choice variables, while γ1 , γ2 , γ3 , α1 and α2

are fixed preference parameters. Typically, we would assume that γ1 > 0,
3
Marshallian demands are also known as Walrasian demands, ordinary demands, and
uncompensated demands.

4
γ2 > 0, γ3 > 0, 0 < α1 < 1, 0 < α2 < 1, and α1 + α2 < 1. You should make
these typical assumptions when answering this question.

Suppose that this consumer is a price taker in all markets, faces a price
vector (p1 , p2 , p3 ) ∈ R3++ , and is endowed with a monetary income of
y > p1 γ1 + p2 γ2 + p3 γ3 > 0. You may assume that the budget constraint
binds and any required constraint qualification conditions and second-order
conditions for a maximum are satisfied by any solution to this consumer’s
budget-constrained utility maximisation problem.

1. What is this consumer’s budget-constrained utility maximisation prob-

lem?

2. What is the Lagrangean function for this consumer’s budget-constrained

utility maximisation problem?

3. What are the first-order conditions for this consumer’s budget-constrained

utility maximisation problem?

4. Find the Marshallian demand functions (or correspondences) for this

consumer.4 Be sure to show all of your working.

5. What is the point income elasticity of demand for each of the three
commodities?5

Additional Practice Questions

Additional Practice Question 1
Suppose that a consumer has perfect complements, or Leontief, preferences
over bundles of non-negative amounts of each of two commodities. The
consumer’s consumption set is R2+ . The consumer’s preferences can be
represented by a utility function of the form U (x1 , x2 ) = min(x1 , x2 ).

1. Illustrate the consumer’s weak preference set for an arbitrary (but

fixed) utility level U .

2. Illustrate a representative iso-expenditure line for the consumer.

4
Marshallian demands are also known as Walrasian demands, ordinary demands, and
uncompensated demands.
5
The point income elasticity of the Marshallian demand for commodity k, when
the vector of prices and income is (p, y) = (p1 , p2 , · · · , pn , y), is given by εyk (p, y) =
d
∂ ln(qk (p,y))
  d 
y ∂qk (p,y)
∂ ln(y) = d
q (p,y) ∂y .
k

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 3. Illustrate the consumer’s utility-constrained expenditure minimisa-
tion problem.

4. Illustrate the derivation of the consumer’s compensated (or Hicksian)

demand curve for commodity one.

5. Find the algebraic expression for the consumer’s compensated (or

Hicksian) demand functions for commodity one and commodity two?

6. Find an algebraic expression for the consumer’s expenditure function.

Additional Practice Question 2

Suppose that a consumer has perfect substitutes preferences over bundles
of non-negative amounts of each of two commodities. The consumer’s con-
sumption set is R2+ . The consumer’s preferences can be represented by a
utility function of the form U (x1 , x2 ) = x1 + x2 .

1. Illustrate the consumer’s weak preference set for an arbitrary (but

fixed) utility level U .

2. Illustrate a representative iso-expenditure line for the consumer.

3. Illustrate the consumer’s utility-constrained expenditure minimisa-

tion problem.

4. Illustrate the derivation of the consumer’s compensated (or Hicksian)

demand curve for commodity one.

5. Find the algebraic expression for the consumer’s compensated (or

Hicksian) demand functions for commodity one and commodity two?

6. Find an algebraic expression for the consumer’s expenditure function.

Additional Practice Question 3

Suppose that a consumer has preferences over bundles of non-negative
amounts of each two goods, x1 and x2 , that can be represented by a Cobb-
Douglas utility function of the form

U (x1 , x2 ) = xα1 x1−α

2 ,

where 0 < α < 1. The consumer is a price taker who faces a price per
unit of good one that is equal to $p1 and a price per unit of good two that
is equal to $p2 . Answer each of the following questions. To keep things
relatively simple, focus only on interior solutions in which positive amounts
of both commodities are consumed.

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 1. What is the consumer’s (utility-constrained) expenditure minimisa-
tion problem?

2. What conditions characterise the consumer’s optimal choice of con-

sumption bundle for this problem?

3. What are the consumer’s compensated (Hicksian) demand functions

for good one and good two?

4. Illustrate a representative compensated demand curve for each com-

modity.

5. What is the consumer’s optimal expenditure level, given the minimum-

utility constraint? (In other words, what is the consumer’s expendi-
ture function?)

Additional Practice Question 4

Suppose that a consumer has preferences over bundles of non-negative
amounts of each two goods, x1 and x2 , that can be represented by a quasi-
linear utility function of the form
√
U (x1 , x2 ) = x1 + x2 .

The consumer is a price taker who faces a price per unit of good one that is
equal to $p1 and a price per unit of good two that is equal to $p2 . Answer
each of the following questions. To keep things relatively simple, focus
only on interior solutions in which positive amounts of both commodities
are consumed.

1. What is the consumer’s (utility-constrained) expenditure minimisa-

tion problem?

2. What conditions characterise the consumer’s optimal choice of con-

sumption bundle for this problem?

3. What are the consumer’s compensated (Hicksian) demand functions

for good one and good two?

4. Illustrate a representative compensated demand curve for each com-

modity.

5. What is the consumer’s optimal expenditure level, given the minimum-

utility constraint? (In other words, what is the consumer’s expendi-
ture function?)

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Additional Practice Question 5
Suppose that a consumer has preferences over bundles of non-negative
amounts of each two goods, x1 and x2 , that can be represented by a con-
stant elasticity of substitution (CES) utility function of the form
1
U (x1 , x2 ) = (xρ1 + xρ2 ) ρ .

The consumer is a price taker who faces a price per unit of good one that is
equal to $p1 and a price per unit of good two that is equal to $p2 . Answer
each of the following questions. To keep things relatively simple, focus
only on interior solutions in which positive amounts of both commodities
are consumed.

1. What is the consumer’s (utility-constrained) expenditure minimisa-

tion problem?

2. What conditions characterise the consumer’s optimal choice of con-

sumption bundle for this problem?

3. What are the consumer’s compensated (Hicksian) demand functions

for good one and good two?

4. Illustrate a representative compensated demand curve for each com-

modity.

5. What is the consumer’s optimal expenditure level, given the minimum-

utility constraint? (In other words, what is the consumer’s expendi-
ture function?)