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2021micro Hw2 Ans

This document outlines homework problems from an advanced microeconomics class. 1. The first problem involves deriving the Marshallian demand functions for a Cobb-Douglas utility function and showing the Hicksian demand curves are integrable. 2. The second problem asks to find the elasticity of substitution for a CES production function and the condition under which it reduces to Cobb-Douglas. 3. The third examines revealed preference between consumption bundles in two years. 4. The final problem is to find the elasticity of substitution for a Cobb-Douglas production function.

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Diana Carillo
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72 views4 pages

2021micro Hw2 Ans

This document outlines homework problems from an advanced microeconomics class. 1. The first problem involves deriving the Marshallian demand functions for a Cobb-Douglas utility function and showing the Hicksian demand curves are integrable. 2. The second problem asks to find the elasticity of substitution for a CES production function and the condition under which it reduces to Cobb-Douglas. 3. The third examines revealed preference between consumption bundles in two years. 4. The final problem is to find the elasticity of substitution for a Cobb-Douglas production function.

Uploaded by

Diana Carillo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Advanced Microeconomic Theory I

Homework 2
Instructor: Chelsea C. Lin
Due at 6 pm on Nov. 29, 2021

1. Suppose the utility function is given by:

u (x1 , x2 ) = α1 ln x1 + α2 ln x2

(a) Find the Marshallian demand function for x1 and x2 .


(b) Use your answer in (a) and apply the slutsky equation to show that
Hicksian demand curves are integrable.

2. Given the CES production function

y = (xρ1 + xρ2 )1/ρ

(a) Please find the elasticity of substitution σ12 .


(b) Under what condition does the CES production function reduce to
Cobb-Douglas form? Please show the isoquant.

3. You are given the following partial information about a consumer’s pur-
chases. He consumes only two goods.

Year1 Year2
Quantity Price Quantity Price
Good1 100 100 y 100
Good2 100 100 150 80

(a) Explain WARP.


(b) Over what range of quantities of good 1 consumed in year 2 would
you conclude that the consumer’s consumption bundle in year 1 is
revealed preferred to that in year 2 ?

4. Given a Cobb-Douglas production function

y = f (K, L) = AK 1/3 L1/2

Find the elasticity of substitution.

1
1a

max u (x1 , x2 ) = α1 ln x1 + α2 ln x2
s.t.
y − p 1 x1 − p 2 x2 ≥ 0

The associated Lagragian is

£ (x1 , x2 , λ) = α1 ln x1 + α2 ln x2 + λ (y − p1 x1 − p2 x2 )
Assuming an interior solution, the K-T conditins are:

α1
£x1 = − λp1 = 0
x1
α2
£x2 = − λp2 = 0
x2
£λ = y − p 1 x1 − p 2 x2 = 0

We have
α1 y
x1 =
(α1 + α2 )p1
α2 y
x2 =
(α1 + α2 )p2

1b Given

α1 y
x1 =
(α1 + α2 )p1
α2 y
x2 =
(α1 + α2 )p2

From the slutsky conditions:

∂xh1 ∂x1 ∂x1 α1 α1 α2 y


= + x2 = x2 =
∂p2 ∂p2 ∂y (α1 + α2 )p1 (α1 + α2 )2 p1 p2
∂xh2 ∂x2 ∂x2 α2 α1 α2 y
= + x1 = x1 =
∂p1 ∂p1 ∂y (α1 + α2 )p2 (α1 + α2 )2 p1 p2

∂xh1 ∂xh2
Therefore, = .
∂p2 ∂p1

2
When the arbitrary Hicksian curves are integrable to an expenditure function
candidate, the candidate for an expenditure function is a true expenditure
function if it satisfies the criteria for expenditure function. If we have a true
expenditure function, by duality, there is a direct utility function (unique up
to a monotonic transformation) associated with the expenditure function.
Therefore, the original Marshallian curves are integrable to a direct utility
function.

 
f1
2a We then find the denominator of σ; d ln
f2

1/ρ (xρ1 + xρ2 ) ρxρ−1


   
f1 1
d ln = d ln
f2 1/ρ (xρ1 + xρ2 ) ρxρ−1
2
 ρ−1 
x1
= d ln
xρ−1
2
= (ρ − 1) (d ln x1 − d ln x2 )
 
1 1
= (ρ − 1) dx1 − dx2
x1 x2

From above, we get:


1
σ=
1−ρ

2b When ρ → 0, σ → 1, the CES production function reduces to Cobb-


Douglas form. Isoquant =(b).

3a For p0 x1 ≤ p0 x0 =⇒ p1 x0 > p1 x1 , if x0 Rx1 )

3b the bundle in year 1 is revealed preferred if

100 + 100 · 150 ≤ 100 · 100 + 100 · 100


and 100 · 100 + 80 · 100 > 100 + 80 · 150
That is, y ≤ 50 and y < 60 .
Hence, y ≤ 50.

3
4
 
1 K 1 w
d = d
K/L L w/i i
 
K
d
L
K
Lw  = 1
d
i
w
i

(2021micro-hw2.ctx)

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