ECN715 Advanced Microeconomics

Homework Assignment 1 (Due on October 16 (Friday), 11:59pm)

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Problem 1. Deine ≽∗ on R2+ as (x1 , x2 ) ≽∗ (y1 , y2 ) if x1 + x2 > y1 + y2 or (x1 + x2 =

y1 + y2 and |x1 − x2 | ≤ |y1 − y2 |) where |b| is the absolute value of number b.1
(a) Show that ≽∗ is complete, transitive.
(b) Is ≽∗ strictly convex? 2
(c) Is ≽∗ continuous?
Problem 2. Let a binary relation ≽ on R2 is complete and transitive. Prove that ≽ is
convex if and only if

x ≽ y and λ ∈ [0, 1] imply λx + (1 − λ)y ≽ y for any x, y ∈ R2 . 3

√ √
Problem 3. Show that u(x1 , x2 ) = 2 x1 + x2 is strictly quasiconcave (Hint: You can
prove it by showing the utility function has diminishing marginal rate of substitution).
Problem 4. A consumer’s preference is represented by utility function u(x1 , x2 ) =
√ √
2 x1 + x2 .
(a) Check that Roy’s identity holds for this consumer.
(b) Check that Slutsky equation holds for the change ∂x
∂p1
1
.
Problem 5. Suppose a consumer has a continuous and quasiconcave utility function
u(x1 , x2 ).4 Then show that set of solutions to the expenditure minimization problem is
a convex set in R2+ .
Problem 6. Think of the following linear attributes model. There are three goods, x, y
and z, available at prices px = 3, py = 2 and pz = 4. A consumer cares about attributes
a1 and a2 and one unit of good x has a1x = 3 units of a1 and a2x = 2 units of a2 . For
good y and z, suppose a1y = 6, a2y = 1 and a1z = 4, a2z = 3. Suppose the consumer has the
initial wealth (income) w = 12. We assume the consumer will spend all her wealth.

(a) If the consumer wants to consume (a1 , a2 ) = (16, 8), how many units of
x, y and z should she purchase?
(a) Suppose the consumer has utility function u(a1 , a2 ) = min{a1 , a2 }. How
many units of goods x, y and z will the consumer choose to consume (at
optimum)?

1
Recall R2+ = {(x1 , x2 ) ∈ R2 |x1 ≥ 0, x2 ≥ 0}.
2
Preference relation ≽ is said to be strictly convex if x ∕= y, x ≽ z, y ≽ z and λ ∈ (0, 1) imply
λx + (1 − λ)y ≻ z. (Recall that ≻ is the asymmetric part of ≽ and defined as x ≻ z if x ≽ z and z ∕≽ x.)
3
Recall the definition of convexity: ≽ on R2 is convex if {y ∈ R2 |y ≽ x} is a convex set of R2 for
any x ∈ R2 .
4
Utility function u : R2+ → R is said to be quasiconcave if , u(x) ≥ α and u(y) ≥ α, then u(λx + (1 −
λ)y) ≥ α for any consumption bundles x = (x1 , x2 ), y = (y1 , y2 ), and any real number α, any λ ∈ [0, 1].