Problem

set 2-3

Problem 1
Assume that this ranking hold for any two bundles we present to him, where only the
amount of good x increases from bundle A to B.
(a) Are W's preferences monotonic? Are they strictly monotonic?
(b) What if he prefers bundle 𝐴 = (3,3) to 𝐵 = (2,2), and a similar ranking holds for any two
bundles where the amount of both goods decreases from A to B?

Problem 2
For each of the following set of preferences sketch the indifference curves. Also explain
non-mathematically, i.e. without calculations, second derivatives, Hessian, etc, whether the
preferences satisfy weak monotonicity (strict monotonicity), weak convexity (strict
convexity). Use general definitions of monotonicity and convexity of consumer’s
preferences.
1. The consumer puts 2 teaspoons of sugar in every cup of tea. He will not drink a cup of tea
with more or less than two teaspoons of sugar. All he cares about is the number of tea cups
with two teaspoons of sugar that he can make.
2. The consumer loves cats but hates dogs. His preferences are determined by the number
of cats minus the number of dogs (i.e. one bundle is preferred to another it has more cats
minus the number of dogs.
3. The two goods are chocolates for the consumer and chocolates for the consumer’s friend.
The consumer is selfish, and all he cares about in the number of chocolates he (not friend)
has.
4. Now the consumer becomes a utilitarian. All he cares about is the total number of
chocolates (available for him and friend)
5. The consumer wants exactly 6 chicken nuggets and 20 fries, and all he cares about is how
close these goods are to this ideal bundle.

Problem 3
For each of the following utility functions sketch the indifference curves. Determine
whether consumer’s preferences are monotonic (weakly or strongly), convex (weakly or
strongly). Use quasiconcavity condition with the first and second derivatives in order to
check up convexity of preferences if it is possible.
i. 𝑢(𝑥1 , 𝑥2 ) = 𝑥1
ii. 𝑢(𝑥1 , 𝑥2 ) = 𝑥1 + 𝑥2
iii. 𝑢(𝑥1 , 𝑥2 ) = 𝑥21 + 𝑥22
iv. 𝑢(𝑥1 , 𝑥2 ) = 𝑥2 − 𝑥21
v. 𝑢(𝑥1 , 𝑥2 ) = min{𝑥1 , 𝑥2 }

Problem 4
Which of the following statements are true? Justify your answer. Hint: If any of the
statements is incorrect, try to explain by giving a counterexample where the preference
relation is represented by a particular utility function.
(a) If the preference relation ≿ is monotonic, then it is convex.
(b) If the preference relation ≿ is strongly convex, then it is strongly monotonic.
(c) If the preference relation ≿ is strongly monotonic, then it is strongly convex.
(d) If the preference relation ≿ is convex, then it is monotonic.
(e) If the preference relation ≿ is monotonic, then it is strongly monotonic.
(f) If the preference relation ≿ is strongly monotonic, then it is monotonic.

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Problem 5
& %'
The 𝑀𝑅𝑆 for the Cobb–Douglas utility function 𝑢(𝑥# , 𝑥$ ) = 𝑥#% 𝑥$ is given by 𝑀𝑅𝑆 = & '! .
"
(a) Does this result depend on whether 𝛼 + 𝛽 = 1?
(b) For commodity bundles with 𝑥# = 𝑥$ , how does the 𝑀𝑅𝑆 depend on the values of 𝛼 and
𝛽? Develop an intuitive explanation of why, if 𝛼 > 𝛽, 𝑀𝑅𝑆 > 1. Illustrate your argument
with a graph.
(c) Suppose an individual obtains utility only from amounts of goods 1 and 2 that exceed
minimal subsistence levels given by 𝑐 and 𝑑. In this case, 𝑢(𝑥# , 𝑥$ ) = (𝑥# − 𝑐)% (𝑥$ − 𝑑)& ,
i.e. it is Stone-Geary utility function. Is this function homothetic?

Problem 6
Consider the following 5 utility functions and assume that 𝛼 and 𝛽 are positive real
numbers:
&
i. 𝑢(𝑥# , 𝑥$ ) = 𝑥#% 𝑥$
ii. 𝑢(𝑥# , 𝑥$ ) = 𝛼𝑥# + 𝛽𝑥$
iii. 𝑢(𝑥# , 𝑥$ ) = 𝛼𝑥# + 𝛽ln 𝑥$
%
iv. 𝑢(𝑥# , 𝑥$ ) = ;& < ln 𝑥# + ln 𝑥$
v. 𝑢(𝑥# , 𝑥$ ) = −𝛼𝑥# − 𝛽ln 𝑥$
(a) Calculate the formula for 𝑀𝑅𝑆 for each of these utility functions.
(b) Which utility functions represent preferences that have linear indifference curves?
(c) Which of these utility functions represent the same underlying preferences?
(d) Which of these utility functions represent preferences that do not satisfy the
monotonicity assumption?
(e) Which of these utility functions represent preferences that do not satisfy the convexity
assumption?
(f) Which of these utility functions represent preferences that are not rational (i.e., that do
not satisfy the completeness and transitivity axioms)?
(g) Which of these utility functions represent preferences that are not continuous?

Problem 7
Consider the utility function 𝑢(𝑥# , 𝑥$ ) = 𝑥# + ln 𝑥$ .
(a) Find the 𝑀𝑅𝑆 of the function. Now, interpret the result.
(b) Confirm that the utility function is quasi-concave.
(c) Find the equation for an indifference curve where 𝑥$ = 𝑓(𝑥# ).
(d) Compare the marginal utility of good 1 and good 2.

Problem 8
As we know, one way to show convexity of indifference curves is to show that, for any two
points 𝐴 = (𝑥#( , 𝑥$( ) and 𝐵 = (𝑥#) , 𝑥$) ) on an indifference curve with 𝑈 = 𝑈* , the utility
' # +' $ ' # +' $
associated with the point ; " $ " , ! $ ! < is at least as great as 𝑈* .
Use this approach to discuss the convexity of the indifference curves for the following three
functions:
i. 𝑈(𝑥# , 𝑥$ ) = min (𝑥# , 𝑥$ )
ii. 𝑈(𝑥# , 𝑥$ ) = max (𝑥# , 𝑥$ )
iii. 𝑈(𝑥# , 𝑥$ ) = 𝑥# + 𝑥$
Graph your results.

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Problem 9
Consider three consumers, F, G, and H.
(a) F’s preferences are weakly monotonic and represented by a utility function. Consider the
bundles (4,8) and (4,9). Is it true that 𝑢(4,8) < 𝑢(4,9)? If yes, prove it; if no, give a
counterexample.
(b) G’s preferences are homothetic and represented by a utility function. It is known that
(4,8) ≿ (2,10). Is it true that 𝑢(8,16) ≥ (4,20)? If yes, prove it; if no, give a counterexample.
(c) H’s preferences are strictly monotonic and represented by a utility function. Consider
the bundles (4,8) and (4,9). Is it possible that 𝑢(4,8) = 𝑢(4,9)? If yes, prove it, if no, justify
why not.

Problem 10
K’s preferences over two goods are described by the utility function 𝑢(𝑥# , 𝑥$ ) = min (2𝑥# +
𝑥$ , 𝑥# + 3𝑥$ )
(a) Graph his indifference curves at utility levels 𝑢(𝑥# , 𝑥$ ) = 5 and 𝑢(𝑥# , 𝑥$ ) = 15.
(b) Suppose the consumer consumes five units of good 1 and two units of good 2. How
much of good 1 would he be willing to trade for one unit of good 2 to keep his welfare
(utility) unchanged?
(c) Determine whether K's preferences are complete, transitive, strictly monotonic, strictly
convex, convex. Your answers should be justified.

Problem 11 (optional)
Based on [JR,1.13] A consumer has lexicographic preferences over 𝐱 ∈ ℝ$+ if the relation ≿
satisfies 𝐱 ( ≿ 𝐱 ) whenever 𝑥#( > 𝑥#) , or 𝑥#( = 𝑥#) and 𝑥$( ≥ 𝑥$) . The name derives from the
way words are organized in a dictionary. See also definition [MWG, Ch 3.C].
(a) Sketch an indifference map for these preferences.
(b) Can these preferences be represented by a continuous utility function? Why or why
not?
(c) Indicate if it is complete, transitive, monotonic and convex.