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Quiz1 Section2a Key

The document contains a quiz on microeconomic theory with 4 questions. Question 1 asks the consumer to compute the marginal rate of substitution between two goods given a utility function. Question 2 asks to derive the Marshallian demand functions from optimization conditions and a utility function. Question 3 asks to derive the Hicksian demand functions from expenditure minimization conditions and the same utility function. Question 4 asks to find the expenditure function and Hicksian demand for one good given an indirect utility function.

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Orochi Scorpion
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8 views

Quiz1 Section2a Key

The document contains a quiz on microeconomic theory with 4 questions. Question 1 asks the consumer to compute the marginal rate of substitution between two goods given a utility function. Question 2 asks to derive the Marshallian demand functions from optimization conditions and a utility function. Question 3 asks to derive the Hicksian demand functions from expenditure minimization conditions and the same utility function. Question 4 asks to find the expenditure function and Hicksian demand for one good given an indirect utility function.

Uploaded by

Orochi Scorpion
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© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Date: 19 February 2024

Microeconomic Theory Key of Quiz 1 Dr. Heman Das Lohano

Q1: A consumer receives utility from consuming two goods as given by the following utility
function where x denotes quantity of good X and y denotes quantity of good Y.

𝑈(𝑥, 𝑦) = 2𝑥𝑦 2

The consumer chooses to consume 5 units of each good. Compute the marginal rate of
substitution of good Y for good X (dy/dx) at this bundle.

Key:
𝜕𝑈/𝜕𝑥 2𝑦 2 𝑦 5
𝑀𝑅𝑆 = = = = = 0.5
𝜕𝑈/𝜕𝑦 4𝑥𝑦 2𝑥 2 × 5

Q2: A consumer receives utility from consuming two goods as given by the following utility
function where x denotes quantity of good X and y denotes quantity of good Y.

𝑈(𝑥, 𝑦) = 2𝑥𝑦 2

Write the two optimization conditions for utility maximization. Using these two equations, find
the Marshallian demand function for each good.

Key:
For utility maximization, we have the following two optimization equations derived from the
first order necessary conditions:
𝜕𝑈/𝜕𝑥 𝑃𝑥
=
𝜕𝑈/𝜕𝑦 𝑃𝑦
(1)
𝑃𝑥 𝑥 + 𝑃𝑦 𝑦 = 𝐼
(2)
As per Equation (1), MRS equals to price ratio. Equation (2) is the budget constraint. For the
given utility function, the above two equations can be written as:

2𝑦 2 𝑃𝑥
=
4𝑥𝑦 𝑃𝑦
(1’)
𝑃𝑥 𝑥 + 𝑃𝑦 𝑦 = 𝐼
(2)
Simplifying and solving the above two equations for two unknowns yield the Marshallian
demand functions:
𝐼
𝑥∗ =
3𝑃𝑥

2𝐼
𝑦∗ =
3𝑃𝑦

1
Q3:
A consumer receives utility from consuming two goods as given by the following utility
function where x denotes quantity of good X and y denotes quantity of good Y.

𝑈(𝑥, 𝑦) = 2𝑥𝑦 2

Write the two optimization conditions for expenditure minimization. Using these two
equations, find the Hicksian (compensated) demand function for each good.

Key:
For expenditure minimization, we have the following two optimization equations derived
from the first order necessary conditions:
𝜕𝑈/𝜕𝑥 𝑃𝑥
=
𝜕𝑈/𝜕𝑦 𝑃𝑦
(1)
𝑈(𝑥, 𝑦) = 𝑈
(2)
As per Equation (1), MRS equals to price ratio. Equation (2) is the constraint for the fixed
utility level. For the given utility function, the above two equations can be written as:

2𝑦 2 𝑃𝑥
=
4𝑥𝑦 𝑃𝑦
(1’)
2
2𝑥𝑦 = 𝑈
(2’)
Simplifying and solving the above two equations for two unknowns yield the Hicksian
(compensated) demand function:
1 2
𝑈 3 𝑃𝑦 3
𝑥𝑐 = ( )
2 𝑃𝑥
1
𝑈𝑃𝑥 3
𝑦𝑐 = ( )
𝑃𝑦
Q4:
For a utility function, the indirect utility function is:
𝐼
𝑉(𝑃𝑥 , 𝑃𝑦 , 𝐼) =
(4𝑃𝑥 𝑃𝑦 )0.5

Find the expenditure function. Then, using Shephard’s lemma, find the Hicksian
(compensated) demand function for good X.

Key:
To find expenditure function, we put I = E and V = U in the above indirect utility function:

𝐸
𝑈=
(4𝑃𝑥 𝑃𝑦 )0.5
Solving for E yields expenditure function:

𝐸 = (4𝑃𝑥 𝑃𝑦 )0.5 𝑈

2
Shephard’s Lemma:
𝜕𝐸
𝑥𝑐 =
𝜕𝑃𝑥

For finding the right-hand side, we take the derivative of expenditure function and get the
Hicksian demand (compensated demand) function for good X:
1
𝑐
𝑃𝑦 2
𝑥 = ( ) 𝑈
𝑃𝑥

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