WS 19/20 - Problem Set 2 Microeconomic Analysis

Consumer Theory

Consumer’s Problem

1. Suppose there are two consumption goods and preferences of a consumer can be represented
by the following utility function:
 1
ρ
u(x1 , x2 ) = α.x1 ρ + (1 − α)x2 ρ ; (0 < α < 1; 0 6= ρ < 1)

(a) Derive the Marshallian demand function of this consumer.

(b) Calculate and intuitively interpret the elasticity of substitution.

2. A consumer has the utility function u(x1 , x2 ) = x1 α x2 1−α where 0 < α < 1.
(a) Calculate his/her Marshallian demand function.
(b) Find his/her indirect utility function.
(c) Check these properties of the derived indirect utility function:
• Homogeneous of degree zero
• Increasing in y
• Decreasing in p

3. Given the following indirect utility function. Derive the Marshallian demand functions using
Roy’s identity:
y y
v(p, y) = +
p1 p2

Date: 04.11.2019 Tutor: Thi Truong An Hoang, M.Sc. Page 1 of 1