Scribd
Upload
4 views4 pages

Intermediate Micro Assignment 1

The document outlines an intermediate microeconomics assignment focusing on budget constraints, corner solutions, and utility functions. It includes calculations for corner solutions under various conditions, the elasticity of substitution in utility functions, and the first-order conditions for marginal productivity of capital and labor. References to key economic texts are provided to support the concepts discussed.

Uploaded by

dorismunkombwe0
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
4 views4 pages

Intermediate Micro Assignment 1

The document outlines an intermediate microeconomics assignment focusing on budget constraints, corner solutions, and utility functions. It includes calculations for corner solutions under various conditions, the elasticity of substitution in utility functions, and the first-order conditions for marginal productivity of capital and labor. References to key economic texts are provided to support the concepts discussed.

Uploaded by

dorismunkombwe0
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 4

Intermediate Micro

Assignment 1

Question 1

a) i. To calculate the corner solutions, we need to find the maximum amount of each good that can be
consumed given the budget constraint.

The budget equation is:

p1x1 + p2x2 = m

To find the corner solution for good 1, we set x2 = 0 and solve for x1:

p1x1 = m

x1 = m/p1

corner solution for good 2, we set x1 = 0 and solve for x2:

p2x2 = m

x2 = m/p2

Ii). The slope of the budget line is:

-Δx2/Δx1 = p1/p2

The income numeraire is:

m/p1 = x1 + (p2/p1)x2

III).

iv) To derive the new budget line function when the government imposes a lump-sum tax of k, a
quantity tax on good 1 of t, and a quantity subsidy on good 2 of s.

The new budget equation is:

(p1 + t)x1 + (p2 - s)x2 = m - k

To find the new corner solutions, we set x2 = 0 and solve for x1:

(p1 + t)x1 = m - k

x1 = (m - k)/(p1 + t)

To find the new corner solution for good 2, we set x1 = 0 and solve for x2:
(p2 - s)x2 = m - k

x2 = (m - k)/(p2 - s)

The new slope of the budget line is:

-Δx2/Δx1 = (p1 + t)/(p2 - s)

The new income numeraire is:

(m - k)/(p1 + t) = x1 + ((p2 - s)/(p1 + t))x2

V).

b). The general constant Elasticity of Substitution ( CES).

U(x1, x2) = (x1^(-δ) + x2^(-δ))^(-1/δ)

I) When δ = 1, the utility function becomes:

U(x1, x2) = x1 + x2

This is a linear utility function, which implies that the consumer is indifferent between the two goods.

Ii). When δ = 0, the utility function becomes:

U(x1, x2) = x1^(-δ) + x2^(-δ) = x1 + x2

This is also a linear utility function, which implies that the consumer is indifferent between the two
goods.

III). When δ = -∞, the utility function becomes:

U(x1, x2) = min(x1, x2)

This is a Leontief utility function, which implies that the consumer views the two goods as perfect
complements.

The graph of the utility function will depend on the value of δ. When δ = 1 or δ = 0, the utility function is
linear, and the graph will be a straight line. When δ = -∞, the utility function is Leontief, and the graph
will be a series of right angles.

Question 2
a). Q = f(K, L)

where Q is the output, K is the capital, and L is the labor.

I). To derive the first-order conditions for marginal physical productivity of capital and labor, we need to
find the partial derivatives of the production function with respect to K and L.

Marginal Physical Productivity of Capital (MPK):

MPK = ∂Q/∂K

Marginal Physical Productivity of Labor (MPL):

MPL = ∂Q/∂L

The first-order conditions are:

1. MPK = r (where r is the rental rate of capital)

2. MPL = w (where w is the wage rate of labor)

Ii). Second-Order Conditions:

1. ∂²Q/∂K² < 0 (diminishing marginal productivity of capital)

2. ∂²Q/∂L² < 0 (diminishing marginal productivity of labor)

These conditions imply that the marginal productivity of capital and labor decreases as the quantity of
capital and labor increases.

References:
Hicks, J. R. (1939). Value and capital. Oxford University Press.

Samuelson, P. A. (1947). Foundations of economic analysis. Harvard University Press.

Varian, H. R. (2010). Intermediate microeconomics. W.W. Norton & Company.

Arrow, K. J., & Hahn, F. H. (1971). General competitive analysis. Holden-Day.

Henderson, J. M., & Quandt, R. E. (1971). Microeconomic theory: A mathematical approach. McGraw-
Hill.

Chiang, A. C. (1984). Fundamental methods of mathematical economics. McGraw-Hill.

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy