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Intermediate Microeconomics - Assignment 1

This document outlines an intermediate microeconomics assignment on consumer theory that is due on April 4, 2023. It includes 5 questions covering topics like diminishing marginal rate of substitution, utility maximization, expenditure minimization, and income and substitution effects. Students are asked to examine utility functions, derive demand curves and indirect utility, analyze how consumer welfare is impacted by price and income changes, and decompose total effects into income and substitution effects for different utility functions and price changes. Students should upload their answers to the university's online learning system by the due date.

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Elaine Xie
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Download as PDF, TXT or read online on Scribd
99 views

Intermediate Microeconomics - Assignment 1

This document outlines an intermediate microeconomics assignment on consumer theory that is due on April 4, 2023. It includes 5 questions covering topics like diminishing marginal rate of substitution, utility maximization, expenditure minimization, and income and substitution effects. Students are asked to examine utility functions, derive demand curves and indirect utility, analyze how consumer welfare is impacted by price and income changes, and decompose total effects into income and substitution effects for different utility functions and price changes. Students should upload their answers to the university's online learning system by the due date.

Uploaded by

Elaine Xie
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Intermediate Microeconomics Assignment 1

Due on April 4 (7th week, Tuesday, 14:00PM), 2023∗

Name Student ID

1. Diminishing MRS and Quasi-Concave Utilities Examine whether the MRS declines as x
increases.
xy
(1) U (x, y) = x+y

(2) U (x, y) = ln x + ln y

2. UMP Consider the Cobb-Douglas utility function U (x, y) = xa y b where a > 0 and b > 0. The
per-unit price for good x and y is px and py , respectively, and the income is I.

(1) Derive the Marshallian demand x∗ (px , py , I), y ∗ (px , py , I), and the indirect utility (value
function) V (px , py , I).
(2) If price px or py increases, is the consumer better-off or worse-off? If income increases,
whether the consumer is better-off or worse-off.

3. EMP Consider U (x, y) = xa y b .

(1) Derive the Hicksian demand for U (x, y) = xa y b , and the expenditure function E(px , py , u).
(2) If price px or py increases, will the total expenditure increase or decrease?
(3) Verify x∗ (px , py , I) = hx (px , py , u) when u = V where V is solved by 2 (1).
(4) Verify hx (px , py , u) = x∗ (px , py , I) when I = E where E is solved by 3 (1).

4. Income & substitution effect for perfect substitutes Assume that a consumer’s utility
function is U (x, y) = 3x + 2y, i.e., x and y are perfect substitutes. The initial prices are
(px , py ) = (1, 1), and his/her income is I = 10.

(1) Other things equal, if px increases from 1 to 1.2, compute its total effect, substitution
and income effect on the optimal choice of x.1
∗
Please upload your answers to bb.bfsu.edu.cn. Your can simply upload the photos/scanned copies, or by other
electronic formats. Using LATEX to generate a PDF document is encouraged. If the blackboard system does not
work, you can also send your answers to [email protected]. Solutions will be provided after 14:00PM on BB.
1
注意这里定义的“替代效应”是 PPT 中“保持原效用不变/沿原无差异曲线旋转”。

1
(2) If px increases from 1 to 2, compute its total effect, substitution and income effect on
the optimal choice of x.2

5. Quasi-linear Utility (这个题目仅供思考，不用做) Consider the quasi-linear utility U (x, y) =


u(x) + y, where u′ (·) > 0, u′′ (·) < 0 and let’s normalize py = 1 for simplicity.

(1) Assume that when the price of x increases from p1 to p2 , the Mashallian demand changes
from x∗1 (p1 , py , I) to x∗2 (p2 , py , I), where both x∗1 and x∗2 are interior solutions. Evaluated
at p2 , is the Hicksian demand hx (p2 , py , V1 ) an interior solution or corner solution? (V1
is the indirect utility of the UMP at p1 ).
(2) Starting from px = p1 , assume that px increases “a little” (such that before and after
the change, all solutions are interior). Show the income and substitution effect due such
increase in px .
(3) Assume that at px = p3 , the UMP gives a corner solution. Show the income and
substitution effect when px increases “a little” around p3 .

2
依旧采用 PPT 中定义的希克斯替代效应。

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