Résune Microeconomics

CONSUMER THEORY

CONSUMPTION so ×

¢≠ ✗ C- Rn, N= (Nn Mn ) IS A CONSUMPTION BUNDLE

•
- - .
-

•
✗ IS CLOSED AND CONVEX

Ñ≥y : AMPA RAISEN COORDINATES BY COORDINATES

pÉNiYp PARAMETRIZE
-
d- THE CONNECTIVITY

R LINE
if
.

•
FEASIBLE SET .
BEX SET
.
of ACHIEVABLE BUNDLES .

•
BEHAVIORAL ASSUMPTION , MAXIMIZE UTILITY , WELFARE,
PREFERENCES TASTE -

PREFERENCE RELATION : Ni ≥ Nz
= Ñ IS ATLEAST AS Good
AS N2 .

REFLEXIVITY : UR EX : a ≥ A

COMPLETENESS : HRT NZEX, x^≠z ? > x2 Vai > sé

/ /
↓
OR / AND

TRANSITIVITY : tan , NUM } EX :

Nz } RZA sea & M3
k^ERz .

THE CONSUMER CAN ②MPLETELY RANK ANY FINITE

NUMBER of BUNDLES
PROBLEM WITH CONSISTENCY IF THE BINARY RECAP
IS CECE : CONDORCET EXAMPLE :
M
≥m
M
un V2 V3 a b b ≥c c ≥ a
a D C ↓ m n
m m

S C a
by majority .
a
≥bZC§a&b
c a b VIOLATION of
TRANSITIVITY .
 STREET PREFERENCES :

knyaz as ≥ Nz N R2
# My
N NTL ≥ M1
INDIFFERENCE ,
My ~N2 Nyt R2

LET seoex
WEAR UPPER Conical SET of ≥ AT 2° :

≥ ( ai) = { seexl zig seok .

STRICT UPPER CANTON SET Of ≥ AT W :

> @ ) { next aloof

°
= .

AT Nii
WEAK LOWER caviar set of
≥
≤ Gi) = { real af seat
STRICT 6WGR CONTALR SET of ≥ ATM:

Ese c- ✗ I sent /
{ (W) = .

INDIFFERENCE SET § AT NO :

(ni ) { next a- no }
~
=

no SUDDEN PREFERENCE INVERSION LINE

#
.

•
µ THERE IS NO INDIFFERENCE

- POINT ,
4dL JUMP FROM

INDIFFERENCE
4 → × .

#
•
LINE

gag if
>

LET ✗ =
+ .
ASSUMPTIONS ON PREFERENCES :

CONTINUITY : VRE CRF THE WEAK UPPER Caviar SET % Ca )

,
AND THE WEAR lower career 85
≤ (a) ARE CLOSED SETS:
TOPOLOGICAL REGULARITY THAT EXCLUDES SUDDEN PREFERENCES
REVERSALS . =D THERE IS AN IN DIFF CURVE .

⇐☐ you) AND 4cm] ARE OPEN SETS

LOCAL NCNSATIATION : Yao _cfR7 ,
V-E> 0
,
3- see BqCUYnfR7
SUCH THAT a> No

A CONSUMER IS NEVER QUITE SATISFIED .

STRICT MONOTONICITY : V- see,Ñ C- FRI , If No ≥ My THEN

no > x?
No ≥ x^ ,
It xD so
=D IMPLIES LOCAL hens ATTATICN .

CONVEXITY , Use ;n^ ERF Ad f b- c- Cats old Nᵗ=tÑtC1 Hoi-

if N^§x°, THEN at 4mi

•

1
•

✓
.

•
1
Not convex STILTLY Converse
convex
STRICT CONVEXITY : ATM c- Ant , Ñ≠nr Ad EEG;D
THEN
If adf.NO 4W
#
a .

BEHAVIORAL ASSUMPTION : MOLE IS BETTER

PROF THAT If GT E ARE CONUEXE , SNTIS GNUEX :

(1)
V-niy-ssd-cqtd.dk/-C1-d1yC-S
SIS CONVEX =D

(2) HN de [913 :
TIS CONVEX =D
,ytT ,

dnt ( 1-d)
YET .

SAT =
{ ✗ 1 RES and
NETT .

WE WANT TO SHCW :
factory ESNT, de Cgl ] s

dnt 11 d) -

y c- SAT .

dat ( 1-d) data d)

g AND
YET
-

C) ②
*
MEANING of CONVEXITY :
1. CONSUMERS CWEAVCUY /STRICTLY) LIKE TO MIX A
PREFER MOLE BALANCED BUNDLES .

2. PREFERENCES EXHIBIT A (WEAKLY/ STRICTLY )

DIMINISHING MARGINAL RATE Cf SUBSTITUTION .

=D HR ERI ,
THE SLOPE G- THE LINE THAT IS

TANGENT TO THE INDIFFERENCE CURVE EQUALS

THE MARGINAL RATE G- SUBSTITUTION .

UTILITY FUNCTION : A REAL VALUED FUNCTION de .-sRn+→fR

IS A UTILITY FUNCTION THAT REPRESENT
THE PREFERENCE RELATION § IF U- NTN c- CRF
Ueno) ≥ UCMJ ⇐☐ a- ya ?
=D UTILITY FUNCTION ASSIGNS RATIONAL NUMBERS TONTO
→ PREFERENCE VIA RATIONAL NUMBERS .

THE COMPLETENESS
,
REFLEXIVITY TRANSITIVITY AND
,
CONTINUITY PROPRETIES of PREFERENCES GUARANTEE THE
3- G- A REPRESENTATION BY A CONTINUOUS UTILITY
FUNCTION .

THEOREM : IF THE BINARY RELATION § ON RI IS

COMPLETE ,
REFLEXIVE ,
TRANSITIVE ,
CONTINUOUS ,
AND STRICTLY
NCNCTONIC THEN THERE 3 A CONTENCUS REAL-VALUED
,
UTILITY FUNCTION Ui fR → R THAT REPRESENTS § .

PROOF
(1) CONSTRUCT A UTILITY REPRESENTATION
(2) SHEW THAT THE CONSTRUCTED ll IS WELL DEFINED
-

=D VALUES ARE UNIQUE AND F.

,yg "",
a

⑦ + ⑦ e=( 1- - - 1) GIVEN ≥ ,wc- Taut

,
UCH REMY MF FR
- -
T
DEFINE
- -

,
WE ii. →
, ±,

SUCH THAT usu ) •

e ~
N

s
aka ,
'
n
?⃝
(3) SHOW THAT No ≥Ñ MCW ) ≥ recant
N°227 MCW ) -
e
-
n°4, x teeny > ~ -

e
DEF

Ulrike ≥ nine ) -

MINI ≥ recut )
nano -

TCNICIIY

(4) U / Body) /
'
IS CONTINUOUS #D YE> O
, Hy c- CR ,
ti IS AN
OPEN SET

b- (Aib)
if C- aib )
SUCH THAT ( bi
'
( a. b) IS CPEN :

{ NERF lulu) Y
'
U ( a.b) C- Ca , b)
-

=D =

it '( a. b) =
{ see CRF I ac men ) ( b }
W' Caib) = { at MY 1 Ucu) > a ANI tent < b
}
aya n4b
OPEN SET N SET
GEN
Cbsc→sc→-
UTILITY CONSTRUCTED IN THE Proof IS NOT A UNIQUE
UTILITY REPRESENTATION : Paul .
) + IT Cccetb BE AS WELL .

=D IT IS THE CRDINAZ INTERNAT G- THE PREFERENCE

RELATION THAT REALLY MATTERS , NCT THE CARDINAL INFO .

THEOREM : LET % BE A PREF RELATION AN SRF AND

all : 7- →
IN A UTILITY FUNCTION THAT REPRESENTS
IT .
THEN
,
Ui RI → 117 ALSO REPRESENTS &
£ A STRICTLY INCREASING REAL-VALUED
Function of fluent / = Vcu )
UTILITY REPRESENTATIONS ARE TwoARIANT/ UNIQUE
UP TO A POSITIVE NCNOTCNIC TRANSFORMATIONS .

CTHE OLDER of NUMBERS IS PRESERVED)

PROPRIETIES of ≥ V8 U :

¥ IS STRICTLY MONOTONIC ll IS STRICTLY INCREASING .

% IS CONVEX MIS QUASI CONCAVE

≥ IS STRICTLY CONVEX MIS STRICTLY QUASICONCAVE

 ≥ CONTINUOUS # ii. (n) CONTINUOUS .

rien)

Ascott THIS Does NOT CHANGE

}
_

1ocHf _ .
THE WEAK UPPER ANTAR SET .

recut

E 9
10C HF ↳ STILL CONTINUOUS

coffee
give
:
-

-
:
~
IC -

IC
-

Milk beer
I 1 I 1 i I 1 i > a 1 ✗
§
Ulan nil / = Min [ 3min24 Mcminn =
Nat 2R2
↳ we use =D SUBSTITUTES .

THE MIN BECAUSE THE

SMALLEST QUANTITY of

BOTH GIVES US THE MAX

FOF THE OTHER ②PPLCNENTS

DIFFERENTIABILITY :
If u: IRI → IN IS DIFFERENTIABLE ,
THEN :

°≈≈ = MARGINAL UTILITY G- CcnncDIi4 i.

STREET NENOTCNICITY Cf ≥ %M£- 20 b-CALNOST)k

Not Athlete
BolenDARES .
IN CRY ,
THE ABSOLUTE VALUE d- THE SCOPE of TH IC THROUGH
A BUNDLE RI ( Ny , Nz ) DEFINES THE MARGINAL RATE d-

SUBSTITUTION d- Goes 2 For Good 1 Aix .

IS THE FUNCTION
ASSUME THAT f- Cnn )=Nz DESCRIBING TH IC

THROUGH x: Y Ma :

UM , f- Cnn ) ) =
Cdstat .

=D MRS.az (a) =/ f-
'
( Ne ) / =
-

f
/
Cnn)
1
MARGINAL RATE SUBSTITUTION .

INDIFFERENCE CURVE
WE ARE ON THE SO UH , four ) / IS
-

, .

CONSTANT IN 21

3%1%727 )
:

died '
+ =
f- Cnn =o

21mn )

/ flaunt
%¥nʰ
'
MRS iz (a)
-

= =

=D Mrsij (a) =
-3*4

2mg
IF WE HAVE STRICT CONVEXITY of § MRS BETWEEN
,

ANY TWO Goods DIMINISHES ALONG ANY LEVEL SWFACE

OF µ .
 THE CONSUMER 'S PROBLEM

GIVEN :

◦
CONSUMPTION SET ✗= FRI
•
CONSUMER WITH PREFERENCE RELATION ¥ ON SRI .

-
POSSIBLE CONSTRAINTS FEASIBLE SET B C-
IRI .

AIM : MAXIMIZE

THECAUSUNERIPRCBU-fFINDN.hr EB SUCH THAT Rt ≥ a b- NEB

ASSUNPIICNS :

≥ IS A PREFERENCE RELATION REFLEXIVE, COMPLETE ,

TRANSITIVE AND ALSO CLNTINUCWS STRICTLY MONOTONIC

,

AND STRICTLY CONVEX CN RI .

THERE 3- A CONTINUOUS ,
STRICTLY INCREASING .

AND STRICTLU QUASICONCAVE UTILITY FUNCTION

all :[RF →
FR REPRESENTING § .

⊕ WE ASSUME THAT THE CONSUMER'S TRANSACTIONS

ARE MEDIATED BY MARKETS .

3- MARKET i A STRICTLY POSITIVE PRICE

GCOD WITH
CONSUMERS ARE PRICE TAUER

FEASIBLE / BUDGET SET :

BCP ,
g) =
{ REMI lpxcy.ly
BUNDLES
→ All THE

YAL CAN BUY

^

PzNz=y
-

+
"m ≤
y
↳ MARSHALLIAN DEMAND
FUNCTION .

%
{
"
*
pish =y
THE CCNSUNER 'S PROBLEM CONSUMERS UTILITY MAX PB :

ucu ] I
man pr≤ y
RENT

I
mornin) KE
Bcpy )

MIN) IS CONTINUOUS AND Bcp g) NONEMPTY CLOSED AND

•
IS
, ,

BOUNDED Bcp,y) IS COMPACT ASCLUT '

Cf Bcp y) 3- ,
.

=D If Ulm) IS STRICTLY QUASI CONCAVE ,

A UNIQUE

SOLUTION G- THE CONSUMER 'S PB 3 :

N*=mCp , y)

BY STRICT NCNOTCNICETY of tech ) , N* SATISFIES THE

BUDGET QNSTRTAINT WITH C- CIUALITY .

'

an
y _

P
PI IF CHANGES, IT

NCUES THE BC .

A a > No

Hpo Ylpo '

LAGRANGIAN Leni)=uCn) +
dry pm )
-

OBJECTIVE & EQUALITY CAUSTRAFNT

FUNCTION
NdhALIZC-D.to HCXKO

FOCV-i.dz?i=#?H-dpi--0ANDy--pN*
If ☐ucn*)≠0
↳
d*≠0
MY
%Yn,=a*pi≠0
, ,
Hi .

g RADIANT
d-
 2min41
°%Y
Hi ,j
2¥
*
: = = >

pg-

↳ JUHI SCOPE G- THE

% :
p;
←

g°µ÷
BUDGET CINE
Mrsijfnx / =

,
=

g.
day
NECESSARY CONDITION For saltier set
of Itf Consumer 'S PROBLEM
WHEN ARE FOC ALSO SUFFICIENT?

→ IS DIFFERENTIABLE lx

THEOREM ASSURE THAT ll€C^ AND THAT ill IS QUASICONCAVE

A MF .
LET (p,
g) DO .
If x* SATISFIES LAGRANGE 'S FOC ,
THEN x* SOLVES THE CONSUMERS UTILITY MAXIMIZATION
PRCBLEN AT
Cpg)
ASSUME THAT FOR A GENERAL OPTIMIZATION PROBLEM of THE

FCRM f. (Mca) SUCH THAT

: Mase
GCM a) = 0 AND a≥o
,
Nla) DENOTES THE UNIQUE SOLUTION .

THE MAXIMUM VALUE FUNCTION M (a) ASSIGNS THE

VALUE ACHIEVED FOR THE MAXIMIZER Rca) BY THE
OBJECTIVE FUNCTION f :

M (a) f- ( Nca) 1
= mark GCU a),
= O AND X≥o

=D Mca) = FCN (a) , a) .

THEOREM of THE MAXIMUM

IF THE OBJECTIVE FUNCTION AND THE CONSTRAINT ARE
CONTINUOUS IN THE PARAMETERS AND If THE DOMAIN IS
COMPACT , THEN Mca) AND Rca ) ARE CONTINUOUS IN THE
PARAMETERS a.
EXAMPLE CESC CONSTANT ELASTICITY of SUBSTITUTION )

Ulna cmz ) =
@% + ✗ % )ˢ

PROVE THAT THE UTILITY FUNCTIOU REPRESENTS STRICTLY Monotonic

AND CCNUEXE PREFERENCES AND SOWE THE censorial's PROBLEM .

Lcn d),
= ( x?
"
+ NÉ3)ˢ +
dcpn Net Pznz
-

y)

÷g 364%+24%121324
↳
① (1)
-

FOC : :
.
= -

app

② 2L :
Ni
"
Cni" +
an "3)2= -

dpz (2)
Jay
③ If :
Parky +
Pznz -9=0 (3)
" %
(E)
"

¥, =
iÉ=C ) % ,
=

m=m(¥ / ,

WE PLUG THE SOLUTION IN ③ :

Pzm( ¥2 ) ¥É!
"
Platt =

g. =D
Pam + Mr =
y

m( Pit
,÷¥)=g m(Pi"¥→1=g
MARSHA KIAN
M=yp??+pz I M =

Yp+pjiz ¥3k
'

DEMAND

to
-

consumers
PRABLCN
 PROVE THAT THE UTILITY FUNCTION IS STRICTLY NCNCTCNIC .

die cnn.kz) -43

3) 2m;
"} "
= Can + nz > 0
#
WE CAN USE

# 20 do 20
LAGRANGIAN

CAUUGXE PREFERENCES µ STRICTLY QUASI COUCHE .

R2 ALL WEAK UPPER CONTOUR SET ARE

^
STRICTLY ANNEX .

CCNUGX
f- Cnn ) IS STRICTLY

Car'3+nz%)3=ée
"3
Ñ "} "}
N, +
Nz =
it
"3 "3
Ii"3
Try Nz = my
-

=D A.z=( it
"3 -

an "3)3=fCz , )
=D NAN WE SHAN THAT f- Gen) IS CCNUEE :
"
f @ 1) so

)2(- g.) xp 's )2

↳ "
'
-213
( a-
3-
f Aln )= 36113 ni's -
see =
-
a-

%
ni's)2 (2) lie "3-npB) fight )
" " ↳ 's
f a- ( ii. 3
a-
Gen )
}
-
_ .

=
{ a-
"
sleet 's ai's )2t
-

a-
2B
32m
-2's
lie
"3 -

se
"3
)> o
THEOREM ( DIFFERENTIABLE DEMAND)
If ll ECZ ON RI ,
AND FOR EACH MAXIMIZER 2*330 ,
WE HAVE ☐
UCN*)≠ 0 AND detc # ( MT ) ) =/ 0 THEN :

"
Rnt
Rcp, y) IS DIFFERENTIABLE ON
tt

INDIRECT UTILITY AND EXPENDITURE .

It DENOTES THE DIRECT ILTILETY FUNCTION .

GIVEN THE DIRECT

UTILITY FUNCTION AND A BUDGET 88 WE CAN DEFINE THE

,

ASSOCIATED VALUE FUNCTION :

V : Rn →
IR = vcpiy-maseucul-uckcp.ly ) )
↳ ME Bcp, g)
INDIRECT ILTILITY
FUNCTION

PROD RETIES of THE INDIRECT UTILITY FUNCTION :

If it IS CONTINUOUS AND STRICTLY INCREASING ON FRI ,

THEN THE

INDIRECT UTILITY FUNCTION V IS :

1. CONTINUOUS ON ME?
2. HAUGE NEALS G- DEGREE ZERO IN Cp g)
,

3. STRICTLY INCREASING IN 9

U . DECREASING IN P .

S .

quasiicowex ur cry)
6. ROY 'S IDENTITY HOLDS IF ✓ is DIFFERENTIABLE at
:
Cp9yo )
AND
%PgH≠o :

micro
:s%T¥;;÷
CONSIDER Mann flu a),
SUCH THAT
gcn
, a) = 0 AND ME
AND THE ASSOCIATED LAGRANGIAN : LIN a,d) ,
:
for at
, tdgca a) ,

ENVELOP THEOREM

ASSURE
f ANG
G ARE IN AND for ALL a ,
Nat >so AND

AS WELL .

THEN ,
tj :

Tta¥- =

%a_j / neat -
deal

Exi Lcn, d) = u Cu ) t
dcy put -

BY THE ENVELOPE THECRCN :

FYI -_%yⁿ|n*,a*=a*so,°¥%:%m=dpio (2)

%¥=%f?ln* >* ¥,
-
dni*%°
,

¥§¥g-y n*=xiCp,y)=§¥§-
ROY 'S
¥ -a*Y**_ =

,
IDENTITY .

>
WE GO BACK TO CES EXAMPLE: iecu) = (x1'3t NEB )

:i÷.ly m*=f÷÷→.is
)÷÷÷! !!!
=

BY PLUGGING IN

I::÷ 1y"¥÷÷ ;D
THE MARSHALLFAN

" ""

/ 2g
'" '"
=
( Pi + pi
THE PRIMAL PROBLEM (PRICES &FNCdE FIXED)

→
MAXIMIZE UTILITY ON THE BUDGET SET:

Mase men ) Si
pm ≤
y
.

=D WE LCOK FOL MARSHA KEAN DEMAND AND INDIRECT UTILITY

%2 FUNCTION

Mak Mcu )
↓

Rcp, g) MARSHA KEAN DEMAND

a
vcpig)
>
Kpis
Xp

THE DUAL PROBLEM ( PRIES & UTILITY LEVEL FIXED)

→ MINIMIZE EXPENDITURE THAT WILL GUARANTEE A FIXED LEVEL

OF UTILITY .

min pm sot recut ≥ñ .

KERF
=D WE look FCR HICKSIAN DEMAND FUNCTION : Nh ( Poli) AND

EXPENDITURE FUNCTION ecpclt ) = pnhcp.at )

At

Min pm 5. teens ≥Ñ
↓
Nh ( poet) HIAESIAN DEMAND
↓
ecp.im/--pnhCp,ei )
B
BC
' Bc* BCZ
LET U = { Mcu) In C- CRF Y DENOTE THE SET of PROBABILITY LEVELS .

THE MINIMAL VAULT FUNCTION i

e :
1M¥ × U → B+ .

Is e WELL DEFINED ?

YES ,
ONE CAN EASILY CAMPACTIFY THE cow STRAINT IN THE

DUAL PROBLEM AND USE WEAR STRAP TO SHAN THAT :

{ e. Eat / e= pm ad recut ≥ñY HAS A SMALLEST Untrue .

PROPERTIES Cf EXPENDITURE FUNCTION .

IF u IS CONTINUOUS AND STRICTLY INCREASING CN Ñf ,

THEN THE

EXPENDITURE FUNCTION e , is :

1. 0 WHEN IT TAKES ON THE LOWEST LEVEL cf UTILITY be .

2. CONTINUOUS ON MY + Xll
3. STRICTLY INCREASING IN If More nooey
U
,
+ be
SPEND .

4. INCREASING IN P .

S HOMOGENEOUS of DEGREE ONE INP DALZLE

.
.
All PRICE
= DAt3Ct All EXPENDITURE

CNO CHANGES IN SCOPE)

6. CCNCAUE IN p .

7. SHEPARD 'S LEMA HCLDS : Ifll IS

STRICTLY QUASI CONCAVE,
e IS' DIFFERENTIABLE IN D:

2e(p° = AF Cp9u9
2pi

(7) → L( pet) = put acct -

recut ) nail -_ñ

◦e{µPI 3m£ ,n*,a* = =d* >0 ( BY ENVELOPE Tlteoen )

"

=%p- / , •
*
,
= ni ( c-nutters c- THE den
)
WE Go Bnek To CES : Ucm) = ( nil's + ni's )3

Min pm St telnet = te

L / on, d) =
pre
-
a [ it -

( mins + Mi's )3]

FOC :
¥h ,
=p,
-

7 C- 3 ( nil 's + nits )2 (13%-23) ) = 0

py =
-
d Nj
%
( mins train )2 (1)

"ˢ
3rad's )2( § ni ) )
¥faz=
"
pz -
DC -3cm →

( Mistri's)
"
pz= -2 ki (2)

¥=¥=::÷÷÷÷:
"
=
:÷:c:|
"
Rz =
Ny ( P&g ) INTO CONSTRAINT

)^b)3
"
it =um* / = Cni 's + ( n, ( Ppg )
=
a. [ a-
CET
"
]ˢ=mE"p;P
n :* =

Ñ[p¥;ajs
Mʰ=
Ñ(p¥%gs
WE INJECT IN

ecpii )=pnʰ

ecp,Ñ / =p, nah

ftp.zazh-u-ih/ZCrihi-pi'42
RELATION eCpµ)
BETWEEN
Vcpiy) AND

THEOREM :
ASSURE THAT THE DIRECT UTILITY FUNCTION IS CCNTINUCUS

AND STRICTLY INCREASING .

V-PD.co AND MEN

, y≥

1. ecpivcpiy)) -_

y
2. UCP , ecp.li) ) = it

=D THE THEOREM IMPLIES THAT IT IS SUFFICIENT TO CNLY

SOLVE EITHER THE PRIMAL CR THE DUAL PROBLEM .

PRIMAL : SINCE UCP , g) IS STRICTLY INCREASING IN el WE

,
CAN INVERT IT WITH RESPECT TO ITS INCOME
VARIABLE vcp , ecp;U) ) V Tp ,u) ( pill)
-

: = it = e.
,

DUALI SINCE e( poll) IS STRICTLY INCREASING in it

,
WE

CAN INVERT IT WITH RESPECT TO ITS UTILITY

FUNCTION ecp,U(pig) v( Pig / '

( pig)
:
)=g ,
= e-

BACK TO CES EXAMPLE :

UP ,y1= y( pi " t
pi
"
)2 ecru)= ? .

↑u ↑ @ ( Pitt)

'

ecp.ee)=M_
'" "
u =
ecru) ( pi +
pi )2
( Pi
' "
tpz -4212
=D Nikah )=3M_ Ni
"
(Pile / =
3YCpi2
-112 } " ≥
2Pi3ʰ(p pztiy + npi Cpi " + pi"Y

CPM)
g.si?z-piatp#-s2ecp?I--aihCP.u
"
ni =
)
 "
RELATION BETWEEN Acp CRU )
,
g) AND A

THECREN :
ASSUME THAT THE DIRECT UTILITY FUNCTION it IS CONTINUOUS
,
STRICTLY INCREASING
,
AND STRICTLY QUASICONCAVE .

V-PD.org ≥ 0 AND MEN .

1.
Aicp, g) = kiʰ(p very ) ) ,

2. Nih ( Pyle) = Aicp, ecru ))

PROPRIETIES of ANSWER DEMAND

THE RELATIVE PRICE of i IN TERMS cfj MEASURES UNITS of

j FCRGCNE PER UNIT OF d

'

units of j =
dslpj =
Pi
writs Fr
of i Y / pi

THE REAL INCOME INTERNS G- GOOD j MEASURES THE MAXIMAL

NUMBER UNITS of If All UNITS IS SPENT ON
of j IT :

Y
emits of j=
Pir

ONLY RELATIVE PRICES AND REAL INCOME AFFECT ANSWER 'S

BEHAVIOR !

THEILEN CHCMOGENEITY AND BUDGET BALANCEDNESS BB)

IF µ SATISFIES CONTINUITY , STRICT MONOTONICITY AND STRICT

QUASI CONCAVITY Aicp, g) IS HD-0 IN PRICES AND INCOME

(ABSENCE
y LBB)
of naval ILLUSION) AND
pse ( Ry) =
 BY ITAROGCNEITY WE CAN USE ARE & THE Geass AS

NUNERAIRE INSTEAD of RONEY :

1pm
+
GOOD N IS NUNCRAIRE : =
> 0

Mcp g),
=
sectp ty)=k(P , ,
. . -

iP¥i1p¥ )
INANE AND SUBSTITUTION EFFECT :

THERE ARE TWO DIFFERENT CONCEPTUALLY DIFFERENT REASONS TO

CHANGE DEMAND IF THE PRICE of A Goers CHANGES :

SUBSTITUTE EFFECT
4
1. TE = SE -
IE -

2. INANE EFFECT
=D THE LTICKSIAN DEMAND ARVE PICKS UP PRECISELY THE HICUSIAN

SE Cf AN CWN PRICE CHANGE .

=D THE MARSHA LCTAN DEMAND CURVE PICKS UP THE TOTAL EFFECT

of AN OWN -

PRICE CHANGE .

THEOREM : SULTZUY EQUATION :

Oki Cpig) 2min (Pcw) Mi CPIY)

pejcp g) u*= vcpiy)
-

= ,

apj app 2g
↓ ↓ ↓
TE SE IE

GIVEN
PROOF : V- uigj , xcp.gl ,
text =
Ucpiy] , y=eCp,u* )

① kiucp.ie#)=RiCp..y )
② kjhcp.ee#)=RjCPill* ) ecp,u*)
① Cp ,e⑥,u* ) ) ani / BY)
aaihcp.ua
tgg-p.I.decp.ci
2mi )
= =

8 Pj
dpj Jpg 2Pj

) ← sit:&
njʰCRu* =
Oni City) +
ERICA 's) .

njhlp.ua )
8 Pir ◦
PETE ay
se = + I C-
 FCR OWN -
PRICE CHANGE :

2Ni(pis) 2UiʰCpiu* ) 2mi CRY)

= _

zeicpy)
2pi dpi 2g
%
&
Slope of hicksias
slope
devoid Ñsve devoid Arve
= observable = lncbseruabhe

THECREN : NEGATIVE OWN SRRBSTITUTION TERNS :

Jail Cru) ≤0
2 Pi
THEOREM : SUBSTITUTION MATRIX

)
&N^ʰ( Pch)

(
Ocp ,u)= 2244PM)
. .
. .
→
symmetric matrix

2ps 2pm semi

→
negative def
-

:<
gunman, .
, .
.
gmnu ,,µ,

2ps 2pm

THEOREM : THE SULTZUY MATRIX AND EQUATION :

tricks)
scpiey)= (
dpj
+
sejcp, g)
Micky)
ay
)
FR u =
vcp, g) scpiy)= ocpiu) →
Scp , g) symmetric
→
scpcy ) negative
semi
def
-
.

COMPARATIVE STATISTICS : ELASTICITY MEASURES THE SENSIUITY Cf

CHANGES IN PRICE CRINGE ON QUANTITY DEMANDED .

 THE PERCENTAGE CHANGE IN THE QUANTITY Afi DEMANDED PER

1 % CHANGE d- INCOME ,

THE INCCNE ELASTICITY :

Hi =
°%iy↳n¥py,
THE PERCENTAGE CHANGE IN THE QUANTITY Of i DEMANDED PER
1% CHANGE of PRICE
Pj ,

THE PRICE ELASTICITY delicacy) Pj

:
Eij ≤

2pj Nicky)
FCR ct≠j , Eij DENCTES THE CROSS PRICE
-
ELASTICITY

ef DEMAND FOR GOOD i WITH RESPECT TO Pj .

FCR Eii
i=j DENOTES THE OWN PRICE ELASTICITY
-

FER DEMAND GOOD i.

THE INANE SHARE ☒ = PROPORTION of THE ANSWER'S INANE SPENT

an ooasi .

is)
N
Pini
si = so THAT Si > 0 AND Esi = 1
in
y

THECREN:
n
1. ENGEL AGGREGATE :
Esini
[ =)
=1

2. CARNOT AGGREGAT' : Ési Eij =

-

Sj
it
 CHAPTER 2 : ANSWER THEORY

UP TO NAN
,
QUANTITY sli ( p g)
, = Mi ( p , Epirki ) DEPENDS CN

PRIES AND INCOME .

THEOREM : HOTELLING , WOLD : DUALITY AND INVERSE DEMANDS

LET all BE A CONSUMER'S DIRECT UTILITY FUNCTION . THE

INVERSE DEMAND FUNCTION FER Good i ASSOCIATED WITH INCOME

9=1 EQUALS :

↓
normalization Zulu )

Picn)= Jai

Ej!,
xj ( Oulu) )
JNJ

UNTIL NOW : UNOBSERVABLE PREFERENCES EXPLANATION of

OBSERVABLE CCNSWMER BEHAVIOR

WHAT DOCS THE COUSWKR REVEAL G- HIS PREFERENCES BY HIS

CHOICE BEHAVIOR ?

AN ALTERNATIVE APPROACH IS TO MAKE ASSUMPTIONS ON CHOICE

BEHAVIOR :(INSTEAD of PREFERENCES)

WEAR AXI.cn cf REVEALED PREFERENCES : WARP .

A CONSUMER'S CHOICE BEHAVIOR SATISFIES WARD IF

b- Nc , Nl SUCH THAT V0 IS CHOSEN AT PRIES p° AND a

>

p?
IS CHOSEN AT
PRICES

p°x° p^m° spent

'
≤
pose
N° IS CHOSEN But If N^ IS CHOSEN / THEN
ONLY
N WAS ARFORD ABLE BECAUSE V0 WAS NOT AEFCRDABLE .

✗
◦
4km1 N' 41 n?
WE ASSUME THAT CONSUMER'S CHOICE SATISFIES WARP .

WE DESCRIBE THE ANSWER 'S CHOICE WHEN FACING PRICES p

AND INCOME BY ✗ ( p, y )
g :

N : Rtf X Mt → RI NOW DENOTES A CHOICE Fauci

-

≠ DEMAND FUNG !

ASSUMPTION SATISFIES WARP EBB)

: 2C AND
pulpy / =
y

C) zec .

) IS HCNOGENALS Cf DEGREE 0 .

(2) LET M°= Ncpc, 's >

'

ya ) >0 WHAT
WHERE 0 AND
, p y -

IS THE SE ? WHAT DOES THE COUSAR CHOOSE FFWE

CCNPENSATE THE INGE Select THAT Ni IS STILL AFFORDABLE
AT THE NEW PRICES p??

=D WARP AND BB IMPLY THAT SCUTZVCUS MATRIX ASSOCIATED

WITH THE CHOICE FUNCTION

secpoy) :

Jai CP ,y4 2mi ( PTV )

'

+ Nj (pgyo ) Is NEGATIVE

Tpj 29 SEMI -
DEF .

FURTHENCRE , FOR 2 Goods : THERE 7 PREFERENCES 4 AND A UTILITY

FUNCTION µ SUCH THAT THE OBSERVED CHOICE BEHAVIOR IS

CLNSISTENT WITH UTILITY MAXIMIAN .

HOWEVER FCRNCRE THAN TWO Cods IT DOESN'T work .

TRANSIUITU Is Not GUARANTEED .

STRONG AXIOM Cf REVEALED PREFERENCES :( SARP) :

SARD IS SATISFIED If U W
,
let , _ . . Kr :

noisily? m2 .
. .
4Eur
← Revealed preferred

THEN i Mr # NO NO REVEALED PREFERENCE

CYCLES .
 IF WARP IS VIOLATED It 's SUFRICIENT TO SAY THAT SARP

IS NOT SATISFIED .

PREFERENCES NOW INUOWE UNCERTAINTY ABOUT THE Alton c- G- THE

CHOICE THAT IS MADE .

A SIMPLE GAMBLE ASSIGNS A PROBABILITY TO EACH G- THE

pi
aitches ai ( ¥ Pi =D ,

SET of SIMPLE GAMBLES ON A :

% =
{ man . .
.
Pran / piso ,
Epi -14

CONSIDER Aig angle . .

. .

§ An WE ASSURE THAT A1 IS THE

,

BEST ALTERNATIVE AND an THE worst .

=D Chan ,
a- a) an ly g Ef
c-
if 2=1 .

la an -

,
Cia)an ) 2g elf if 2=0

CONTINUITY :
Gg c-
G. ,
7 ✗ C- [0,1] SUCH THAT :

Ca an C1 a) an )~g
-

- -

MAVOTCNICITY :
✗
, BE [91]
Chai , Uhlan) 6 [Ban ,
a-plan ) 22,3 .

SUPPOSE 4 IS CONTINUOUS AND A = { $1000, $19 "

death .

Usually : $10004, $104 "

death "

CONSIDER Ct .
$10 ) V2 i
,

can $1000 ce -2 ) .
"
death ) ~ ( i.$10 ]
,

SIMILARLY AS BEFORE WE ASK WETHER WE CAN REPRESENT

4 BY A UTILITY FUNCTION .

}
WE HAVE : COMPLETENESS
REFLEXIVITY UTILITY FUNCTION 7

TRANSIUITY =D UN NEWMAN MAGENstern

CONTINUITY UTILITY .
 VON -
NEUMANN -
NOLGENSTERN UTILITY .
( UNM )

EXPECTED UTILITY : µ
Cf :
→ SR HAS THE EXPECTED UTILITY

V-gc-tg.g~C.pro
PRCDCRTY ,
If

) .
. .
Pran
n

Mlg ) = Epiiecai ) sun of EXPECTED

-1--1
ILTILITY Ai .

WE SAY THAT THE COSNER IS AN EXPECTED UTILITY

MAXIMIZER IF HER UTILITY FUNGO IS A VNM

UTILITY FUNG '

EXAMPLE : CONSTRUCTING A UNH UTILITY REPRESENT AT

a- =
2$19 $4 , -

$24 104 44-2 .

ibÉÉk
USING (h -10, Cea) C- 2) Ju ai WE CAN CONSTRUCT µ .

WHAT PROBABILITY FOR THE BEST OUTCOME MAKES 4dL INDIA

'

BETWEEN THE BEST -

WORST GAMBLE AND ai ?
THERE IS AN ✗ BY CONTINUITY
,
WHERE I AM INDIFF BETWEEN
,
$ FCR SURE AND ( 210 ; Cta)C-2) )

New INFO :

$4 ~ (0,6-10,94-1-2) )
Ucla 1=1 UCU / =
0,6 all C- 21=0

LET TWO GAMBLES BE i

91=(0,2-4 / 0,8-10)
92 ( 0,07 C-2) , 903-4
=
, 0,810)

Mcgill = 92 UCU)+ 0,8 tell) = 992

UC 2) 903 lech leno) 9918
clecgz ) 0,07 t + 95
-

= =
 RISK AVERSION :

ASSUME FCLRTLTETRRE THAT THE UNM FUNCTION Il IS DIFFERENTIABLE

AND SATISFIES Ufcw) 3,0 AND THE WEALTH LEVELS W .

CAN WE DISCOVER AN AGENT 'S ALTITUDE TOWARDS RISK FROM

THE VNN ILTILITY FUNCTION ?

EXPECTED VALUE :

LET
g= ( pawn ,
. . .

,
Pnwn) C- (g) = Epiwi .

WE ASK AGENT TO CHOOSE BETWEEN :

④ THE GAMBLE
g
(b) RECEIVING C- (g) WITH CERTAINTY .

THEN THE AGENT COMPARES :

(a) THE UNM UTILITY G- THE GAMBLE Idg) =

Epilecwi )
(b) THE UNM UTILITY Af THE EXPECTED VALUE G- THE

GAMBLE ill Ecg) ) =u( Epi Wi )

UC C- (g) ) > Mcg) RISK AVERSE

U( C-(g) ) =
leg] RISK NEUTRAL

UCECg) ) < eecg) RISK LOVING .

n
u Risk
risk averse loving
Mcw)

""
÷%e "
" - - -
-
- - -
- - ionone

'
-
-
l

g-
-
-

µ( ,
g)
- - -

1 I '

9 ' :
l
:
I
.

i is
:
/

wait.is?-.---.-.-i--j-i
guy

,
' :
: : :
1 ! I 1 i j w
wt
CE Ecg) w2 Wn Ecg) € WZ
CERTAINTY EQUIVALENT & RISK PREMIUM :

WE CALL THE AMOUNT of WEALTH THAT

,
IF GIVEN TO THE AGENT

WITH CERTAINTY IS
EQUIVALENT TO THE GAMBLE THE CERTAINTY
, g,
EQUIVALENT OF
g.

UC CECG)] =
dilg)

THE RESU PREMIUM Pcg ) IS THE AMOUNT of WEALTH SUCH

THAT :

U(g) = a [ CECS) -

Plg ) ]

Pcg)= C- (g) -
CE
(g)

CAN WE MEASURE INTENSITY of RESU AVERSION?

THE ARROW -

PRAT MEASURE G- ABSOLUTE RISK AVERSION .

Racws
__-Ta"¥;-
•
Racw) >0 RISK AVERSION .

•
Racer)=o RISK NEUTRALITY .

•
Racw) co RISK LOVING .

BEFORE :
def g) =
Epi
E- 1
ceca;) WHERE A= Lan . . .

any

NCW i A- =
IRT ,
INSTEAD of PROBABILITIES , WE HAVE A

DISTRIBUTION (DENSITY ]
PROBABILITY
flew) CN Mt -

lecg)= [ flew)iecw) dw .
WE HAVE RISK AVERSION ill [ C- Cs) ] >
Ucg )

)
Jensen 's
u ( Stcw) wdw >
f fav) Mcw) aw .

inequality
 CHAP 3 : THEORY G- THE FIRM .

PRODUCT : PROCESS of TRANSFORMING INPUTS INTO INPUTS .

THIS TRANSFCRNAT CONSTRAINED BY TECHNOLOGICAL

'
IS
FEASIBILITY

1. GENERAL CHARACTERIZA to of THE FIRM 'S TECHNOLOGY :

PRODUCTION POSSIBILITY SET YCIRM SUCH THAT you)EY

y= Cyr . . .

IS A PREDICTION PLAN AND THE DENOTE THE

lgi ≠
INPUTS AND Outputs

Yi 20 If IS USED UP IN THE PRODUCT CINDUT )

lyi
If IS PRODUCED IN THE PRODUCT Couipui )
Yi > 0 yi

2. PRODUCTION FUNG f. 1127

i →
[Rt ( For one output) :

y=f(u) =
y UNITS cf OUTPUT CAN BE PRODUCED
•

BY USING INPUTS A-Car . - -

an ]

f (c)
•
=0

flu) IS
IS CCNTINUCUS
•

flu) STRICTLY MANGINE = MALE INPUT = MOLE

OUTPUT .

•
STRICT QUASI -
CONCAVITY .

If
flu) IS DIFRERENTIABLE :
-

27¥? DENOTES THE MARGINAL PRODUCT d- xi

?gfµ
" "
-

≥ 0 AND 30 Y ALMOST ALL Ali .

LET y BE A FIXED LEVEL CF OUTPUT :

THE SET of INPUT vectors PsozxING or

y,
THE LEVEL ISOQLLANT
g-
:

"

Qcy) -=
In≥o1fCuI=y4 III.
inaiyf curve
sane
interpretation
FCR INPUT UECTCR se
,
THE ISO QUANT TIIRCUGH a =
Qcfcm))

MARGINAL RATE of TECHNICAL SUBSTITUTION :@RTS)

◦
F(%Ni fide
=

input
rate at
can
which are
be substituted
MRTS U)
if = =
for another without

gym, / g.gg changing

gag aetpwr produced
the arrant of

NOT unit free

R2

•
^
"
* "" €"
" " =

2fCn%n2

Qcfcn ) )
"
= iso
quart of n?

V1

ELASTICITIES 0ij IS THE PERCENTAGE CHANGE IN THE

INPUT PRLPOLT Mj /ni ASSOCIATED WITH 1% CHANGE IN

THE MRTS A WAY TO GET UNIT FREE

ij =
-

% chase of Nitro
.

del Miki )
Oig = =

% charge of nrisig.cn, derlfiln ) /

fjcw) )
A 1% CHANGE of MRTS CLRRESPONDS TO WHAT % CHANGE
,
of % / ni ?

Ex : flan , Nz ) = Canst Nzs )" for 0--18<1 .

Ahl Man ) "

t.ms -1 a
@ ni
-

Tulu ) =
'
L' → =
"
^

fzcu )= Cnn tnzs )%

& '
2h
Ms
]
C)
-
-

a
=
:÷
 aenff.IE?-,)- aafTi:s:.)- aalE.I-'=dCC8-DeeCf)3- @-DaeeCE )

Encu)=aa(ⁿ4# = dhCMnI
( 8- 1) "
ducktail G- 1) dell " %
,
)
=

:F:=÷ .

^
Perfect substitutes
^ N÷ %¥g positive
a
Perfect ccnpkuerts
rank

0=0
020 CD
0 → oo

D D D
MRTS = 0 (slope doesn't →
quasi
-

concave
, 030 → the ratio doesn't
chafe ! ) → % Mris ≠ @ chafe ,
1101 , 2102 . _

% MRTS
change of -0
0
= 0=0
=D 0 → 2
Frig

THEOREM SHEPARD :

IF PRODUCT FUNCTION f IS CCNTINUCUS

,
STRICTLY INCREASING
,

STRICTLY QUASI CONCAVE

f( 07=0 , AND HCNOGENECLLS Cf
-

CONCAVE
DEGREE
↳ HD -1
1
,
tells us what
THEN
f IS .

the
quantity of outputs are .
HOW CAN WE MEASURE CHANGES IN PRODUCTION?
MARGINAL PRODUCT : Mpi ( n ) = Of G) = what does an extra unit
of input
you , give us ?

AVERAGE PRODUCT : flu) AVERAGE PRODUCT :

Total Anant

µ
.

Ni

OUTPUT ELASTICITY Of INPUT i i

% Chase in output
pick =

%
Chapin input Ni

Afar)
=

fans
Eic
=
Mpicu)
Apicn)

HOW DOES CUT PUT RESPOND TO VARIATIONS IN THE INPUT WITH

RESPECT TO THE SAME PREDATION ?

= 2x inputs ¥ Lxaitputs ?

GLOBAL RETURN TO SCALE :

CONSTANT RETURN TO SCALE If

f Ctu ) tfcu ) ft > 0 the
-

i =
,

INCREASING RETURN TO SORE If . : f Ctu) > tfcu) t> 1

,
Yu

DECREASING RETURN tf Cn) U-M

TO SCALE If
fc.lu ) Yt > 1
-

: c
,
.

ELASTICITY of SCALE : LOCAL RETURNS TO SCALE .

lulu/ = 1 = returns to scale

are
locally cerstait

(n ) £ & fi G) Ni
µ (a) >1 ≤ returns to scale

µ; ( ) locally increasing
µ = m are
=

f (m )
pluses =_ returns to scale
are
locally
decreasing .
 "
C-× :
y=fCm , Nz ) =
Uclt Miami's ) , 2,13>0 ,
◦
Eyck

Calculate and Cu )
µiCn)
1-
µ
Find
2- the
elasticity of scale in terms
of the output y .

film> Uh
" "
-13 £1m , -13
-

2mi Nz %
Le
-

① Un =
, f (a) =
-

=
2. he
,
( 1+24 -2N pyz
fcm) B)
2
_

, ( it Niang
-

✗ knnnn
- a- '
nits ✗ Mr
- a
nip
µn= ÷fCu) =

Nian , B) )
2
↳ 1- ¢1 Miami
's
-

B-1
fzCm)=.BkRn→Nz-
B)
2
111-24-2
-

nz

's
Bm"Mz Corp) Nidhi
µzcu)= →
µ (a) =

Cltnitmz B) Utm -2 nz-B)

-

② µCu) →
Lucy]

y=k( it Ni2niB ) =ʰy

"
"
→ it nisei

ninnies
}
=
-1

fly )= Ktp) ( Eg -1 ) -

% = cat B) Cr -

Yu)

•
Now we assume that :
273>1 .

1%1
x-p
-
july
* 1=1 1 = Chip) (i -9¥ )
A - - - -
1=2 + p
_

CARIDI
i
i.
' KtB)y*_ = @ + B) -1
y* % Y u

→
yxt-f.EE?jj-Jk--kC-c1-rsP
 COSTS : EXPENDITURE SPENT ON THE INPUTS THAT ARE NECESSARY
TO PRODUCE OUTPUT .

If THE OBJECTIVE G- THE FIRM IS TO MAXIMIZE PROFIT

( REVENUE -

COSTS ) IT MUST CHOOSE THE COST -

MINI MIRING

PRODUCT '
PLAN

WE ASSURE THAT THE FIRM IS ATOMISTIC / PERFECTLY COMPETITIVE

IN THE INPUT MARKETS = IT HAS NO POWER TO AFFECT

PRICES IN THOSE MARKETS .

•
FIXED INPUT PRICES : W = ( we . . .
Wh ) ≥ 0

•
INPUT UECTCRS : K= Cnn . . . Rn ) .

A Qcy)
g- target product
←

4¥ -

Mary) ;
- - - - -

cost function
I
✓
n §
Kravis) ccwiytwn

COST FUNCTION

COST FUNCTION FCR A FIRM FACING INPUT PRICES w >30

AND REQUIRED OUTPUT

eye f- Cat ) :

if secwiyj solves the

cost mirimizato problem ,
1 flu) ≥ y
-

④ CCW, g) = Min Wu then ccwig) -

_
www.y)
+
KE

flu) IS STRICTLY INCREASING AND ANTINOUS far)=y

•
If R* SOWES C*) N* >so , f- DIFFERENTIABLE AT ME
, ,

AND
TfCu* ) ≥io .

LAGRANGIAN :
Wi = 2*2 fCn* )
↳ L=
wntdcy fcu)) -
2mi

2ft Yoni
*
"
Wi
=
Mrtsijcnxr ) =

wj
0fCn%uj

f- IS STRICTLY QUASI -

CCNCAUE & W>so solution

of (A) IS ILNIGLLE = CONDITIONAL INPUT DEMAND

K* = Ncw, g) .

MATHEMATICALLY THE Problem of FINDING THE COST

FUNCTION AND ITS CCRRESPCNDING CONDITIONAL INPUT DEMAND

= FINDING THE EXPENDITURE FUNGO AND ITS CORESPOUDING

HICKSIAN DEMAND .

PROPRETIES Cf THE COST FUNCTION :

If L IS CCNTINUCUS AND STRICTLY INCREASING , THEN carry]

IS :

1. =O WHEN ;
, Iy=0
2. CONTINUOUS ON ITS DOMAIN ;

3. b- w>> 0 STRICTUL INCREASING IN

, clg ;
4. INCREASING IN
wj
5. HOMOGENEOUS G- DEGREE ONE IN W
;
6. CONCAVE IN W .

If STRICTLY QUASI
f IS -
CONCAVE ,
WE HAVE :

7. SHEPARD'S LEMMA i CCW

,y) IS DIFFERENTIABLE IN

W AT CWTY
'
) WHENEVER was> 0 AND

2¥Y =
Ni CW 'iy• ) Yi =L - in
EXAMPLE : COST FUNCTION COBB -

DOUGLAS :

ccuu ,
g) =AwiwPy

¥µ Aunt Coty
'
SHEPARD'S LEMA Rn Cw , ✗
g)
-

: = =

Nzcwiy] =

¥-2 pn-wiwp.ly = .

✗A/↳£'w2P#
RATIO :
≈÷ =

B.Alwin wzp-191
=
%¥ Proportion =

THE INPUTS
of

ONLY
DEPEND CN RELATIVE PRICES .

wiki ( ↳ Y)
INPUT SHARES :
Si = = INPUT SHARE of GCODI
Ccw
,y)

PROPERTIES OF CONDITIONAL INPUT DEMANDS G- hicksian demand)

SUPPOSE THE PRODUCTION FUNCTION IS CONTINUOUS

,
STRICTLY

QUASI CC ) C2
INCREASING STRICTLY COUCHE ,
fco)=o C- :
-

,
.

1 . NCW, y) IS HD
-
0 IN W .

£ negative semi
→
symmetric and -

( y
'

* 2mi Cee, g) definite

•
cwiy )=
2wj I
,j=1 . - -
n

A Hard HETIC FUNCTION IS A STRICTLY NCNOTCNIC TransferNAT of

A CINEARUL HCMOGENEAES FUNCTION .

It HONOTHETIC PRODUCT FUNCTION THE MRTS IS CCNSTANT

,

ALONG RAYS FROM THE ORIGIN .

=D UNTIL NOW
,
WE CONSIDERED ALL INPUTS TO BE VARIABLE .

WE WERE 6dUING AT THE LONG -

RUN COSTS .
IN THE SHUT -
RUN, SORE INPUTS ARE FIXED :

SHUT -

RUN / RESTRICTED COST FUNCTIOU :

•
UGCTCR Cf INPUTS : Z = (U ,Ñ )
variable I ↳ fixed
inputs inputs

INPUT PRICES ( wilt)

•

flu Je) DENOTES THE PRODUCT '

RUN
'
N →
SHOUT FUNG
•
-

SHOUT -

RUN TOTAL COST FUNCTION :

*) sclw , [ win wrist ÑÑ I

fcuin ) ≥y
-w,yiñ ) =

If ncw Ñ
, , y , ñ) SOLVES (* ) THEN :

EE.EE#:?)--wnIE-t+-w-n-. total variable cost total fixed

cosh

WE CCW Ñig) ≤ secco , ñ) y ,Ñ & Fwiw

HAVE :
,
≤ short Run
-w,y , .

lay nun
costs costs

LET
ÑCY / BETHE CDTINAZ CHOICE G- FIXED INPUTS TO MINIMIZE SC :

Cherie / g) = sccw ,w-,y,ÑCy ) )

2-. = 0 ( BECAUSE a- ( y) IS OPTIMAL) b- i

the
of tweens
Fy ¥ §¥Myi_
slope run

2y
-

= + = costs at
function y
=

tyre
→

Knee the of
ape the short -
run

cost
costs in the
costs in function .

LR
the SR
THE COMPETITIVE FIRM

MAIN ASSUMPTION : THE FIRM IS A PRICE TAUER IN INPUT

NAZUETS AS WELL AS IN OUTPUT MARKETS .

PERFECT INFORMATION ALL INPUTS ARE VARIABLE IN THE

,

LONG RUN , AND WE HAVE STANDARDIZED OUTPUTS .

COMPETITIVE FIRM WANTS To man I = Reverie -

profit -

↳
Rcy) =py

LANG RUN -

8TTUlAF=

equality
man
py
-
WM
fluky constraint

Man
pfcu)
-

Wn (* )
n≥o

2CpfCn☒ ) -
wnxn )
Foe = 0 Vi ,

2mi
marginal product

pFÑ = Wi
in
ti
2mi
✓ marginal cost
marginal revenue of input i
of input i

If we > 0 Yi i

ofCu*) /2mi =
Wi

afCn9/zxj wj
#prices
÷be-Éj agiooej
WE CAN ALSO WRITE THIS PROBLEM LIKE THIS :

Man
pg
-
Ccw, g) *)
y≥0

Foc 2Cpy* - CCW , y* ) ) @

ZCCW ,y* )
, =
p=
2cg price 29 a
marginal costs
 Soc ,
22 Cpgxt - CCW , y* ) ) ≤
22C Cwiy* )
o ≥@
892 9
min
Jgz man
↑

IT IS MAXIMIZED MARGINAL COSTS = PRICE

=D THE CCRRESPCNDING CDTINAL Clltpclt

y* IS CALLED THE

FIRM 'S CUTOUT SUPPLY FUNCTIOU .

THE CURESPENDING COTINAL INPUT vector N*=R( piw)

IS THE vector of THE FIRM'S INPUT DEMAND FUNG 'S

PROFIT FCLNCTIOU IT :
→ profit function
might not
always
CTCP,w)=_ flu) ≥ 9 defined
be well -

man wa
py
-

because a maximum

might not exist

=D depends on the
returns to scale
behavior .

PROPERTIES of PROFIT FUNCTION .

SUPPOSE THE PRODUCTION FUNCTION IS CONTINUOUS

,
STRICTLY

INCREASING ,
STRICTLY COUCHE , fco)=o , Cp ,w) ≥ 0 ,

Tcp ,w) is :

1. INCREASING IN
Pj
2. DECREASING IN
wj
3. HD -

1 IN CP,w) ;
4. CONVEX IN ( pile ;
S .
DIFFERENTIABLE in Cpcw) 3) 0 ;

6 .
Moreover,

HOTELLING 'S CEMA :

2¥ =
ycpiw)

= Ric w ) ti
PROPERTIES of OUTPUT SUPPLY
clgcpiw) AND INPUT DEMAND MCP, w)

LET ITCPIW) C- CZ PROFIT FUNCTION FOR COMPETITIVE

FIRM ( p ,w) DO WHERE IT :
,
.

I.
ycpiw) ,
Mn ( Pcw) - -
-

Mn ( Pcw) HD -0 .

2. OWN PRICE ◦YCPIW) ski

-

EFFECTS : 70 ≤ 0
,
2p gwi

3. THE SUBSTITUTION MATRIX :

d%p °%w ,
- - .

2912Wh →
is
symmetric
and
positive semi -

→ def
Mbp -2mbar Mown
-

-
- -

"
Mnbp -2mbar Mown
-
-

_ .

BY HOTELLING 'S LEMA :

2ñCpiw) 2YCRw) 021T

}
=
yep,w) =
≥ 0

Jp Zp 22 p
21T Caw) 2Ri LAW) -221TEur) b- i.
-

•
= ni Cp,w) = ≤ o

Zwi Zwi 2wi2

EX :
forum )= ashcan ) + azercnz)
CALCULATE THE ALTPUT 86hr14 FUNCTION AND THE
lg* INPUT

FUNCTION
DEMAND xi* AND IT
CASS-NT-É )
Foeman
py-wns.tfcnl-y.MY
objective function

man pafcu) -
WN =
planet Cnn ) tazercuz) -

Winn WLNZ -
① Edna Pn÷=w^ :#
/
¥
: = =

② 2L Paz
ahhhh
: =w
, a =
>
ja, a-

①
Pw =
My g= an [ eecp ) toucan) -
eecwr)] +

Az [ Acp)+ eecaz ) -

lncwz) ]
② P÷=xz =
(aztazercp) + aneecan) -

anercwr )
✓ + azeecaz)
-

azercwz)
conditional
demands

=D IT with WZNZ
py
=
-
-

=
py pas paz =p Cantar) exp) + panlrcan )
-
-

pazeecwn ) tpzazeecaz)
-

pazercwz ) -

pcantaz)
"

h(Pw )
"
4- Cp ,w)=p[ eel PE;) + -

Cantar )]

THEOREM : SHUT -
RUN / RESTRICTED PROFIT FUNCTION

•
Input VECTOR : 2- = (U , Ñ)
•

INPUT PRIES : @ ,W- )

SHUT -

RUN PROFIT FUNCTION :

Tcp , wiwiñ ) = man

py
-

wa -
ion s -
t
fCMiñI ≥ g

THE SOLUTIONS
yC) AND Mcp ,w , w_,Ñ )
-
Short -
run output variable
input
devoid fendras
supply
WE HAVE : Short -
RUN PROPERTIES = LONG-RUN PROPERTIES .

ONLY EXCEPTION IS HeroGENEITY of IT

 short-Run cost function

4- Cp ,w,w- pi) = man

y
[
py
-

Ñ T]
¥5 25C
shot
p= price equals Run
-

§ marginal cost .

If AT
igl FOC IS SATISFIED PACE = MARGINAL COST :

'
IT =
pyl -

tuccy ) tfc ' -

¥Éme toked
C08tsG8t#
SR TOTAL Costs =
tuccy) tfc -1 .

'
IF I LO SHALCD THE FIRM SHUT DOWN ?
,

◦
IF THE FIRM SHUTS DANN Y°=0 IT
=p 0 tucco) tfe
- -
: .

= -

tfc 20
'
PRODUCE envy t ≥ñ°
'

pyl
-

tuccy ) ≥o

tuccy )
'

p≥
y
'
=

AUCCy#
variable
average
cost .

CONCLUSION : If FIRM HAS A STRICTLY POSITIVE OUT Pit LEVEL ,

THEN :

1- PRICE = MARGINAL COST

2- PRICE ≥ AVERAGE VARIABLE COST .

C-Xi f( Mn Nz ) RnhNz^
&
( 91 ) SUPPOSE Nz IS FIXED AT Ñz
-

= a C-
, ,
.
.

CALCULATE THE SHUT -

RUN PROFIT FUNCTION . ILSE HOTELLING

TO CALCULATE THE SHUT -

RUN ALTPUT SUPPLY FUNCTION .

Nz is fixed →
fca , , xD = Nini "ʰ=g

L= putrid ñzÑz
Maan wish
- -
 ¥4m
"
Foci : 2pm# ñz^ = Wy
,

wt

¥
'

ñz
i
Nyt
- -

= =

a
tpnze
-

m=(YpˢFñz
IT ( pawn , ñwz ) p(awpˢÉÑz wn(¥p[ñz
=
-

-5oz Ñz
"" "

ñz[p⇐ˢp↑ wn(p
-

ñz ]
-

0¥
41-2
with 24^-2 -2^1^-2 ]
^

Jez
-

[
y = =

¥,
p

"" "

g. =

(E) ñz
CHAP 4 : PARTIAL EQUILIBRIUM

THERE ARE U PARTIAL EQUILIBRIUM :

2 = ʳ

{
PARTIAL EQUILIBRIUM : WE
↳
FOCUS on ONE Connors -1-54 ,

EUGRUTHING ELSE IS FIXED

=D ALL OTHER NUTS ARE FIXED .

1- PERFECT CCMPETITIOU

BUYERS AND SELLERS ARE PRICE TAKERS .

DEMAND SIDE : I =
{1 . _ . IY ,
A SET of BUYERS EACH

ENDOWED WITH PREF , CCNSUNPTION SET AND INCOME .

1- c- I , qicp , Ñ ,yi )
↓ ( of agent ii.
i 's demand ← ↳ income

for good q price of >

price ceder
good 9 of an remaining goods
has
each buyer

/
≠ income

gdcp ) =
Eqicp , pig :) = Maruti

DEMAND

WE HAVE MARKET DEMAND IS HD -0 CIN PRICES & INCOME )

qictp ,
top ,tyi)= qicpp ,yi )
Eqictpitp , tyi / = Eqicpipiyi )
*
SUPPUY SIDE POTENTIAL SELLERS of firms productif
:
9 .
→ are .

J= {1 . _ .
JY SET G- SELLERS IN THE SHOW -
RUN [ FIXED)

YJEJ ,

qicp ,w)
j's short I ↳ w are the markets
Run market prices of the
inputs .

supply

J SHUT -

RUN

qscp ) =
Eqi
j=s
( p, W ) nanueiswsrsil

↳ at
price p= 10 ( forex ) I
. ask
the firms to
what they are
going
produce and I add it up .

qd (p) & qscp) TOGETHER DETERMINE PRICE & QUANTITY

TRADED .

=D A MARKET IS IN SHUT -

RUN EQUILIBRIUM AT p* IF

THE MARKET CLEARING CCNDITIOU HOLDS :

from man IT

qd(p☒) =
qscpxr ) =
q* → maximise
seller 's
utility
profit
and each

→ p= marginal cost

=D NO AGENT HAS INCENTIVE TO DEVIATE .

&

9- Rt let
-

EXAMPLE :
= ( COBB -
DCUGLAS) 04<1
↳ input
variable

ITÉ p
#
Wn a ( 1- a) he -

www. ,
qJ=p%wn¥Éhk .

2=112 4 1 k=1 5=48

, Wn =
1Wh =
,

p2
1T£ 95=78 p=qJ8
^

=
p2 4- - 4 =

Ig
-1 ,

EQUILIBRIUM p=9J8 = Mccqj

 9s ( p) =
489J ,
WE HAVE qᵈ= 284
P .

C- a
48g 's =
29¥ ¥p=2ˢ , p*=t .

gi*= 71g
ITI =

¥ -1 =
2,062s >0 q*= 42

MARKET

$ a inverse supply
pS( g) =

curve

-
pidcq)
^/
6
.
1) , , i i I >
9

" %
$40M
7-
t - - _
SINGLE.fi?n .
_

. smccq) = Short run

mofnhd Gsr

Ñsac⑨-
- - - - -
-
- - - -

,
shatner average car
I q= Nk
"
=D NM m=q2
4- ✗

! TC = Wn
-

N + while =
492 1- 1

; MCG ) =
89
-
; ac (g) =

491-91
1) ↑ I I >
1,1, 718
9
huh AC=nc
Ac 9=112

IT =
qcp
-
Ae] =
71g (7-4,64) = 2,062s

FCR UNG -
RUN EQUILIBRIUM WE NEED More THAN NARUET

CLEARANCE . =D WE NEED NO INCENTIVE TO ENTER CR LEAVE

MARKET .
 LONG -
RUN MARKET MUST BE NON -
NEGATIVE → or
firms will leave

LONG-RUN PROFITS MUST BE NOT POSITIF → or firms will copy me

to
technology enter the
market .

FCR LONG-RUN EQUILIBRIUM : LCCNDITIOUS

(1) qd (f) =
Eqicp ) = MARKET CLEARANCE

(2) ñi(p)=O = ZERO C- caloric profits .

U-j=1 . - J .

2- PURE MONOPOLY :

SINGLE SELLERS G- A PHD UCT WITHOUT CLOSE SUBSTITUTES .

ENTRY IS BLOCKED BY TECHNOLOGICAL , FINANCIAL OR

LEGAL IMPEDIMENTS .

MONOPOLIST TAKES THE MARKET DEMAND FUNCTION AS

GIVEN AND CHOOSES PRICE , EQUIVALENTLY QUANTITY 8. T

more
ñCq / =
rcq ) -

ecq) ,
rcg )= pcg) -

9
revenue cost

FOC :
mrcgxs / =
mcCq* )
marginal revolve = marginal cost

orcs) Opar)
Mrcg ) = =
PG) +
q
2g 29
=
pcq)[ it 9 apca)
]
pcg ) 29
]
=
pcq) [ it I
LEGS /
↳ 9. chase quality =
elasticity of
% charge in price market devoid
at
g.
 GIVEN mrCg* ) =
mccqxr )

[ ]
1
pcgxr ) e- =
mcq☒ )
/ Eq*y ≥o

A MONOPOLIST NEVER CHASES AN OUTPUT IN THE INELASTIC

RANGE of NARUET DEMAND

pCq* ) -

mcCg* ) =
1

lECq☒) /
Profit marlineisnnf
how much
markup =

more the Maplin charges

more than perfect capehha

Price ,
cost
^ MC Ca )
-

IT

pCq☒)
- - - - - - - -
µ
-

main :mc*,
I pcg)
39

t.F.m.IE
r
OLIGOPOLY

"
SUPPOSE THA
a
THERE Are FEW FINS PRODUCE A CERTAIN

PRODUCT AND NEW ENTRY IS EFFICIENTLY BLOCKED .

MCNCPOCISTS AND PERFECT CORPETIRCRS Do Not HAVE TO Worry

About THE ACTS / STRATEGIES of THEIR CPPCNENTS .

'
.
=D THIS IS DIFFERENT FOR CLIGOPCUL ?

IN OLIGOPOLY ,
FIRMS ARE INTER DEPENDANT AND ACT STRATEGICALLY

COLLUSIVE EQUILIBRIUM :

☐ MAXIMAL TOTAL PROFIT = MONOPOLY PROFIT .

-
FIRMS CALLD COLLUDE USE THE ROUGHLY PRICE AND
,

QUANTITY AND SPLIT THE QUANTITY AND TEAL PROFIT THEY

COLCABCRAIE TO EXTRACT THE MAXIMUM FROM THE MARKET .

BUT THE COLLUSIVE EQUILIBRIUM IS NCT STABLE .

CONSIDER A NARUET af J FIRMS ,

EACH PRODUCING OUTPUT

qi .
FURTHERMORE ,
ASSUME EACH FIRM'S PROFIT IS ADUERSAOY
AFFECTED BY AN INCREASE IN THE OUTPUT Of ANY a- HE FIRM

"
01T car 9k) < o f k≠j
. . .

29k

LET THE QUANTITY VECTOR

§ MAXIMIZE ÉÉ (g)
F- 1
in total take neareineune from market
, they the the .

FOC : 011-59-7 = ° t k= 1- .
J :

gqu
04%9-1 •
(11-45) + Eiticg ) )
◦ =
=
i±u

ogle oqk
 211-4 (g) + E Ziti (5)
=

ogle
÷i%-
=D EVEN THE QUANTITY GIVES MAXIMAL MARKET
IF UECTCR g-
PROFIT EACH FIRM K CALLD INCREASE ITS ANN DROIT By
,

UNILATERALLY PRODUCING K
MOLE THAN
g- .
→
situation isnt stable

=D FIRMS ARE PLAYING A NON

-
COOPERATIVE GAME .

IN THIS CCNTEXT WE WILL INTRODUCE THE NCN

-
COOPERATIVE
,

EQUILIBRIUM CONCEPT INTRODUCED BY JOHN NASH .

NASH EQUILIBRIUM : EVERYBODY IS DCING THEIR BEST GIVEN THE

ACTING STRATEGIES G- ALL OTHER AGENTS . E UNILATERAL

DEVIATION DOES Not PAY AT N -0 .

IN NE
,
EACH FIRM CHOOSES THE OPTIMAL QUANTITY GIVEN

ALL OTHER FIRMS QUANTITIES .

at "Cq* )
9.* IS NE = 0 → no
agent wants to increase an

gu
their
g. decease
quantity

WE APPLY NE IN ≠ SEEINGS DEPENDING ON HAN WE

SPECIFY THE ACTIONS / STATEGIES OF THE FIRM →

NE then takes ≠ names )

COURNOT OLIGOPOLY : =D COMPETING IN QUANTITY .

ASSUNPTICNSI J IDENTICAL FIRMS PRODUCE A HCNOGENEAES GOOD

,

ENTRY IS BLOCKED AND COSTS ARE GIVEN BY :

( ( gi ) =
Cgi i=e .
-
J & c≥0 ,
ALL FIRMS HAVE

THE SAME MARGINAL COST C.

INVERSE MARKET DEMAND: p= a- b £ 9J a

,
b) 0
,
a> C
J=1
PROFIT for FIRM ji ñi(q ? 9J)= Pgi . .
-

Cgi =( a - b. Égi )qJ Cgi

5=1
-

=D THIS NE IS CALLED CALRNCT -

NASH EQUILIBRIUM .

COURNOT NASH EQUILIBRIUM :

-

U-j=1 . _
J , g- MUST MAXIMIZE j'S PROFIT GIVEN THAT ALL

OTHER FIRMS PRODUCE oil , e≠j .

i
g- =
mare ñiCq- ^
,
. _

qi .
. .
g-
J
)
2 [ Ca b [g- e) q 's eqi ]
2ñiCq- )
_

FOC : = =0 .

Jqj gqj
Ca -
b E. g- e) + C- boii ) -
C = 0

bq-i-a-c-SE-qev-j-e.is
i he
=n
g- =
g- = g-

b. g- = a- c- BE g- =
a-c- 5J g-

a- C
output
g- = = INDIVIDUAL
bcjt > )

[ g- J J( A-C)
= = TOTAL OUTPUT

j=^ bCJt1 )

p = a- b E -9J
J( a c) -

at Jc
= a
_

=
= EQUILIBRIUM PRICE .

5th 5+1
 2
c)
IT ' p-q-i-cq-J-cp-cjq-j.ca
-

=
≤ INDIVIDUAL

bcj -1112 PROFIT .

Sore OBSERVATIONS :
p -
c. =
A-C
so
Jts

f-C =
PROFIT MAXIMIZING MARKUP 30

5=1 =D MONOPOLY

J →
go =D PERFECT COMPETITION ,
line D- = C
g- → •

BERTRAND OLIGOPOLY : FIRMS RATHER CONSIDER PRICING

STRATEGIES .

WE CCNSIDER DUOPOLY ; 5=2 FIRMS PRODUCE A Hcnoafveaes

Good .

C. Cgi )= Cgi j= 1,2 ,

C> 0 =D MG=Mcz=C

MARKET DEMAND : @ = a -

pp ,
CCI
p

FIRMS SIMULTANEOUSLY DECLARE THE PRICES THEY WILL

CHARGE AND ARE READY TO SUPPLY ALL THAT IS DEMANDED

AT THEIR PRICES .

CONSUMERS BUY AT THE CHEAPEST PRICE .

→
firm with the
dewest will
price
serve the entire maker
and
if prices are
equal,

both firms shoe market

deuadepieally
.

CONSIDER FIR 1 'S PROFIT PRICES BELOW 243 :

 lT^(pYp2)=(p^-
( p^ c) Cd Bp^ ) p2
-
<
cap
-
-

c) Ca -

Bp^) Ccp^=p2
@ OTHERWISE .

WHAT IS THE NASH EQUILIBRIUM FOR THIS SITUAT

-
?

EQUILIBRIUM CF ,p- 2)
"
BERTRAND -
NASH :

USING Cannon SENSE :

151=152 = C IS THE UNIQUE EQUILIBRIUM .

'
d- Bc
of
'

g- g-
'
+ = 2-
pc g- = =

11=1--11--2--0

=D BERTRAND MODEL FIRMS BEHAVE LIKE PERFECT

COMPETITORS

MONOPOLISTIC CCMDETITIOU :

IN CALRNCT AND BERTRAND OLIGOPOLIES PRODUCERS SOLD

A HANOGENECUS ooo .

IN NCNOPOLISTIC CCMPETITIOV A
4
RELATIVELY LARGE
"
GROUP
of FERNS SELL DIFFERENTIATED PRODUCTS THAT BUYERS VIEW

AS CLOSE [ BUT Not PERFECT) SUBSTITUTES .

=D LIMITED NCNODCUL POWER FOR EACH FIRM .

FOR THE BUYER THERE IS A TRADE -

off BETWEEN THE PRICE
- _

AND THE DISTANCE of THE PRODUCT TO HIS IDEAL PRODUCT .

ENTRY ONLY OCCURS WHEN A NOU -

EXISTENT VARIANT of

THE PRODUCT IS INTRODUCED .

DEMAND FOR A PRODUCT DEPENDS ON ITS OWN AND OTHER

29J aaj
PRICES ,
S - t qJ= qicp) : <0 AND > ◦

dpi 2pm
 PROFIT NOW DEPENDS ON ALL PRICES
(p= CPTP? . .
)) :

ñi(p)= ricqicp ) ) -

cicgi (p ) )
=
gJ(p)pJ -

cicgicp ) )
IN THE SHOE -
RUN : TO FIND NASH -

EQUILIBRIUM
PRICE UECTCR
§ :

FOC :
01T icp ) 0
=

2pj

= .

2ps

mricqicp ) ) =
mcicqicp ) )

IN THE LCNG RUN : AT NASH -

EQUILIBRIUM p* :

Mri ( gJCp* ) ) = mcicqjcpxr ) ) + ñi(qJCp* ) ) -0 !

•
Price .com price,
^ ^
" "
Mci
"
Tislpbo "
aci
ÉJ . _ _ . . . . .
. - -

%i; pJ* - - - - - -
i
- -

:
- - - - - - - - -
, I

mci Y !
gÉmaeuet
- - -
- - - - -

= "
"

! MRI massive demand Anchor

MÉ - - - - -

T
"

qi
Mri Mri
I renew cost !
>9 ,
qicp) qicpxr ) ,

SHALT -
RUN .
LONG -

RUN
 EQUILIBRIUM & WELFARE .

UCALCUCAT " "

PREDICTION
"
UNTIL NOW :
°

CR G- EQUILIBRIA
FOR PERFECT COMPETITION , NCNOSOUL AND ≠ OLIGOPOLY MARKETS .

Now i NCRNATIUE JUDGMENT AND CCNPARAISCN = POLICY

ANALYSIS .
→ WHO GAINS ,
WHO LOSES ? HOW IS

INDIVIDUAL WELFARE AFFECTED ?

PRICE AND INDIVIDUAL WELFARE :

OFTEN THE EFFECT of A NEW POLICY ESSENTIALLY BCILS DAUN

TO A CHANGE IN PRICE ( = TAXES CR SUBSIDIES)

1- Hav DOES A PRICE of A GOOD AFFECT INDIVIDUAL

WELFARE ?

PARTIAL EQUILIBRIUM APPROACH : WE ASSUME THAT ONLY THE

PRICE
p of Coo
g CHANGES = 15451 . -

p-n ) of Goods

g- =
Cgi .
-

95 ) ARE FIXED :

vcp , pi y) vcpiy)
→
,

x( Pip , g) →
secpiy)
Uo) ecp.no)
ecpip , →

"
"
a Capilla ) - n (Pollo)

LET M DENOTE THE AMOUNT of INCOME SPENT ON ALL

OTHER Glass COMPOSITE Geass

g- = .

amount of money I am
/ spending on them .

Mcp pi , g),
= FnCp,Fiy
corporate
] ↳
good marsnauian
demand

Mcp,p,y) →
mcpiy)
 UTILITY FUNCTIONS :

ltcqm ) = Man
ucq.si ) s.tpn.cm
NEMI

CONSUMER 'S PROBLEM = SOLVE :

mauii(q,m)S.tpgtmty_
=
vcpiy)

EXAMPLE : IMPROVEMENT of A WATER TREATMENT FACILITY .

→ A ONE TIME
"
WATER TAX
"
TO COVER THE COSTS .

HAN MUCH IS EACH CONSUMER WILLING TO PAY?

SUPPOSE WE KNW EACH COSNER'S MARSH ALLIAN DEMAND

curve .

LET'S FOCUS ON A CONSUMER ASSURE

WITH INCOME yo .

p° IS THE INITIAL PRICE AND p^ THE PRICE AFTER Inkatha

>
SUCH THAT p Cpa .

V(pTy° ) IS INITIAL UTILITY , V(pTy° -

tou ) UTILITY ARIES
IMPROVEMENT .

consumer BETTER off vCp7y° -

tant ≥vCpgy9

in income
maximal charge
( that
makes the
CONSUMER INDIFFERENT VCp^ , yo + cut =
Ucp;yo ) cashier
iroliff .
 CV = CHANGE IN INCOME REQUIRED TO KEEP TH ANSWER'S

UTILITY CCNSTANT AS A RESULT Cf PRICE CHANGE

= COMPENSATING VARIATION .

RECALL :
ecpivcpcy) ) =
y

e. Cpt , vcpc , yo ) ) ¥ e(p^ , ✓ ( p^ y,

'

+ CU ))
CV
=
got
ecpo ,u( Psy ) ) CV
'

= +

=D CV =
ecpyvcpgy41-ecpgvcpgy.at )
v9 ecpgvo )
'
CU= ecp ,
-

USING SHEPARD'S LEMA :

ecp ecp :o)

'
cu=
,
v4 -

=
qʰ(p ,
v9 dp
{ 20

> 0
If

If
p^<p°
p^>p°

PROBLEM : CU DEPENDS on HICLCSIAN DEMAND BUT WE WU

,

HAVE THE MARSHAL LIAN DEMAND CURVE FOR ONE INCOME LEVEL .

WHAT HAPPENS IF WE USE THE MARSHAL LIAN DEMAND

FUNCTION INSTEAD OF ATE HICUSIAN DEMAND FUNCTION .

= WHAT IF WE LOOK AT THE CHANGE IN CONSUMER

SURPLUS ? po
DCS = CSC Pty ) -
csc Pig ) =
Jpn qcpiyo )dp .

£0 so

of
if p^<p°
pi > po

HAN Glob of AN APPROXIMATE CV IS DCS ?

 WILLING (197-6) : FOR SMALL PRIG CHANGES THE ERROL TERM

BY USING ACS INSTEAD of CV IS SUFFICIENTLY SMALL .

=D IF PRICES CHANGES ARE NOT Too LARGE A Good

,

ESTIMATE of WELFARE of INDIVIDUAL CAN BE DERIVED

FRAN DCS .

EFFICIENCY :

PARETO IMPROVEMENT : CHANGE SUCH THAT Soneove IS BELTER

Off AND NO ONE IS WISE off .

PARETO EFFICIENT : ALLOCATION / SITUATION SUCH THAT THERE

EXISTS NO PARGO IMPROVEMENT

PARETO EFFICIENT = PARGO CPTINAI .

WHICH MARKET STRUCTURES CCNSIDCVLED UNTIL NAN YIELD

A PARETO CDTTNAL OUTCOME ?

navepolll outcast Not PARETO CPTINAL

PROOF : WE CCNSTRUCT A PARETO Improvement .

p°→p^
% CV= At B
mccg)
qhcp, v4

"
IT IT :[p^q^
-
-

CGI -
[pqo-cc.gg ]
jail , = [p^q^ -

pogo] -
[ CGT -499 ]
pie ¥
/Ñccg)ag
,

Hi ! = [ page -

pogo ] -

' " 9°
qcpig )
'

1% ! = [ C+D -

A] -

☐
'
go gn 9
= C- A

FROM A + B COLLECTED WE REDISTRIBUTE A- TO FIRMS AND

B TO Alsina
=D Cllsicncr IS BETTER off BY B AND Producers B4
C

=D CCNPETITIUE cUTCChE IS THE ENCY PARETO EFFICIENT

EQUILIBRIUM .

EFFICIENCY AND TOTAL SURPLUS MAXIMIZATION ;

Consumer SURPLUS ≈ DOLLAR MEASURE G- GAINS

PRODUCER SURPLUS = DCLLAZ MEASURE of GAINS

= REVENUE -

TOTAL VARIABLE COSTS .

DIFFERENCE BETWEEN PRODUCER Sherpas & POET :

IN SURPLUS THE FIXE COSTS ARE NOT INCLUDED .

EFFICIENCY IS REACHED

( CONSUMER SURPLUS + PRODUCER )RhPUS IS MAXIMAL

OTHERWISE WE called construct PARETO

,
Inprcencwt .

cscq ) + Pscq )= [ p( G) af pcqlq -

]+[pcq)q -

ccgltf]

ftp.CY/df-c q)tF- S9pCE1de-f9mcCe1de=f9EpCE)-mcCE)3dE

=

FOC for man Cscq) tpscq ) IS pcq )= Mcca )

9

=D PERFECTLY CARPETITFUE EQUILIBRIUM QUANTITY q*

MAXIMIZES Cscg) + Pscq)
 Phil McCoy )

CS

F
"" É
I
pcq)
PST : >
q
9-

CHAP S: GENERAL EQUILIBRIUM

PARTIAL VERSUS GENERAL EQUILIBRIUM .

PARTIAL EQUILIBRIUM : WE FOCUS on one MARKET

,
ONLY
THE PRICE of THE COMMODITY IN THAT NARUET IS VARIABLE .

ALL OTHER PRICES ARE FIXED .

GENERAL EQUILIBRIUM : WE LOOK AT All MARKETS

SIMULTANEOUSLY =) ALL NARUETS INTERACT .

ALL PRICES ARE UNVIABLE .

BACK TO COMPETITIVE MARKETS : DOES AN EQUILIBRIUM

EXIST ? IS IT UNIQUE ? IS IT STABLE ?

PURE EXCHANGE : No MCNEY

,
PURE EXCHANGE C-Colonel .

ONLY CONSUMERS ,
NO PRODUCT IN .

-
CONSUMERS ARE PRICE TAKERS .

I. =
{1 . _
.
IT CONSUMERS,

n GOODS
-

,
 pnot MI
pauailable resources .

ei-ce.ir . . .
enil CONSUMER ci 'S INITIAL ENDOWMENT .

Yi consumer i 'S PREFERENCES

E = ( hi ,
et ) ; c- ±
DEFINES AN EXCHANGE ECCNCNY .

e. = ( et , .
. .

,
@
I
) ENDOWMENT UECTCR

-
N = (x? . . NF ) ALLOCAT
-

= xi= ( x1 . . . Min ) ≥ 0

SET of PARETO -
EFFICIENT ALLOCATIONS :

PCE ) -_
{ se la c- f- (e) & *
ye-rcels.tcv-i.yyiufT-j.yyi.MY
EDGEWORTH BOX :

AGENTS 1,2 Conn CDITIES A

,B ( A. B) = ( 61s)
,

SET G- FEASIBLE ALLOCATIONS :

{NBTNBZ Chef Naz )

,
s - t neat Naz =
6

) s - t xB^t Mpf = 5 .

Unc Nani Npi )= Matt 2M£

Uz(na7NB4= Min { ma
2
; 2kg2}
A
T ' l I 1 I 1 I 1 I 1 I \ 1 1 02
B
-
@
-

-
-
-

- i -

-
- ,

- -

-
-

I 1 I 1 1 I '
l I 1 I 1 1 I ) B
µ
A
 CONTRACT CURVE -

.
SUBSET of FEASIBLE ACLOCATIOUS WHERE
'
THE CCNSLLNENS INDIFFERENCE CURVES ARE TANGENT .

e-
-46967,12 ;%Y
AL
£
1 I 1 i 1 , , , , , , , , , , ,
¢NTRAÉ CURVE

EFFICIENT
BUNDLE
I.

B
PARETO IMPROUMENT

EQUILIBRIUM IN CCNPETITIUE NARUET 84856ns :

PERFECTLY CAPETIAN MARKET SYSTEM COUSINS ARE

PRICE TAKERS .

IF
p= Cpr . .

pn )
>> 0 HIEI :

I
Morey spend
man µi(mi ) sit pui ≤ pei a bundles ≤
maey
earn
.

pet = NARUET VALUE of

consumer's ENDOWMENT
= INCOME .

ASSUME lli CONTINUOUS ,

STRICTLY INCREASING AND

STRICTLY QUASI CONCAVE on Mtn .

MARSHALLIAN DEMAND : seicp , Pei ) well-DEFINED .

MARKET CLEARANCE .

2- ( p) ( Elp Zncp) (0 a)
=
) . .
= . . .

Zucp )= Eniu(p pei ) ,

-

Eeiu = 0

- -
total endowment
ncrshaleia
aggregated he
demand of commodity K of connecting .

Zucp) > 0 excess devoid

of good k

k
zucp) co excess
supply of good .

"

^ RA
< 02
i :
-
- -
- - - - - -
-

&
-
i - - - -
- -
Rpf
B is
endedeuerded
↑ i

I
i

&
,
- - -

µ
, . -
_

1 !
i. La '
'

budget line

✗ [
i
I y2=pe2
On
Ñ
quality of
i
A that is twice
budget
Ais overdecorated
the
y^= pet
denuded

PROPERTIES of 2-(p) for p > 30

1. 2- ( ) .
IS CONTINUOUS IN P ;
2 .
2- c.) IS HD-0

3- WALRAS LAW i PZCPI = 0 tip

IMPLICATION I : E EXCESS DEMANDS =

E EXCESS SURLY
IMPLICATION # : MARKET CLEARANCE IN N -
I NARUEIS

MARKET CLEARANCE IN ALL MARKETS .

 WLALRASIAN EQUILIBRIUM :
p
"
>> 0 5. t -26*1=0

Enincpxr ,p*ei ) = Eeiu Uk .

SINCE 2- C.) IS HD -0 ONLY RELATIVE PRICES MALTER IN

EQUILIBRIUM

EXAMPLE CES UTILITY FCNCTICN :

"
"
Milan , He)=(halt nil ) ,
nj(p,yi)= Pj yi
Part Pzr

f- l
e' Clio) eko,l)
p
=
, -
1

y7= P1 +
Pz

( p*)=0
"
What is s -1 2- that gives
p .

p
market deoora .

Z1(p1= Nihcpuipz) t Nflpa , Pz )

-
I

Pi"(prtP2 )
"

Pst
'

Pr Pnr P2
-

=
+ -
I =
-1=0

Par + Pi pi + pzr Part Pzr

ZIP)= Nz^(Pn , Pz) t Nz2( pnipz) -

^

( Pntpz )
'
Pzr
-

= -
1=0

Pnrtpzr

' ' '

Pn Cprtpz ) P2 " ( Mtm )

-

= , µ) & = 1 (2)
Part ihr Pi +
pi
 ,%,=1
'

Pnr " '

-

=
=p,

WALRASIAN EQUILIBRIUM SUCH THAT

pn*=pz*

IF UTILITY FUNCTIOUS ARE :

1) CONTINUOUS

2) STRONGLY INCREASING

3) STRICTLY QLLASICCNCAUE

7 WALRASIAN EQUILIBRIUM PRICE VECTOR

THEOREM : IF ALL UTILITY FUNCTIONS ARE CONTINUOUS ,

STRONGLY INCREASING , STRICTLY QLLASICCNCAUE

AND I E. @ is> 0 :

1. 2- C.) IS CCNTINUCUS or Rtt .

2. WACRA 'S LAW APPLIES :

pzcp )=0 Fps> 0 .

3. IF 1- pk →
0
,
THEN THE EXCESS DEMAND FOR
GOOD K IS ARBITRARILY HIGH .

I WALRASIAN EQUILIBRIUM .

FIXED POINT THEOLEN Of BROUWER :

LET Sean AND

f :S → s s - t :

yr =
film . _ .
Nn)

yz= fzCNr .
-
Mn )

i.

Gn -
fn Cnn . _ .
Nn )
MANY PROBLEMS TAKE THE fan :

fruit UH )=xn* ;

}
. .
.

fzcnit , . .
.
mi ) =
az*
: fcu*)=n*
fn CNN . . .
Nn ) = Nn*

N*
=D IS CALLED A FIXED POINT Of
f.
THEOLEN : LET s≤ Rn BE NCNENPTY , COMPACT , AND CONVEX SET .

LET CCNTINUCUS
f :S →
S BE ☒ ONE FIXED POINT of
.

SAE
FOL ES
fait
"
at
f. IN S N ,
-_ .

THE CCRE Cf AN EXCHANGE ECCNCNU .

ASSUMPTION : VOLUNTARY EXCHANGE .

BLOCKING COALITIONS : LET s≤ I , S BOOKS ME f- (e) IF 3 ,

s t
if
- :

C.) Eyi = Eei

IES

(2) it
"Ées,yi≥ini AND Fasone
jes , Yi 4m$ .

THE cat of AN EXCHANGE ECCNONY E=( Yi ,

ei )ieI IS THE

SET OF ALL UNBLOCKED FEASIBLE ALLOCATIONS

of feasible
→ set

C. (E) =
{ ME f- (e) I $ y g. t (1) , (2) Y
auoeariaswuicn
cannot be
improved upon
(( E) ≤ PCE) larboard) by
any coalition of
agents
 ^
<

a
j÷
:

WALRASIAN EQUILIBRIUM ALLOCATIONS (WEA )

s

LET p* BE A WALRASIAN EQUILIBRIUM E=( yiiei )

For

)={x^(pYp•ei ) xI(p*,p×,ei / Y
"
AND LET Acp .
. .
BE

THE MARSHAL LIAN DEMAND AT p* .

=D K(p* ) IS A WALN ASIAN EQUILIBRIUM ALLOCATION .

W( E) DENOTES THE SET of WEAS .

THEOREM ( CORE & EQUILIBRIA)

E. = (Yi ei )ieI AND PREFERENCES ARE CCNTINUCUS
, ,
STRICTLY MCNCTCNIC
,
AND STRICTLY CCNUEX ON IRT
WCE ) ≤ CCE )

EXAMPLE : 2 GOODS & MOLE AGENTS :

E3
•

nz•↑ÉˢH→•x
MRS^=MRS2= MRS
}

feasibility
• ,
N1

Ei
É

WEA : FEASIBILITY + MARKET CLEARANCE .

CORRALARU :

If All ILTICITY FUNCTIONS ARE CONTINUOUS

/ STROLGCY
INCREASING AND STRICTLY QLLASICCNCAUE ON ☒ +n
IMPORTANCE :

WC E) ~
COMPETITIVE BEHAVIOR _
DECENTRALIZE .

CCE) -
PURE BANTER EXCHANGE → no
money exchange

ALL WEAS ARE PARETO EFFICIENT AND INDIVIDUALLY

RATIONAL

FIRST WELFARE THEOREM :

LET E=( Gi, ei )ie± , 4 ARE CCNTINUCUS < STRICTLY NCNCTCNIC

AND STRICTLY CONVEX CN 1127 . THEN : WCE ) ≤ PCE ) .

SECCND WELFARE THEOREM :

LET E=( Gi, ei )ie± , 4 ARE CCNTINUCUS < STRICTLY NOUCTCNIC

AND STRICTLY CONVEX CN 1127 AND AGGREGATE ENDOWMENT

FOR EACH GOOD IS STRICTLY POSITIVE .

SURGE THAT TEEPEE ) AND THAT ENDOWMENTS ARE

REDISTRIBUTED SUCH THAT NEW ENDOWMENT VECTORS EQUAL Ñ .

=D FOR E- = ( Yi ,
ñi ) WE HAVE ñE WCÉ ) .

2- IS THE UNIQUE WEA in E- .

= ISSUE of
EQUITY IN DISTRIBUTION IS LOGICALLY
SEPARABLE FROM THE ISSUE OF EFFICIENCY ALLOCATION .
 EQUILIBRIUM IN PRODUCTIN :

WE ADD PRODUCTIOU TO AUR PREVIOUS EXCHANGE NCDEL .

CONSUMERS ARE PRICE TAUGRS

Plonkers ARE PRICE TAMED .

COMPETITIVE MARKET SYSTEM .

THE MODEL :

n COMMODITIES ( INPUTS / OUTPUTS DEPENDING ON COUTEXT )

CONSUMERS 21 IY
{
I = . . .

PRICE TAKERS

PRODUCERS J , { 1 . . .
Jy .

INDIVIDUAL FIRMS :

J
LET j C-
,
THEN
Igi c- EM DENIES A PRODUCTIN PLAN .

CONVENTION :

lyfe (O COMMODITY K IS AN INPUT For FIRM

j .

COMMODITY
Yui >0 =D K IS AN output for Fern
j .

EXAMPLE : YJ =
( -7,3) =D 7 UNITS d- THE FIRST CCMOOITY
ARE NEEDED TO PRODUCE 3 UNITS of THE 2nd Carnotite .

ASSUNPTIOUS : ltje J 4J IS THE Production POSSIBILITY

,

SET .

1. OE Yi C-Rn PROFITS ≥ 0

2. 45nA? = {OY Production NEEDS INPUTS

no FREE UNCA
3. 4J CCNTINUITYINPRODUETIOV )
IS CLOSED (
AND BALNDED (=D SIMPLIFICATION ,
NO • INPUT ,

cannot PRODUCE • QUANTITIES)

4. 4J IS STRICTLY CCNUEX .
 PRODUCTIN FUNCTION PRCDUCTIOU POSSIBILITY SET

→ aepwr

f- fcn) my
it
flu

JR
£
I > a

Nco because they

are inputs

ay y=fW= strictly arcane

^

)
FG

5N c s
return to
decreasing
scale → not
strictly
convex

if Jcm) a

> N 2 >
return
increasing
scale
to

STRONG CONVEXITY :

YI IS STRONGLY CCNVEX y^,y2 c- 4 ,y^≠y2

's
,
V-E C- coil ) ,
7 4J tight ( l t )y2
g- C- Srt 5>
-
 FIRMS ARE PRICE TAKERS ,
FOL GIVEN Corrosive PRICES p ≥o
THEY SOLVE :

4- Icp / = man
pyi = man { Receive -
costs Y
yieyj
Yi
}
IS CCNPACT FIRM 'S PRET FUNCTION wecc perinea
-

pyi IS continuous

MAXINUX 3-
◦
WEIERSTRAP : .

◦ Tltfchtn of THE MAXIMUM :

1T£ (p ) IS CCNTINUCUS CN RF .

◦ STRONG CONVEXITY : UNIQUENESS of THE NAXIRIIZING ProductIN

PLAN
yicp ) If
PDO .

*HEEREN of THE MAXIMUM :

lyicp) IS CONTINUOUS an aft .

gi( PI =
Cynicp ) . .

gnicp ) ) , Yui ( p) IS An

A
output

FUCT
SUPPLY CR DEMAND .

yi ( p ) =
j 's SWPUY FUNCTION

's
•
IT (p) & yI(p ) HD -0 INP .

AGGREGATE PRODUCTION POSSIBILITIES :

Y =
{ ye Rn I g. =
Eyi sat
yi c- Yi Y
THEOREM : IF ALL YI SATISFIES At -4 THEN so DCES 4 .

1. OEY ≤ an
2. 4hr7 = { 04 ( WRONG ,
BUT ASSUMING IT IS
REALISED
3. 4 CLOSED AND BALNDED .

4. STING CANEXIIY : NAE work .

AGGRECATE PROFIT MAXIMIZATION : LET p≥o .
THEN :

Yi
Pg ≥ py it
yell .

V-j c- J ,
3
Yi c- S .
t

g- =
Eiji AND
py-
i
≥ pyJ yi c- 4J .

AGGREGATE PROFIT IS MAXIMIZED FIRM MAXIMIZES

PREET .

INDIVIDUAL consumers .

LET iEI .
hi Carsten _cr i 's UTILITY C- Etf ( CCNTINUAF
STRICTLY INCREASING, STRICTLY QUASI CONCAVE ) .

ei ENDOWMENT vector → ALLOWS US TO MODEL POSSIBLE

SUPPLY TO THE NARUET .

time traded = labor , time na - traded = leisure

④ WE ASSURE PRIVATE AVNERSHIP A FERN 'S Prefer

ARE DISTRIBUTED TO ITS SHAREHOLDERS .

DENOTE Costner i 'S BY ⑦ it

SHARE IN FIRM
j :

O < ≤ i vi. j .

E ⑦i = 1
V-j

A CCNSURER 'S Incat :

Micp)= pei + 2-0%11-5 ( p) ≥ 0

 CONSUMER'S PROBLEM :

mare ii. ( mi ) sat pni ≤ micp)

assumptions
p→◦ ] UNIQUE solution Ni(pimicp ) ) 7 .

Mi(p) IS CONTINUOUS or
177 AND ni(p Milos) IS CCNTINUCCS
,

Cov Mt?

Eceiyei , Gii , )ieI

'
Economy : Y
JET

EQUILIBRIUM :

EXCESS DEMAND FUNCTION for corrosive K:

Zucp)= Enincp ,
micro )) -

Eyiucp) -

Eeui
-
#
in
devoid total endowment
aggregated k
of
K pveduenaef Of .

ie ( ≤ or > a)
◦

AGGREGATE EXCESS DEMAND FUNCTION :

2-G) = (Elp) . . . Zncp))

ZmC*¥deaa•
WACRASIAN EQUILIBRIUM : → ◦ St

.
Ex 5.2 1 Consumer , 1 Proven = Robinson .

✓
e- _
CT , 0 ) tech , g) =
ÑPyP F- I BEG -4
time t ↳ cocauterd aish ↳ carats ✗ ( q1 )
end

1) PROFIT NAXIVLIZATIOU :
ITCP , W )

Y=Ut 4h4
man TR -

TC
=p
-

y
-
WU .

=
put -
Wh .

-2
Foci ✗ put =w

h=¥ y=(¥)€ '

2) Consumers Mcp ,h)= WT I WT Wwe

pyt
: + + -

= -

CE ]
' ""
wt
(E)
=
+ -

?
1¥ "w(%)
-2
= Wtt >o

man
h^→yB St .

pytwu-mcp.li)

he ( 1- B) mcpiw) Bmcrw )
=
yC=
W P
 3) MARKET CLEARANCE . 2- Cut
, p)=o ( HD -
c)

p☒=1 ,
BY WALRAS LAW =p IF CNE MARKET CLEAR ,

BOTH Do .

TINE MARKET i hct Ut=T

COCO darker
yEyᵗ .

'M
⇐ 1%2
a- is) cwttñcw
take 1 To verify : 1- = +

5=11 Bitter -
-

BITE g- ( 1%-2+411%1
13-11-13 %"
B. 1- =
✗
( pit -1 .

✗
213T
ptars
=⇐P)%a
)£'=d( d)
1-2 > °
✗ PT BU
w* =L
(
1-
-

> o

distr B
-
ABT