Lecture 05

Properties of Walrasian Demand
Econ 2100 Fall 2018
Lecture 5, September 12
Problem Set 2 due in Yunyun’s mailbox now
Outline
1 Properties of Walrasian Demand
2 Indirect Utility Function
3 Envelope Theorem
Summary of Constrained Optimization
gi (x) 0
When x is solves max f (x) subject to then
i = 1; ::; m
m
X
rL (x ; ) = rf (x ) i rgi (x ) = 0
i =1
and gi (x ) 0, i 0, and i gi (x ) = 0 for i = 1; :::; m.
gi (x) 0
i = 1; ::; m
m
X
rL (x ; ) = rf (x ) i rgi (x ) = 0
i =1
Important details:
gi (x) 0
i = 1; ::; m
m
X
rL (x ; ) = rf (x ) i rgi (x ) = 0
i =1
Important details:
If the better than set or the constraint sets are not convex: big trouble.
gi (x) 0
i = 1; ::; m
m
X
rL (x ; ) = rf (x ) i rgi (x ) = 0
i =1
Important details:
If functions are not di¤erentiable: small trouble.
gi (x) 0
i = 1; ::; m
m
X
rL (x ; ) = rf (x ) i rgi (x ) = 0
i =1
Important details:
If the geometry still works we can …nd a more general theorem (see convex
analysis).
gi (x) 0
i = 1; ::; m
m
X
rL (x ; ) = rf (x ) i rgi (x ) = 0
i =1
Important details:
analysis).
When does this fail?
gi (x) 0
i = 1; ::; m
m
X
rL (x ; ) = rf (x ) i rgi (x ) = 0
i =1
Important details:
analysis).
If the constraint quali…cation condition fails.
gi (x) 0
i = 1; ::; m
m
X
rL (x ; ) = rf (x ) i rgi (x ) = 0
i =1
Important details:
analysis).
If the objective function is not quasi concave.
gi (x) 0
i = 1; ::; m
m
X
rL (x ; ) = rf (x ) i rgi (x ) = 0
i =1
Important details:
analysis).
If the objective function is not quasi concave.
This means you must check the second order conditions when in doubt.
Walrasian Demand
De…nition
Given a utility function u : Rn+ ! R, the Walrasian demand correspondence
x : Rn++ R+ ! Rn+ is de…ned by
x (p; w ) = arg max u(x) where B(p; w ) = fx 2 Rn+ : p x w g:
x2B p;w
When the utility function is quasi-concave and di¤erentiable, the First Order
Conditions for utility maximization say:
utility budget X non negativity
r( ) budget r( ) non negativity r( )=0
function constraint constraint constraints constraints
Walrasian Demand
De…nition
x2B p;w
When the utility function is quasi-concave and di¤erentiable, the First Order
Conditions for utility maximization say:
utility budget X non negativity
r( ) budget r( ) non negativity r( )=0
function constraint constraint constraints constraints
So, at a solution x 2 x (p; w ):

@L (x ) @u (x )
= w xi + i = 0 for all i = 1; ::; n
@xi @xi
Marginal Rate of Substitution
Suppose we have an optimal consumption bundle x where some goods are

consumed in strictly positive amounts.
Then, the corresponding non-negativity constraints hold and the correspoding
multipliers equal 0.
At such a solution x , the …rst order condition is:
@u (x )
= w pi for all i such that xi > 0
@xi

@u (x )
@xi
This expression implies

@u(x )
@xj pj
@u(x )
= for any j; k such that xj ; xk > 0
pk
@xk

@u (x )
@xi
This expression implies

@u(x )
@xj pj
@u(x )
pk
@xk
This is the familiar condition about equalizing marginal rates of substitutions
to price ratios.
Marginal Utility Per Dollar Spent
At an optimal consumption bundle x where some goods are consumed in
strictly positive amounts, the …rst order condition is:
@u (x )
@xi
@u (x )
@xi
Rearranging, one obtains

@u(x ) @u(x )
@xj @xk
pj pk
the marginal utility per dollar spent must be equal across goods.
@u (x )
@xi

@u(x ) @u(x )
@xj @xk
pj pk
@u (x ) @u (x )
If not, there are j and k for which @xj
<
@xk
pj pk
@u (x )
@xi

@u(x ) @u(x )
@xj @xk
pj pk
@u (x ) @u (x )
< pkk
@x
pj
" "
DM can buy pj
less of j, and pk
more of k, so the budget constraint still holds,
and
@u (x )
@xi

@u(x ) @u(x )
@xj @xk
pj pk
@u (x ) @u (x )
< pkk
@x
pj
DM can buy p"j less of j, and p"k more of k, so the budget constraint still holds,
and
by Taylor’s theorem, the utility at the new choice is 0 1
@u (x ) @u (x )
@u (x ) " @u (x ) " B @xk @xj C
u (x )+ + +o (") = u (x )+" @ A+o (")
@xj pj @xk pk pk pj
which implies that x is not an optimum.

@u (x )
@xi

@u(x ) @u(x )
@xj @xk
pj pk
@u (x ) @u (x )
< pkk
@x
pj
DM can buy p"j less of j, and p"k more of k, so the budget constraint still holds,
and
by Taylor’s theorem, the utility at the new choice is 0 1
@u (x ) @u (x )
@u (x ) " @u (x ) " B @xk @xj C
u (x )+ + +o (") = u (x )+" @ A+o (")
@xj pj @xk pk pk pj
which implies that x is not an optimum.

Think about the case in which some goods are consumed in zero amount.
Demand and Indirect Utility Function
The Walrasian demand correspondence x : Rn++ R+ ! Rn+ is de…ned by
x2B (p;w )
De…nition
Given a continuous utility function u : Rn+ ! R, the indirect utility function
v : Rn++ R+ ! R is de…ned by
v (p; w ) = u(x ) where x 2 x (p; w ):
x2B (p;w )
De…nition
v (p; w ) = u(x ) where x 2 x (p; w ):
The indirect utility function measures changes in the ‘optimized’value of the

objective function as the parameters (prices and wages) change and the
consumer adjusts her optimal consumption accordingly.
x2B (p;w )
De…nition
v (p; w ) = u(x ) where x 2 x (p; w ):

Results
x2B (p;w )
De…nition
v (p; w ) = u(x ) where x 2 x (p; w ):

Results
The Walrasian demand correspondence is upper hemi continuous
x2B (p;w )
De…nition
v (p; w ) = u(x ) where x 2 x (p; w ):

Results
To prove this we need properties that characterize continuity for
correspondences.
x2B (p;w )
De…nition
v (p; w ) = u(x ) where x 2 x (p; w ):

Results
correspondences.
The indirect utility function is continuous.
x2B (p;w )
De…nition
v (p; w ) = u(x ) where x 2 x (p; w ):

Results
correspondences.
The indirect utility function is continuous.
correspondences.
Berge’s Theorem of the Maximum
The theorem of the maximum lets us establish the previous two results.
Theorem (Theorem of the Maximum)

If f : X ! R is a continuous function and ' : Q ! X is a continuous
correspondence with nonempty and compact values, then

the mapping x : Q ! X de…ned by
x (q) = arg max f (x)
x 2'(q)
is an upper hemicontinuous correspondence and

x 2'(q)
the mapping v : Q ! R de…ned by
v (q) = max f (x)
x 2'(q)
is a continuous function.

x 2'(q)
v (q) = max f (x)
x 2'(q)
Berge’s Theorem is useful when exogenous parameters enter the optimization

problem only through the constraints, and do not directly enter the objective
function.

x 2'(q)
v (q) = max f (x)
x 2'(q)
Berge’s Theorem is useful when exogenous parameters enter the optimization

problem only through the constraints, and do not directly enter the objective
function.
In the consumer’s problem prices and income do not enter the utility function,
they only a¤ect the budget set.
Proposition
If u(x) is continuous, then x (p; w ) is upper hemicontinuous and v (p; w ) is
continuous.
Proposition
continuous.
Proof.
Apply Berge’s Theorem:
Proposition
continuous.
Proof.
If u : Rn+ ! R a continuous function and B (p; w ) : Rn++ R+ ! Rn+ is a
continuous correspondence with nonempty and compact values. Then:
Proposition
continuous.
Proof.
(i): x : Rn++ R+ ! Rn+ de…ned by x (p; w ) = arg maxx2B (p;w ) u(x) is an upper
hemicontinuous correspondence and
Proposition
continuous.
Proof.
(ii): v : Rn++ R+ ! R de…ned by v (p; w ) = maxx2B (p;w ) u(x) is a continuous
function.
Proposition
continuous.
Proof.
function.
We need continuity of the correspondence from price-wage pairs to budget
sets.
Proposition
continuous.
Proof.
function.
We need continuity of the correspondence from price-wage pairs to budget
sets.
We must show that B : Rn++ R+ ! Rn+ de…ned by
B (p; w ) = fx 2 Rn+ : p x w g
is continuous and we are done.
Continuity for Correspondences
Reminder from math camp.

De…nition
A correspondence ' : X ! Y is

De…nition
upper hemicontinuous at x 2 X if for any neighborhood V Y containing
'(x), there exists a neighborhood U X of x such that '(x 0 ) V for all
x 0 2 U.

De…nition
x 0 2 U.
lower hemicontinuous at x 2 X if for any neighborhood V Y such that
'(x) \ V 6= ;, there exists a neighborhood U X of x such that
'(x 0 ) \ V 6= ; for all x 0 2 U.

De…nition
x 0 2 U.
'(x 0 ) \ V 6= ; for all x 0 2 U.
A correspondence is upper (lower) hemicontinuous if it is upper (lower)
hemicontinuous for all x 2 X .

De…nition
x 0 2 U.
'(x 0 ) \ V 6= ; for all x 0 2 U.
A correspondence is upper (lower) hemicontinuous if it is upper (lower)
hemicontinuous for all x 2 X .
A correspondence is continuous if it is both upper and lower hemicontinuous.
Conditions for Continuity (from Math Camp)
The following su¢ cient conditions are sometimes easier to use.
Proposition (A)
Suppose X Rm and Y Rn . A compact-valued correspondence ' : X ! Y is
upper hemicontinuous if, and only if, for any domain sequence xj ! x and
corresponding range sequence yj such that yj 2 '(xj ), there exists a convergent
subsequence fyjk g such that lim yjk 2 '(x).
Note that compactness of the image is required.
Proposition (B)
Suppose A Rm , B Rn , and ' : A ! B. Then ' is lower hemicontinuous if, and
only if, for all fxm g 2 A such that xm ! x 2 A and y 2 '(x), there exist
ym 2 '(xm ) such that ym ! y .
Continuity for Correspondences: Examples
Exercise
Suppose ' : R ! R is de…ned by:
f1g if x < 1
'(x) = :
[0; 2] if x 1
Prove that ' is upper hemicontinuous, but not lower hemicontinuous.
Exercise
Suppose ' : R ! R is de…ned by:
f1g if x 1
'(x) = :
[0; 2] if x > 1
Prove that ' is lower hemicontinuous, but not upper hemicontinuous.
Continuity of the Budget Set Correspondence
Question 1, Problem Set 3; due next Wednesday.

Show that the correspondence from price-wage pairs to budget sets,
B : Rn++ R+ ! Rn+ de…ned by
B(p; w ) = fx 2 Rn+ : p x wg
is continuous.
First show that B(p; w ) is upper hemi continuous.

Then show that B(p; w ) is lower hemi continuous.
In both cases, use the propositions in the previous slide (and
Bolzano-Weierstrass).
There was a very very similar problem in math camp.
De…nitions
x (p; w ) = arg max u(x) where Bp;w = fx 2 Rn+ : p x w g:
x2B p;w
and the indirect utility function v : Rn++ R+ ! R is de…ned by
v (p; w ) = u(x (p; w )) where x (p; w ) 2 arg max u(x):
x2B p;w
De…nitions
x2B p;w
x2B p;w
Properties of Walrasian demand:

De…nitions
x2B p;w
x2B p;w

if u is continuous, then x (p; w ) is nonempty and compact.
De…nitions
x2B p;w
x2B p;w

x (p; w ) is homogeneous of degree zero: for any > 0, x ( p; w ) = x (p; w )
De…nitions
x2B p;w
x2B p;w

if u represents a locally nonsatiated %, then p x = w for any x 2 x (p; w ).
De…nitions
x2B p;w
x2B p;w

if u is quasiconcave, then x (p; w ) is convex.
De…nitions
x2B p;w
x2B p;w

if u is strictly quasiconcave, then x (p; w ) is unique.
De…nitions
x2B p;w
x2B p;w

continuous.
De…nitions
x2B p;w
x2B p;w

continuous.
Next, comparative statics: How does Walrasian Demand change as income
and/or (some) prices change?
Implicit Function Theorem
This is the main tool to perform comparative static analysis (also with constraints)
Same as math camp.
Theorem (Implicit Function Theorem)

Suppose A is an open set in Rn+m and f : A ! Rn is continuously di¤erentiable.
Let Dx f be the n n derivative matrix of f with respect to its …rst n arguments.
If f (x; q) = 0n and Dx f (x; q) is nonsingular, then there exists a neighborhood B of
q in Rm and a unique continuously di¤erentiable g : B ! Rn such that
g (q) = x and f (g (q); q) = 0n for all q 2 B
Moreover,
1
Dq g (q) = [Dx f (x; q)] Dq f (x; q):
@fi
Notation: (Dx f )ij = @xj
Same as math camp.

Moreover,
1
Dq g (q) = [Dx f (x; q)] Dq f (x; q):
@fi
IFT gives a way to write, locally, the xs as dependent on qs via a smooth

(di¤erentiable) function.
Same as math camp.

Moreover,
1
Dq g (q) = [Dx f (x; q)] Dq f (x; q):
@fi

We use this in the consumer’s utility maximization problem by setting f ( ) to
be the FOC for utility maximization;
Same as math camp.

Moreover,
1
Dq g (q) = [Dx f (x; q)] Dq f (x; q):
@fi

We use this in the consumer’s utility maximization problem by setting f ( ) to
be the FOC for utility maximization;
then g ( ) is the Walrasian demand, and q is the vector of prices and income.
Bordered Hessian
For comparative statics the following object is useful.
De…nition
Let m = fi : xi (—p; w ) > 0g and reindex Rn so these m dimensions come …rst. The
bordered Hessian H of u with respect to its …rst m dimensions is
2 3
0 u1 u2 um
6 u1 u11 u21 um1 7
6 7 where ui = @u
0 (Dx u)> 6 u2 u12 u22 u 7 @xi
H= 2 = 6 m2 7 ,
@2 u
Dx u Dxx u 6 .. .. .. . . 7 and u ij =
4 . . . .. .. 5 @xi @xj
um u1m u2m umm

Bordered Hessian
For comparative statics the following object is useful.
De…nition
Let m = fi : xi (—p; w ) > 0g and reindex Rn so these m dimensions come …rst. The
bordered Hessian H of u with respect to its …rst m dimensions is
2 3
0 u1 u2 um
6 u1 u11 u21 um1 7
6 7 where ui = @u
0 (Dx u)> 6 u2 u12 u22 u 7 @xi
H= 2 = 6 m2 7 ,
@2 u
Dx u Dxx u 6 .. .. .. . . 7 and u ij =
4 . . . .. .. 5 @xi @xj
um u1m u2m umm
This only considers demand functions which are not zero and then takes …rst
and second derivatives of the utility function with respect to those goods.
Di¤erentiability of Walrasian Demand
Proposition
Suppose u is twice continuously di¤erentiable, locally nonsatiated, strictly
quasiconcave, and that there exists " > 0 such that xi (—p; w ) > 0 if and only if
xi (p; w ) > 0, for all (p; w ) such that k(—p; w ) (p; w )k < ".a If H is nonsingular at
(—p; w ), then x (p; w ) is continuously di¤erentiable at (—p; w ).
a This condition is automatically satis…ed if xi > 0 for all i , by continuity of x .
Proof.
Question 2, Problem Set 3.
Proposition
Proof.
These are su¢ cient conditions for di¤erentiability of x (p; w ), yet we do not
have axioms on % that deliver a continuously di¤erentiable utility.
Proposition
Proof.
We also assume demand is strictly positive (locally), but this is the very object
we want to characterize.
Proposition
Proof.
We also assume demand is strictly positive (locally), but this is the very object
we want to characterize.
This is “bad” math.
Proof.
We want to use the Implicit Funtion Theorem. Things we know right away:
Proof.
u is strictly quasiconcave ) x is a function.
Proof.
u is continuously di¤erentiable ) the …rst order conditions are well de…ned.
Proof.
u is locally nonsatiated ) the budget constraint binds.
Proof.
x is strictly positive in the …rst m commodities ) ignore corresponding
nonnegativity constraints.
Proof.
It now su¢ ces to show that x is di¤erentiable in the …rst m prices, and w ,
and ignore the last n m commodities.
Proof.
and ignore the last n m commodities.a
a There is a neighborhood of (—
p; w ) where consumption is zero for the last n m commodities,
and these constant dimensions will have no e¤ect on the di¤erentiability of x .
Proof.
The remainder of the proof uses IFT to show that x is di¤erentiable as
desired;
a There is a neighborhood of (—
p; w ) where consumption is zero for the last n m commodities,
Proof.
The remainder of the proof uses IFT to show that x is di¤erentiable as
desired;
Fill in the details.
a There is a neighborhood of (—p; w ) where consumption is zero for the last n m commodities,
Comparative Statics
Without constraints this is the same as math camp
Problem
Let : Rn Rm ! R, written (x; q); DM chooses x to maximize ; while q are
parameters she does not control.
Comparative Statics
We want to know how DM adjusts her optimal choice x (q) when the parameters
q change. In other words, what is the derivative of x (q)?
Comparative Statics
Without constraints this is the same as math camp
Problem
Let : Rn Rm ! R, written (x; q); DM chooses x to maximize ; while q are
parameters she does not control.
Comparative Statics
We want to know how DM adjusts her optimal choice x (q) when the parameters
q change. In other words, what is the derivative of x (q)?
If is strictly concave and di¤erentiable, and smooth, the Implicit Function

Theorem gives the answer.
Envelope Theorem Without Constraints
De…ne: x (q) = arg max (x; q): The maximizer solves the …rst order condition:
f (x; q) = Dx (x; q) = 0>
n : The Jacobian of f is Dx f (x; q) = Dxx (x; q) , and is
nonsingular (why?).
f (x; q) = Dx (x; q) = 0>
nonsingular (why?).
Reminder from math camp

By IFT: x (q) is continuously di¤erentiable close to a solution x (q); q, and
f (x; q) = Dx (x; q) = 0>
nonsingular (why?).

By IFT: x (q) is continuously di¤erentiable close to a solution x (q); q, and:
Dq x (q)
f (x; q) = Dx (x; q) = 0>
nonsingular (why?).

1
Dq x (q) = [Dx f (x (q); q)] Dq f (x (q); q)
f (x; q) = Dx (x; q) = 0>
nonsingular (why?).

1 1
Dq x (q) = [Dx f (x (q); q)] Dq f (x (q); q) = [Dxx (x (q); q)] Dqx (x (q); q)
| {z }| {z }
n n n m
f (x; q) = Dx (x; q) = 0>
nonsingular (why?).

1 1
| {z }| {z }
n n n m
Using the Chain Rule, the change of (x (q); q) is:
Dq (x (q); q) =
f (x; q) = Dx (x; q) = 0>
nonsingular (why?).

1 1
| {z }| {z }
n n n m
Dq (x (q); q) = Dq (x; q)j q=q +

x=x (q)
f (x; q) = Dx (x; q) = 0>
nonsingular (why?).

1 1
| {z }| {z }
n n n m

=0
z }| {
Dq (x (q); q) = Dq (x; q)j q=q + Dx (x; q)j q=q Dq x (q) =
x=x (q) x=x (q)
f (x; q) = Dx (x; q) = 0>
nonsingular (why?).

1 1
| {z }| {z }
n n n m

=0
z }| {
Dq (x (q); q) = Dq (x; q)j q=q + Dx (x; q)j q=q Dq x (q) = Dq (x; q)j q=q
x=x (q) x=x (q) x=x (q)
f (x; q) = Dx (x; q) = 0>
nonsingular (why?).

1 1
| {z }| {z }
n n n m

=0
z }| {
x=x (q) x=x (q) x=x (q)
the “second order e¤ect” of how the maximizer x responds to q is irrelevant; only
the “…rst order e¤ect” of how q changes the objective function evaluated at the
…xed maximizer x (q) matters.
f (x; q) = Dx (x; q) = 0>
nonsingular (why?).

1 1
| {z }| {z }
n n n m

=0
z }| {
x=x (q) x=x (q) x=x (q)
…xed maximizer x (q) matters. This observation is sometimes called the Envelope
Theorem.
f (x; q) = Dx (x; q) = 0>
nonsingular (why?).

1 1
| {z }| {z }
n n n m

=0
z }| {
x=x (q) x=x (q) x=x (q)
…xed maximizer x (q) matters. This observation is sometimes called the Envelope
Theorem.
@2
@x @q@x
If x and q are scalars, Dq x (q) becomes @q = @2
@x 2
Comparative Statics With Constraints
There are k equality constraints, Fi (x; q) = 0 with each Fi smooth.
The maximization problem now becomes:

x (q) = arg max (x; q)
F (x;q)=0k

F (x;q)=0k
Assume constraint quali…cations are met and form the Lagrangian:

>
L( ; x; q) = (x; q) F (x; q):

F (x;q)=0k

>
L( ; x; q) = (x; q) F (x; q):
The derivative of the Lagrangian is:
f ( ; x; q) D( ;x) L( ; x; q)
| {z }
1 (k +n)

F (x;q)=0k

>
L( ; x; q) = (x; q) F (x; q):
0 1
1 k
z }| {
B F (x; q) C
B C
B C
f ( ; x; q) D( ;x) L( ; x; q) = B C
| {z } B > C
@Dx (x; q) D F (x;
|{z} | {z }A
x q)
1 (k +n) | {z }
1 n 1 k k n

F (x;q)=0k

>
L( ; x; q) = (x; q) F (x; q):
0 1
1 k
z }| {
B F (x; q) C
B C
B C
f ( ; x; q) D( ;x) L( ; x; q) = B C
| {z } B > C
@Dx (x; q) D F (x;
|{z} | {z }A
x q)
1 (k +n) | {z }
1 n 1 k k n
Fix q 2 Rm and let and x be the corresponding maximum;


F (x;q)=0k

>
L( ; x; q) = (x; q) F (x; q):
0 1
1 k
z }| {
B F (x; q) C
B C
B C
f ( ; x; q) D( ;x) L( ; x; q) = B C
| {z } B > C
@Dx (x; q) D F (x;
|{z} | {z }A
x q)
1 (k +n) | {z }
1 n 1 k k n
Fix q 2 Rm and let and x be the corresponding maximum;

We can now use IFT on the FOC f ( ; x ; q) = 0>
k +n (it works because the
Jacobian is non singular).
By IFT, x and are implicit functions of q in a neighborhood of q, and
1
Dq ( (q); x (q)) = D( ;x ) f ( ; x ; q) Dq f ( ; x ; q)
1
We know f is the derivative of the Lagrangian:

F (x; q)
f ( ; x ; q) = >
| {z } Dx (x; q) Dx F (x; q)
1 (k +n)
1

F (x; q)
f ( ; x ; q) = >
| {z } Dx (x; q) Dx F (x; q)
1 (k +n)
So, we can …gure out that
0 1
k k k n
z}|{ z }| {
B C
B 0 Dx F (x ; q) C
B C
D( ;x) f ( ; x ; q) = B C
| {z } B D F (x ; q)> D 2 (x ; q)
C
Dx [ > Dx F (x ; q)]A
@ x
(k +n) (k +n) | {z } | xx {z }
n k n n
and
1

F (x; q)
f ( ; x ; q) = >
| {z } Dx (x; q) Dx F (x; q)
1 (k +n)
So, we can …gure out that
0 1
k k k n
z}|{ z }| {
B C
B 0 Dx F (x ; q) C
B C
D( ;x) f ( ; x ; q) = B C
| {z } B D F (x ; q)> D 2 (x ; q)
C
Dx [ > Dx F (x ; q)]A
@ x
(k +n) (k +n) | {z } | xx {z }
n k n n
and 0 1
k m
z }| {
B Dq F (x (q); q) C
B C
B C
Dq f ( ; x ; q) = B C
| {z } BD 2 (x ; q) > > C
Dq ( Dx F (x ; q) )A
@ qx
(k +n) m | {z } | {z }
n m n m
Envelope Theorem With Constraints
Now we can …gure out the change in the objective function.
Using the Chain Rule, the change of (q) = (x (q); q) is:
Dq (x (q); q) =
Dq (x (q); q) = Dq (x; q)jq=q, x=x (q) +
Dq (x (q); q) = Dq (x; q)jq=q, x=x (q) + Dx (x; q)jq=q, x=x (q) Dq x (q)
Because the constraint hold, F (x; q) = 0k and thus

Dx F (x; q)Dq x (q) =Dq F (x; q)

>
From FOC we get Dx (x; q) = Dx F (x; q)

>
Thus,
> >
Dx (x; q)jq=q, x=x (q) Dq x (q) = Dx F (x; q)Dq x (q) = Dq F (x; q)

>
Thus,
> >


>
Thus,
> >

The change in the objective function due to a change in q is:
>
Dq (x (q); q) = Dq (x; q)jq=q;x=x (q) ( (q)) Dq F (x; q)jq=q;x=x (q)
Next Class
Applications of Envelope Theorem

Hicksian Demand
Duality
Slutsky Decomposition: Income and Substitution E¤ects

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Properties of Walrasian Demand

Econ 2100 Fall 2018

Problem Set 2 due in Yunyun’s mailbox now

So, at a solution x 2 x (p; w ):

Suppose we have an optimal consumption bundle x where some goods are

Suppose we have an optimal consumption bundle x where some goods are

This expression implies

Suppose we have an optimal consumption bundle x where some goods are

This expression implies

Rearranging, one obtains

Rearranging, one obtains

Rearranging, one obtains

Rearranging, one obtains

which implies that x is not an optimum.

Rearranging, one obtains

which implies that x is not an optimum.

The indirect utility function measures changes in the ‘optimized’value of the

The indirect utility function measures changes in the ‘optimized’value of the

The indirect utility function measures changes in the ‘optimized’value of the

The indirect utility function measures changes in the ‘optimized’value of the

The indirect utility function measures changes in the ‘optimized’value of the

The indirect utility function measures changes in the ‘optimized’value of the

Theorem (Theorem of the Maximum)

Theorem (Theorem of the Maximum)

Theorem (Theorem of the Maximum)

Theorem (Theorem of the Maximum)

Berge’s Theorem is useful when exogenous parameters enter the optimization

Theorem (Theorem of the Maximum)

Berge’s Theorem is useful when exogenous parameters enter the optimization

Reminder from math camp.

Reminder from math camp.

Reminder from math camp.

Reminder from math camp.

Reminder from math camp.

The following su¢ cient conditions are sometimes easier to use.

Note that compactness of the image is required.

Question 1, Problem Set 3; due next Wednesday.

First show that B(p; w ) is upper hemi continuous.

Properties of Walrasian demand:

Properties of Walrasian demand:

Properties of Walrasian demand:

Properties of Walrasian demand:

Properties of Walrasian demand:

Properties of Walrasian demand:

Properties of Walrasian demand:

Properties of Walrasian demand:

Theorem (Implicit Function Theorem)

Theorem (Implicit Function Theorem)

IFT gives a way to write, locally, the xs as dependent on qs via a smooth

Theorem (Implicit Function Theorem)

IFT gives a way to write, locally, the xs as dependent on qs via a smooth

Theorem (Implicit Function Theorem)

IFT gives a way to write, locally, the xs as dependent on qs via a smooth

For comparative statics the following object is useful.

um u1m u2m umm

For comparative statics the following object is useful.

um u1m u2m umm