Econ 202 Microeconomics Theory I

First Semester, AY 2023-24

Assignment 3: Constrained Choice

1. Consider the consumer chooses bundle xi at prices pi, i = 1, 2, 3, where:

p1 = (1, 1, 2) ; x1 = (5, 19, 9) P1X1=42, P1X2 = 48, P1X1 = 40
p2 = (1, 1, 1) ; x2 = (12, 12, 12) P2X1=33, P2X2 = 36, P2X3=39
p3 = (1, 2, 1) ; x3 = (27, 11, 1) P3X1=52, P3X2= 48, P3X3 = 50
(i) Do the data satisfy weak axiom of revealed preference?
(ii) Are the preferences rational? Why or why not?

2. The committee on culture in a small town has been given the responsibility of
operating the community theater. The costs of running the theater can be met either
through taxes or admission fess, or both. Only members of the community can attend the
theater. The committee has found that if it levies no tax and charges an admission fee of
Php45, each person in the town will attend the theater once. If the committee imposes a tax
of Php20 per person and charges an admission fee of Php15, each person attends four times,
and with a tax of Php50 and an admission of Php5, each person attends seven times. Each of
the above proposals covers the cost of operating the theater. Use a revealed preference
argument to suggest which of the plans the committee shall adopt.

3. Check whether the following demand functions satisfy the weak axiom of revealed
preference (WARP).
a) “Random demand”: For any pair of prices p1 and p2 and wealth w, the consumer
randomizes uniformly over all points in the budget frontier.
b) “Average demand”: The expected “random demand” given p1, p2 and wealth w.
c) “Conspicuous demand”: The individual spends all his wealth on the most expensive
good, i.e.,
⎧w w ⎧w w⎫ w w
⎪ if = min ⎨ , ⎬ and ≠
⎪⎪ p1 pi ⎩ p1 p2 ⎭ p1 p2
w
x1 ( p1, p2 , w ) = ⎨ if = w w
⎪ p1 p1 p2
⎪
⎪⎩0 otherwise

4. Consider a consumer that has preference represented by the following utility

function:
" x + x if x1 + x2 < 1
u(x1, x2 ) = # 1 2 .
$ x1 + 4x2 if x1 + x2 ≥ 1
Suppose p2 = 2 and w (wealth or income) = 1.

Show that demand for x1 increases with p1 if 1 > p1 > ½. Explain why the law of demand
does not apply in this case.
Econ 202 Microeconomics Theory I
First Semester, AY 2023-24

5. Consider a household that chooses its consumption vector, c, to maximize a strictly

quasi-concave utility function, 𝑈(𝑐), subject to 𝑝 ! 𝑐 = 𝑦, where p and y are the price vector
and the level of expenditure, respectively. Show that the household’s utility-maximizing
behavior satisfies SARP.

Now consider the graph below. Show that a household’s consumption behavior that is
consistent with SARP is also consistent with utility-maximization behavior.

c1

c3 c2