Download Intermediate Microeconomics 1st Edition Mochrie Solutions Manual all chapters

Intermediate Microeconomics 1st
Edition Mochrie Solutions Manual

Go to download the full and correct content document:
https://testbankfan.com/product/intermediate-microeconomics-1st-edition-mochrie-sol
utions-manual/
More products digital (pdf, epub, mobi) instant
download maybe you interests ...
Intermediate Microeconomics 1st Edition Mochrie Test

Bank
https://testbankfan.com/product/intermediate-microeconomics-1st-
edition-mochrie-test-bank/
Workouts in Intermediate Microeconomics 9th Edition

Varian Solutions Manual
https://testbankfan.com/product/workouts-in-intermediate-
microeconomics-9th-edition-varian-solutions-manual/
Intermediate Microeconomics and Its Application 12th

Edition Nicholson Solutions Manual
https://testbankfan.com/product/intermediate-microeconomics-and-
its-application-12th-edition-nicholson-solutions-manual/
Intermediate Microeconomics and Its Application 11th

Edition Nicholson Solutions Manual
https://testbankfan.com/product/intermediate-microeconomics-and-
its-application-11th-edition-nicholson-solutions-manual/
Microeconomics 1st Edition Acemoglu Solutions Manual
https://testbankfan.com/product/microeconomics-1st-edition-
acemoglu-solutions-manual/
Intermediate Microeconomics with Calculus A Modern

Approach 1st Edition Varian Test Bank
https://testbankfan.com/product/intermediate-microeconomics-with-
calculus-a-modern-approach-1st-edition-varian-test-bank/
Microeconomics Australian 1st Edition Perloff Solutions

Manual
https://testbankfan.com/product/microeconomics-australian-1st-
edition-perloff-solutions-manual/
Intermediate MACRO 1st Edition Barro Solutions Manual
https://testbankfan.com/product/intermediate-macro-1st-edition-
barro-solutions-manual/
Microeconomics Canadian 1st Edition Karlan Solutions

Manual
https://testbankfan.com/product/microeconomics-canadian-1st-
edition-karlan-solutions-manual/
For use with Robert I. Mochrie, Intermediate Microeconomics, Palgrave, 2016
Solutions Manual: Part V

Welfare
Summary answers to the ‘By yourself’ questions
Chapter 20
X20.1 Given that the endowments represent Liling’s and Maya’s total wealth, explain why the
expressions on the left-hand side of Expression 20.2 cannot both be positive.
Were both expressions positive, then there would be a move up and to the right in the
diagram. Liling would consume more carrots and more beans; and Maya would consume
less of both. So, assuming that preferences are well-behaved, Liling would be better off and
Maya would be worse off, meaning that Maya would not agree to the new division.
X20.2 Define the marginal rate of substitution for Liling and Maya at the endowment, E. Explain
how the difference in values means that trade is possible.
For both Liling and Maya, the marginal rates of substitution are the slopes of the tangents to
their indifference curves. We see that Maya’s indifference curve is steeper than Liling’s, so
that she is willing to give up more carrots than Liling to acquire a set quantity of additional
beans. Liling and Maya could agree to any exchange rate : MRSL > - > MRSM.
X20.3 In Figure 20.2, the endowment is at the lower-right corner of the lens. Under what
conditions would the endowment be at the upper-left corner of the lens? What would be
the outcome of trade in this case?
We now require Liling’s indifference curve to be steeper than Maya’s, so that MRSM > - >
MRSL.
X20.4 Use Expression 20.2 to obtain an expression for the relative price of broad beans (the rate
at which Maya gives up consumption of carrots in order to increase consumption of broad
beans).
The relative price will be the ratio of the increase in consumption of broad beans to the
bLT  bLE
increase in consumption of carrots. We obtain    T .
cL  cLE
X20.5 Suppose that at the division, E, Liling and Maya were to have the same marginal rate of
substitution. Sketch an Edgeworth box showing this outcome. What do you conclude
about the possibility of exchange?
In the Edgeworth box, we begin by drawing a straight downward-sloping line that will be the
common tangent. We then draw two curves, both downward-sloping, with the one above
the line convex, and the one below the line concave. We draw these lines so that each has a
single point of tangency between each curve and the line; and so that the point of tangency
is common to both curves.
We note that there is no area defined by the intersection between the curves, and so there
are no divisions of the endowment where both Liling and Maya are better off than at the
point of tangency. This implies that there is no possibility of trade between Liling and Maya.
X20.6 How likely do you consider it to be that Liling would accept the division of goods at F?
It is possible, but we note that Liling is no better off than at E, so that she has no strong
reason to agree to the new division.
X20.7 Explain why division G is Pareto efficient, and discuss whether or not you consider it likely
that it will be the outcome of exchange.
G is Pareto efficient since the indifference curves through this division share a common
tangent. At this division, Maya is no better off than at the initial endowment, E, so it is
unlikely that she would agree to the division.
X20.8 The contract curve is sometimes defined as the portion of the Pareto set between F and G.
Why might this be a useful definition? [Hint: Consider peoples’ willingness to agree to any
division of the endowment.]
Between F and G, both Liling and Maya are better off than at the endowment E. Since all
points on the contract curve share a common tangent, there is no possibility of further Pareto
improvements. It is therefore possible that Liling and Maya might agree to any of these
divisions, with neither being able to propose an alternative division in which both would be
better off.
X20.9 Suppose that Maya and Liling consider broad beans and carrots to be perfect
complements, with their preferences represented by the utility function, U: U(bi, ci) =
min(bi, ci). The total quantities of broad beans and carrots in their total endowment are
equal.
a) Explain why, in any division in which bL = cL, their indifference curves just touch.
We know that with both Liling and Maya treating the goods as perfect complements, their
preferences across divisions can be expressed by a set of L-shaped indifference curves. For
Liling, the vertices are on the line bL = cL. On this line, bM = b – bL = c – cL = cM, so that the
vertices of Maya’s indifference curves also lie on this line. At every point on the line, bL = cL,
any downward-sloping line is a common tangent to the indifference curves that meet at this
point.
b) Suppose instead that Liling grows carrots and Maya grows broad beans. Using a diagram,
show that if Maya can determine the division of the endowment, she can take all of Liling’s
carrots and offer no broad beans in return.
With Maya growing broad beans, but taking all of Liling’s carrots, Liling is no worse off than
at the initial division, so that the Pareto efficiency condition is met by trade.
c) Again, using the diagram, show that it is possible for Maya and Liling to trade to any
division for which cL = bL.
From parts a) and b), we see that the Pareto set is represented in the Edgeworth box by the
line, OLOM, running from the bottom left to the top right corners (that is from the origin of
Liling’s measurement to the origin of Maya’s measurement); and all divisions in the Pareto
set are feasible in the sense that neither Liling nor Maya would be worse off after trade than
before. The whole of the line is the contract curve.
X20.10 Now suppose that Maya and Liling consider carrots and broad beans to be perfect
substitutes. However, while Maya would substitute 1 kg of broad beans for 1 kg of carrots,
Liling would swap 2 kg of broad bean for 1 kg of carrots.
a) Draw an Edgeworth box showing indifference curves, given that they wish to divide 12 kg
of carrots and 20 kg of broad beans, and that Maya starts with all of the carrots, and Liling
with all of the broad beans. On your diagram, indicate the region within which they might
trade.
We draw the Edgeworth box, measuring the endowment of broad beans on the horizontal
axis and the endowment of carrots on the vertical axis, so that the dimensions of the box are
20x12. We denote the bottom-left hand corner as OL, from which Liling’s consumption is
measured; and the top-right corner as OM, from which Maya’s consumption is measured.
Then the initial endowment, E, is located at the bottom-right corner of the box. For Liling, the
indifference curve through point E has the equation bL + 2cL = 20, while for Maya, it has
equation bM + cM = 12.
Liling’s indifference curve is a line meeting the left-hand edge of the box, (0, 10), while
Maya’s is a line meeting the top edge of the box at (8, 12). We see that Maya’s indifference
curve is steeper than Liling’s, so that the feasible set for trade is the area between them.
b) Assume instead that their initial endowments are (bLE, cLE) = (12, 6) and (bME, cME) = (8, 6).
Draw another Edgeworth box, and mark on it this endowment, E. Sketch the indifference
curves through the endowment, and indicate the region within which trade might occur.
In this case, the initial endowment, E, is located at the point (bLE, cLE) = (12, 6). For Liling, the
indifference curve through point E has the equation bL + 2cL = 24, while for Maya, it has
equation bM + cM = 14.
Liling’s indifference curve is a line meeting the top of the box at (0, 12), while Maya’s is a line
meeting the top edge of the box at (6, 12). As before, Maya’s indifference curve is steeper
than Liling’s, so that the feasible set for trade is the area between them.
c) What is the range of terms of trade which Maya and Liling might agree?
The terms of trade will be such that both Maya and Liling are better off after trade. We
define the relative price, , as the opportunity cost of beans, defined so that MRSM >  > -
MRSL; or so that -0.5 >  > - 1.
d) Under what conditions might Liling end up with all of the carrots?
This will happen if the exchange line is steep enough so that it passes through the top edge of
the box.
X20.11 Suppose that Maya and Liling have preferences represented by the utility function,
U: Ubi , ci   bi 3 ci 3 . The initial endowment, E: (bLE, cLE) = (90, 0) and (bME, cME) = (30, 120).
1 2
Assume that they agree to trade 1 kg of carrots for 2 kg of broad beans.

a) What is the opportunity cost of 1 kg of broad beans?
The opportunity cost,  = –0.5.
b) Write down expressions for their marginal utility functions and their (common) marginal
rate of substitution, MRS.
We obtain marginal utilities by partially differentiating U with respect to the quantity of each
of the goods in the consumption bundle.
  ; and marginal utility of carrots, MU =

2
U ci
 13
3
So marginal utility of beans, MUB = bi bi C

1
U bi
 23
3
c i ci
The marginal rate of substitution is (minus 1 times) the ratio of marginal utilities; MRSi =
 
2
1 ci 3
MU B 3 bi ci
   .
MU C
 
1
2 bi 3 2 bi
3 ci
c) Show that MRS = –0.5 whenever b = c. What do you conclude about the composition of
the most preferred, affordable consumption bundle?
If MRSi = -0.5, then 2cbi  21 , so ci = bi. We note that when bi = ci, Liling and Maya have the
i
same marginal rate of substitution; and note that for the total endowment (b, c) = (120, 120),
then if bL = cL, bM = 120 – bL = 120 – cL = cM; so that the conditions for Pareto efficiency are
satisfied when bL = cL; and the Pareto set consists of all allocations (bL, cL): bL = cL.
d) Confirm that the division H: (bLH, cLH) = (30, 30) and (bMH, cMH) = (90, 90) is feasible, given
the terms of trade; and that Liling’s and Maya’s indifference curves through H both have
gradient  = –0.5.
To reach division H from the initial endowment, E, Liling gives up 60kg of beans, and acquires
30kg of carrots; Maya acquires 60kg of beans in exchange for 30kg of carrots. At division H,
the conditions for Pareto efficiency are satisfied, with beans being exchanged for carrots at
the agreed relative price.
e) Sketch an Edgeworth box showing the endowment point; the terms of trade line; the
indifference curves passing through the endowment point, E; and the indifference curves
passing through the final division, H.
In an Edgeworth box with dimensions 120x120, we measure the division of beans on the
horizontal axis, and division of carrots on the vertical, measuring the quantity available to
Liling of each from the bottom left corner. The initial endowment E: (90, 0) therefore lies on
the bottom edge of the box, three-quarters of the way from the left side to the right side of
the box. The terms of trade line starts from point E, and has slope -0.5, so that it passes
through point H(30, 30). At this final division, the indifference curves for Liling and Maya
(which are downward sloping and convex to their respective origins, approaching but never
touching the axes against which they are measured) both have gradient -0.5, so that the
terms of trade line forms a common tangent.
X20.12 In Figure 20.6, we suggest that Lukas and Michael will divide the endowment equally.
a) Confirm (from Expression 20.10) that Michael’s preferred bundle is half of the endowment
if the relative price,   bc .
We know that Michael’s optimal bundle bM*,cM *    c
2

, 2c . So with the relative price  = bc ,
the result follows. bM*,cM *  2 , 2

b c
 
b) Demonstrate that when the relative price,   bc , Lukas’s most preferred affordable
bundle, b*,c *  2 , 2 .
b c
 
c cL c
If the relative price  = b, then for Lukas, MRSL = bL
= b. Then cMb = bMc; and for the
c b  bL  bM
feasibility constraint to be satisfied, b bL + cL = c. Then cL = b
c b
c  2c ; and it is easy to
b
confirm that bL = 2 .
c) Explain why we can write Lukas’s problem as having two constraints:

bc 
1
c 1
max
b L ,c L
(bL cL)½: cL = b (b - bL) and [(b – bL)(c – cL)]½ = 2
2
. Form the Lagrangean, ,
required to solve the problem.
Lukas’s problem has the two constraints of affordability and feasibility. It has to be possible
for Lukas and Michael to trade to the equilibrium. Michael has to be willing to accept the
outcome of the trade, and so must be no worse off than at his optimum.
We write the Lagrangean,   bLcL   bc  bcL  cbL   
0.5
 bc
1
2
0.5

b  bL c  cL 0.5 .
d) By obtaining the first-order conditions, confirm that cL *  2 .

c
The first-order conditions for an optimum can be written as


bL  0 .5  
c L 0.5
bL   
c c
  c  0 .5  b  bLL 
0 .5
 0.

c L  0 .5  
bL 0 .5
cL 
  b  0 .5  c  cLL 
bb 

0 .5
 0.


 bcbcL cbL  0.


 12 bc 0.5  b  bL c  cL 0.5  0.
We see from the last two expressions that (b – bL)c = bcL, so we can repeat the argument.
Since
c – cL =
c
b
b L , we can rewrite the last condition as 4bbL  b bL bc , so that 4(b – bL)bL = b2.
c
 
b
This simplifies to (b – 2bL)2 = 0, so that bL = 2 . The result then follows by substitution.
X20.13 Assume that Rachel’s maximization problem can be written as:

max
bR ,cR
U bR , cR   bR cR1  :  bRE  bR  cRE  cR  0
a) By forming the Lagrangean or otherwise, confirm that Rachel’s most preferred, affordable
1 
bundle (bR*, cR*) has the characteristic: bR *   c R * .
We write the Lagrangean, :  = bRcR1 -  + [(bRE – bR) + (cRE – cR)]
We obtain first-order conditions for the maximum:

b R
  cR 1  
bR
   0 ; 
c R
 1         0 ; and    bRE bR cRE cR 0
bR 
cR
Taking the first two, we see that 


     1     . The result follows immediately
cR 1  
bR
bR 
cR
from cross-multiplying terms.
b) Hence or otherwise, demonstrate that Rachel’s most preferred affordable bundle is

b R *, c R *  :
bR *, c R *     b R
E

cR E

, 1   b R
E
 cRE 
1
We write cR   bR , and since (bRE – bR) + (cRE – cR) = 0, we can write
1 b 
1 
 R

b  bRE
 R
 cRE ; and the result follows immediately.
c) Show that as the relative price, , increases, cR increases, but bR decreases.

By partial differentiation, we see that bR    c R2  0 , but that cR  1   bR E  0
E
d) Write an expression for cR* in terms of bR*. (This is the equation of Rachel’s price offer
curve.)
We see that it is possible to extract a common factor, bRE + cR from the expressions for bR*
1 
and cR*. This gives us cR* = 
bR * .
X20.14 Assume that Rachel continues to solve the problem in X20.13, but with the expenditure
share parameter, a  3 , and initial endowments (bRE, cRE) = (bSE, cSE) = (12, 12).
1
a) Obtain an expression for Rachel’s optimal consumption bundle in terms of the relative
price, .
We apply the expressions obtained from X20.13: bR *, c R *    bR E  c R , 1    bR E  c R E  .
E
  
Then bR*,cR *   12 ,
1
3
12

2
3
12  12 41 1 ,81   .
b) Show that if  > 0.5, Rachel will want to trade some of her broad beans for more carrots.
If  = ½, it is easy to confirm that (bR*, cR*) = (12, 12) = (bRE, cRE), so that Rachel can do no
better than by consuming her endowment. Given that bR* is decreasing in , and that cR* is
increasing in , it follows that if  > 0.5, then Rachel will give away some beans, and demand
more carrots.
c) Evaluate the expression in (a) for Rachel’s optimal consumption bundle for relative prices
 = 0.125, 0.25, 0.5, 1, 2, and 4. Are all of these choices feasible?
 0.125 0.25 0.5 1 2 4
bR* 36 20 12 8 6 5
cR* 9 10 12 16 24 40
We see that when the relative price,  = 2, cR* = 24, so that Rachel wishes to consume all of
the carrots. With cR* increasing in , this is the maximum possible value of the relative
price; for higher prices, the price offer curve will lie outside the box.
Although it is not shown in the table, we note that when  = 0.2, bR* = 24. In this case,
Rachel wishes to consume all of the beans in the endowment and, as before, with bR*
decreasing in , this is the minimum possible value of the relative price; for lower prices, the
price offer curve will lie outside the box.
d) Sketch Rachel’s price offer curve.

Plotting these points in an Edgeworth box with dimensions 24x24, we see that Rachel’s price
offer curve is downward sloping and convex to OR. It intersects the top edge of the box at
the division (bR, cR) = (6, 24), where MRS = -2, passes through the division (12, 12), and
intersects the right edge of the box at the division (24, 6), where MRS = -0.2.
X20.15 Repeat X20.14 but for Sonja, whose utility function we write as UbS , cS   bS 3 cS 3 .
2 1
We are able to write Sonja’s preferred division, given the relative price  as (bS*, cS*):
   
bS *, c S *   1    bR E  cR ,  bR E  c R E  , which with the given parameterization becomes
E
bS*,cS *  23 12  12 , 13 12  12 81 1 , 41  .

Replicating the table of preferred consumption bundles from X20.14:
 0.125 0.25 0.5 1 2 4
bS* 72 40 24 16 12 10
cS* 4.5 5 6 8 12 20
We note that it would not be feasible for the value of  to be very small: from the table, and
knowing that Sonja’s demand for beans in her preferred division, bS* is decreasing in the
relative price, , we require bS*  0.5. Although we have not shown this in the table, it is
straightforward to show that if  > 5, then cS* > 24, so that Sonja would then demand more
than the total endowment of carrots.
X20.16 Given the endowments and utility function in X20.14 and X20.15, confirm that at the
division J: (bRJ, cRJ) = (8, 16); (bsJ, csJ) = (16, 8) with relative price  = 1, Rachel and Sonja
maximize their utilities and both markets clear.
We see that by adding up the demands that both markets clear, the demand for both beans
and carrots equals the total endowment.
X20.17 Suppose that the relative price increases, so that  = 2. Find Rachel’s and Sonja’s most
preferred, feasible consumption bundles. Explain why these are not consistent with an
equilibrium division.
When  = 2, (bR*, cR*) = (6, 24); and (bS*, cS*) = (12, 12). The total demand for carrots is 36,
so that there is excess demand for them; and the total demand for beans is 18, so that there
is excess supply.
X20.18 Repeat X20.17, but with the relative price decreasing so that  = 0.5. Without carrying out
any further calculations, characterize the nature of the outcome for  = 0.5.
We have seen that when the relative price is above the market clearing price, there is excess
demand for carrots, and excess supply of beans. We therefore expect that for a relative price
less than the market clearing price, there will be excess supply of carrots and excess demand
for beans.
[Check: When  = 0.5, (bR*, cR*) = (12, 12); and (bS*, cS*) = (24, 6). The total demand for
carrots is 18, so that there is excess supply of them; and the total demand for beans is 36, so
that there is excess demand.]
X20.19 Continuing to use the endowments and utility functions in X20.14 and X20.15, suppose
that Rachel initially proposes  = 2.
a) Confirm that Sonja will not wish to trade, but that Rachel would wish to acquire Sonja’s
endowment of carrots.
This follows directly from calculations that we have completed already. Sonja demands her
initial endowment, while Rachel demands the bundle (bR, cR) = (6, 24), which includes the
total endowment of carrots.
b) Calculate the excess demand for carrots and the excess supply of broad beans.
Again, from previous calculations, we see that there is an excess demand for carrots, cR + cS -
24 = 12 and excess supply of beans, 24 – (bR + bS) = 6.
c) Repeat parts (a) and (b), assuming firstly that Sonja proposes a revised relative price,  =
1.5, and then that Rachel proposes a further revision,  = 1.25.
We present the results in a table, in which the first four columns show Rachel and Sonja’s
demands for beans and carrots, and the next two show the excess demand for beans and
carrots.
 bR* bS* cR* cS* bX cX bX + cX
2 6 12 24 12 -6 12 0
20 40
1.5 3 3
20 10 -4 6 0
1.25 7.2 14.4 18 9 -2.4 3 0
1 8 16 16 8 0 0 0
We note that as the relative price falls towards the market clearing price, there is a reduction
in the excess supply of beans and the excess demand for carrots.
X20.20 To prove some important results in general equilibrium theory, it is often convenient to
rely upon Walras’ Law: that the sum of values of excess demand across markets must be
equal to zero.
a) Confirm that Walras’ Law is satisfied in X20.19, so that at each relative price, the value of
the excess demand for carrots is also the value of the excess supply of broad beans.
This is straightforward: we multiply the excess demand for beans by the relative price, and
add the excess demand for carrots. In all cases in the table in X20.19, we see that this
condition is satisfied.
b) Given that Rachel and Sonja share a single feasibility constraint, use an Edgeworth box to
demonstrate that if the market for carrots clears, the market for broad beans must also
clear.
Suppose otherwise. Then it would be possible to draw an Edgeworth box, with dimensions
representing the endowment of beans and carrots, and Rachel’s share of the endowment in
any division measured from the bottom left corner (with the distance from the left edge
representing the quantity of beans, and the distance from the bottom the quantity of carrots
in her consumption bundle), with the feasibility constraint shown as a downward sloping
straight line, passing through the endowment. There are two points shown on the feasibility
constraint, one Rachel’s preferred division, and the other Sonja’s preferred division, where
the quantity of carrots available to Rachel would be the same in both, but the quantity of
beans would be different. This contradicts the assumption that the line has a negative
gradient, since as the quantity of beans increases, the quantity of carrots in the division must
decrease.
c) Show that if there is a Walrasian equilibrium, the division must also be Pareto-efficient.
Continuing to think about the Edgeworth box analysis, if there is a Walrasian equilibrium
then the indifference curves passing through that division share a common tangent, and so
there is no possibility of further, mutually beneficial trade for Rachel and Sonja: if Rachel
increases her utility, it will be at some cost to Sonja (and vice versa). This division is therefore
Pareto-efficient.
X20.21 Using the results of X20.16, explain why we can be certain that the Walrasian equilibrium
J1 will be achieved through an exchange that begins from any division on the line bR + cR =
24.
In X20.16, we have seen that it is possible to trade to the equilibrium division (bR*, cR*, bS*,
cS*) = (8, 16, 16, 8) from a single point on this line. It must therefore be possible to reach this
division from any point on this line.
X20.22 Assume that Rachel and Sonja have identical Cobb-Douglas preferences over consumption
bundles containing broad beans and carrots:
UbR ,cR   bR 3 cR 3 ; UbS ,cS   bS 3 cS 3
1 2 1 2
with a total of 24 kg of both goods in every division.

a) By partial differentiation, or otherwise, show that if Sonja has to meet a payoff target VS :
VS  (12), Rachel will propose a division in which bR = cR.
We write the Lagrangean, , for the constrained optimization as:
1 2

bR ,cR ,   bR 3 cR 3   24 bR  3 24 cR 3  12
1 2

Partially differentiating with respect to bR and cR, we obtain the first-order conditions:
     0 , so that      ; and
2 2 2 2
 cR  24 cR cR 24 bR
 13
3 3 3 3
bR bR 3 24 bR bR 24 cR
     0 , so that      . Then since the right hand side of these

1 1 1 1
 bR 2 24 bR bR 24 cR
 23
3 3 3 3
cR cR 3 24  cR cR 24 bR
expressions must be equal, (24 – cR)bR = cR(24 – bR), and bR = cR.
b) Confirm that whatever division Rachel proposes, with bR = cR, her marginal rate of
U R
b R
substitution,  U R   0.5 .
c R
For Rachel, marginal rate of substitution, MRS : MRS(bR, cR) =

 
2
U 1 cR 3
MU B 3 bR cR
 b R ; and so the result follows directly, given bR = cR.
MU C    
 
U 1
c R 2 bR 3 2 bR
3 cR
c) Hence confirm that if Sonja insists on receiving a payoff VS, she will just meet that target if
the initial endowment lies on the line bR  2 c R  36 .
We require Sonja to obtain payoff VS = 12, and confirm that where Rachel proposes the
1 2
division (bS, cS) = (24 – bR, 24 – cR) = (12, 12), Sonja obtains payoff VS = 12 3 .12 3 = 12; so Sonja
just meets her target. We also note that for Sonja, MRSS(12, 12) = -½, since she and Rachel
have the same utility function; so when they divide the allocation equally, Sonja is just able to
achieve her target payoff while Rachel maximizes her utility subject to that constraint.
In terms of an Edgeworth box with dimensions 24x24, reflecting the total endowment, and
with Rachel’s allocation of beans measured along the bottom edge from the left hand corner,
and her allocation of carrots measured along the left edge, we draw in the indifference
curves passing through the division K: (bR. cR; bS, cS) = (12, 12; 12, 12) as convex curves, which
have a common tangent at K, with gradient -0.5. We can therefore write the equation of the
tangent as (cR – 12) = -0.5(bR – 12), so that bR + 2cR = 36.
X20.23 Rachel and Sonja seek to maximize their utilities, which have the same form as in X20.22.
Suppose that Sonja has a utility target VS = 10. Rachel’s endowment ER = (18, 12); Sonja’s
endowment ES = (6, 12). Sketch a diagram showing (1) the initial endowment; (2) the
Pareto set; (3) the relative price at which they will trade; and (4) the indifference curves
(for Rachel only) at the initial endowment and after trade.
We draw here on what we have already found out about this situation in X20.22. Drawing
an Edgeworth box with dimensions 24x24, reflecting the total endowment, and with Rachel’s
allocation of beans measured along the bottom edge from the left hand corner, and her
allocation of carrots measured along the left edge, we denote the endowment E: (bRE, cRE; bSE,
cSE) = (18, 12; 6, 12) as a point ¾ of the distance from the left to the right edges and midway
between the top and the bottom edges. We know that from this endowment, given the
relative price  = -0.5, Rachel and Sonja will agree to trade to a division K1: (bR. cR; bS, cS)
where bR = cR and bS = cS, with Rachel giving up 2kg of beans for every 1kg of carrots that she
obtains from Sonja. This implies that Rachel will trade 4kg of beans for 2kg of Sonja’s
carrots; Sonja ends up with 10kg of beans and carrots, and Rachel ends up with 14kg of each.
Rachel ends up better off because she has a larger proportion (in terms of value) of the
endowment.
X20.24 Confirm that irrespective of her initial endowment, when Rachel’s price offer curve
intersects the Pareto set, bR = cR, her marginal rate of substitution, MRSR = -0.5.
This follows directly from the argument of X20.22b).
X20.25 What might be the policy implications of this capacity of an exchange economy to reach a
competitive equilibrium from any initial division of endowments?
This suggests that if we are concerned about the outcome, it is possible to cause some
variation in it by changing the initial endowment, rather than prices within the economy.
This suggests that lump-sum taxes might be preferable to proportional taxes based on
activity, which will change prices.
X20.26 Using Figure 20.12, confirm that compared with the competitive equilibrium, J*, Rachel
secures a larger share of the final division and so a higher utility when she is able to choose
the relative price *.
We note that Rachel’s indifference curve, ICRM intersects the Pareto set above and to the right
of the intersection of Sonja’s price offer curve, PS, with the Pareto set. The competitive
equilibrium would occur at the latter intersection, so Rachel must be better off when able to
choose the price.
X20.27 We can write Rachel’s problem formally as:

max

UR b b * bS S
E

,cS E ,  ,c  cS * bS E ,cS E ,  , 
wherebS *,cS * : bmax U  bS ,cS  : bS  cS  bS E  cS E
,c S S S
a) Set out Rachel’s problem for the now familiar case in which the endowment of 24 kg of
broad beans and 24 kg of carrots is divided equally between them, when Rachel’s utility
function UR bR ,cR   bR 3 cR 3 , and Sonja’s utility function US bS , cS   bS 3 c S 3 .
1 2 2 1
Sonja’s constraint can be simplified substantially in this case, since bSE = cSE = 12. She wishes
to maximize her utility subject to the constraint that bS + cS = 12(1 + ). We rewrite Rachel’s
problem as
max

UR 24 bS *  ,24 cS *  , wherebS*,cS * : bmax,c US  bS ,cS  : bS  cS  121   . S S
b) Solve Sonja’s maximization problem, defining her demands bS and cS in terms of the
relative price, . Note: you can use the expressions for demands obtained in Chapter 9, to
simplify calculations.
We write the Lagrangean, , for the constrained optimization as:
bS ,cS ,  bS 3 cS 3  121    bS  cS` 
2 1
Partially differentiating with respect to bS and cS, we obtain the first-order conditions:
  0 ,and    0 , so that        . From the latter

1 2 1 2
 cS  bS 2 cS 1 bS
 23  13
3 3 3 3
bS bS cS cS 3 bS 3 cS
equality, 2cS = bS.
In addition, in the last first-order condition,


 121   bS cS` 0 , substituting for
bS, 12(1 + ) = 3cS, so that we obtain bS *, c S *   8   , 41   .
1 

c) Hence, solve Rachel’s maximization problem, defining the relative price, M, so that Rachel
maximizes her utility.
From b), we are able to simplify Rachel’s problem further:
max

UR 82  ,45    . This
1

becomes
max
U 
 R
82   45    , and on differentiating, we obtain the first-order
1

1
3
2
3
condition:
dUR
d
  
 38 2 8 2  1
 23
45 
2
3
   45
 83 8 2  1
1
3  13
0 .
This simplifies to 1
2
45    82  1 , so that 5 -  = 42 - 2, and 42 -  - 5 = 0. Applying
1  81
the quadratic formula, we obtain   8
 1.25 .
d) Compare the outcome in parts (b) and (c) with the Walrasian equilibrium when prices are
set competitively, confirming that with Rachel able to set the relative price, it is now
higher, that Rachel’s share of the endowment (and so her payoff) has increased, but that
Sonja is worse off. Confirm that the monopoly outcome is not Pareto optimal.
From X20.16, we know that the competitive equilibrium division is J1: (bR*, cR*; bS*, cS*) =
(8, 16; 16, 8), with the competitive equilibrium price, * = 1. Here we see that Rachel
chooses a relative price  = 1.25, which is greater than in equilibrium. We do not perform all
of the calculations here, but substituting back into the solution of part b), we see that Sonja
chooses the bundle (bS, cS) = (14.4, 9), so that Rachel is able to consume the bundle (9.6, 15).
There is less trade than we would expect there to be in the Pareto efficient outcome, and we
see for Rachel MRS(9.6, 15)  1.25, so that the requirement MRSR = MRSS =  is not satisfied.
X20.28 Repeat X20.27, but replacing the utility functions and endowments:
a) Rachel: utility, UR bR ,cR  bR 3 cR 3 , endowment ER = (18, 12);
1 2
Sonja: utility, US bS ,c S   bS 3 c S 3 , endowment ES = (6, 12).

1 2
Sonja’s constraint can again be simplified, given the endowments. She wishes to maximize
her utility subject to the constraint that bS + cS = 6(2 + ). We rewrite Rachel’s problem as
24 bS *   24cS *   , wherebS *,cS * : bmax b 3 c 3 : bS  cS 62    .
1 2 1 2
max 3 3
 ,c S S
S S
We write the Lagrangean, , for Sonja’s constrained optimization as:

bS ,cS ,   bS 3 cS 3  62     bS  cS` 
1 2
   0 ,and    0, so that        . From the latter

2 1 2 1
 cS  bS 1 cS 2 bS
bS  13 bS
3
cS  23 cS
3
3 bS
3
3 cS
3
equality,
cS = 2bS.
In addition, in the last first-order condition,   6 2 bS cS`

  0 , substituting for c ,
S
6(2 + ) = 3bS, so that we obtain bS *,c S *   2 1  2 , 42    .   
We now return to Rachel’s problem, which we simplify as:

max

2421   24 42    ,
2

1
3
2
3
or
max

22  16 4  . On differentiating, we obtain the first-order condition:
4

1
3
2
3
dUR
d 
 342 22 4 
23
164
2
3  
 83 22 4 3 1643 0 .
1 1
This simplifies to 1
2
4   11  2 , so that 4 -  = 112 - 2, and 112 -  - 4 = 0. Applying
the quadratic formula, we obtain   1  22177  0.60 .
b) Rachel: utility, UR bR ,cR   bR 2 cR 2 , endowment ER = (24, 0);

1 1
Sonja: utility, US bS , cS   bS 2 c S 2 , endowment ES = (0, 24).

1 1
Sonja’s constraint can again be simplified, given the endowments. She wishes to maximize
her utility subject to the constraint that bS + cS = 24. Note that since Sonja has no
endowment of good B, the value of her endowment is constant, and does not depend on the
relative price that Rachel chooses. We rewrite Rachel’s problem as
24 bS *   24 cS *   , wherebS *,cS * : bmax
1 1 1 1
max

2 2 b 2 c 2 : bS  cS  24 .
,c S S
S S
We write the Lagrangean, , for Sonja’s constrained optimization as:

bS ,cS ,   bS 2 cS 2  24  bS  cS` 
1 1
   0 ,and    0, so that        . From the latter

1 1 1 1
cS bS 1 cS 1 bS

bS  12 bS
2 
cS  12 cS
2
2 bS
2
2 cS
2
equality,
cS = bS.

In addition, in the last first-order condition,   24bS cS`

0 , substituting for b , S
24 =2cS, so that we obtain bS *, c S *   12

 ,12 .  
We now return to Rachel’s problem, which we simplify as:

max

24  12 , or
12

1
2
1
2
max

 .
12 2  1
1
2
On differentiating, we obtain the first-order condition:

dUR
d  
 62 2 1
12
 1.5 26 10.5 0 . This is
a rather complicated expression, but we can show that it can only be evaluated for value of 
> 0.5, and that the derivative is decreasing in , but always positive, so that Rachel will set as
large a value as possible. As   , (bS*, cS*)  (0, 12). Rachel takes half of Sonja’s
endowment, offering as little as possible in return. Given the form of the utility functions,
and the extent of Rachel’s monopoly power, this should seem intuitively reasonable
Chapter 21
X21.1 Suppose Robinson has a diminishing marginal product of labour, while he requires an
increasing rate of compensation for his labour, on the basis that his preferences over
combinations of leisure time and fish are well behaved.
a) Sketch a diagram representing the total quantity of fish that Robinson can catch (as a
function of labour time); and (at least) three separate indifference curves representing
levels of preference over combinations of labour time and fish, one of which just touches
the total quantity curve.
Drawing a diagram with Robinson’s hours of work measured on the horizontal axis and the
number of fish that he catches measured on the vertical axis, we draw an upward-sloping
concave curve that starts from the origin. This output curve represents the total quantity of
fish that Robinson catches. We also draw three upward-sloping convex curves, which begin
from some point on the vertical axis, and one of which is drawn so that there is some point of
common tangency between this curve and the output curve. These convex curves are
effectively indifference curves, drawn on the basis that Robinson trades off effort against
catching fish.
b) Define the agreed wage w as the number of fish that Mr Crusoe gives Robinson per hour of
labour time. Assume that Mr Crusoe will also pay Robinson a retainer – a quantity of fish,
F0 = F(0), in addition to the wage paid for fishing. Sketch straight lines on your diagram
showing the minimum wage that Robinson must be offered to reach each of the three
indifference curves. Decide whether or not the implied production plans are feasible.
We assume here that Robinson is able to choose the number of hours of labour, L, that he
works. He receives total payment W = F0 + wL. For him to be able to reach any particular
indifference curve, we have to construct the payment so that there is a point of tangency
between the indifference curve and the value of the payment schedule.
For feasibility, F0 + wL  F(L), where F(L) is the quantity caught given effort. Each production
plan will be feasible if at the planned hours of effort, the number of fish caught is large
enough for him to reach the desired utility target.
c) On a separate diagram, show that the optimal outcome has the characteristics that:
i. the marginal rate of substitution of fish for labour time is equal to the marginal
product of labour time, and also the agreed exchange rate for fish for additional
effort (the wage);
This is essentially Figure 21.1. We draw a single payoff curve, which shares a
common tangent with the output curve. The slope of the common tangent is the
wage rate that Mr Crusoe offers.
ii. the total compensation which Mr Crusoe offers Robinson is the whole catch of fish;
We achieve this by Mr Crusoe making two transfers – a fixed rate transfer F0 plus the
transfer equal to the payment for the time spent working.
iii. Mr Crusoe maximizes profit by just breaking even; and

The number of fish that Mr Crusoe has to give Robinson will be equal to the number
caught. He cannot give Robinson fewer, or Robinson will reduce his effort.
iv. Robinson maximizes utility given the production constraint.

This follows directly from the satisfaction of the first-order conditions.
X21.2 If the bakery and the creamery operate in perfectly competitive markets, why might they
decide not to use their founders’ endowments of labour and capital?
We have developed a standard model in which all firms in a perfectly competitive market are
the same size, at least in the long run. It would therefore be quite surprising were the
founders’ endowments to be appropriate to that scale of business. This merely relates to the
quantity of factors. If we were to allow for some degree of differentiation in factors, it might
be that other sources of capital and labour would be more efficient than the founders’
endowments.
X21.3 Suppose that Richard concludes that he could run the bakery more efficiently with less
capital and more labour, while Seth would prefer to hire more capital and less labour. How
might they be able to trade their endowments so that both firms can increase their
output?
This could be done through the bakery hiring Seth as a worker (on a part-time basis), or even
through the creamery seconding Seth to the bakery (from time to time). In the same way,
Seth might borrow money to finance the purchase of assets either directly from Richard, or
else the creamery might borrow the money from the bakery.
X21.4 Suppose that the bakery has a production function bKB ,LB   KB 3 LB 3 , while the creamery
1 2
has production function cKC ,LC   KC 3 LC 3 . Set out the firms’ production problems where
2 1
the total endowment, (K, L), is divided equally between them, and obtain the Pareto-
efficient outcomes.
For the bakery, the problem is to maximize b = KB 3 LB 3 :wK KB  K2 wL LB  2L  0 . The
1
   
2
: wK KC  K2  wL LC  2L  0 .
2 1
creamery’s problem is to maximize c = KC LC 3 3
Writing the Lagrangean for both of these problems separately, we have

(KB, LB, ) = KB 3 LB 3  wK K2  wL 2L  wK KB  wLLB  , from which we derive the first-order
1 2
  w 0 ; and
2

 13
LB 3
 
1
conditions: KB KB K

 LB  2
3
KB
LB
3
  w L  0 . Rewriting these conditions as
    , we see that wLLB = 2wKKB; and taking into account the third of the first-
2 1
LB KB
  3w1 K KB
3
 3w2 L LB
3
order conditions, 

wK K2  wL 2L  wK KB  wLLB   0 , we substitute to obtain
3wKKB  21 wKK wLL and 3w L LB  w K K  w L L .
We omit the calculations for the creamery, but they are very similar, and recalling that we
expect, with a Cobb-Douglas production function, that the factor shares of expenditure will
be proportional to indices in the production function, we obtain the result 3w K K C  w K K  w L L
and 3wLLC  2 wKK wLL .
1
Writing the value of the endowment as V = wKK + wLL, it follows that (KB, LB) =  v
6wK

, 3wv ; and
 
L
v
that (KC, LC) = 3wK
, 6wv . We note that we start off with both firms sharing the endowments
L
exactly equally, so that each firm’s endowments consist of half of the capital and half of the
labour; or of half of the total value of the assets in the endowment.
X21.5 Repeat X21.4, but replacing the production functions and endowments:
a) Bakery: production, bKB ,LB   KB 3 LB 3 ; endowment, EB = (18, 12);

1 2
Creamery: production, cKC ,LC   KC 3 LC 3 ; endowment, EC = (6, 12).

2 1
For the bakery, the problem is to maximize b = KB 3 LB 3 :wK KB  18 wL LB  12  0 . The
1 2
creamery’s problem is to maximize c = KC 3 LC 3 :wK KC 6 wL LC 12  0 .

2 1
The first-order conditions are essentially the same as in X21.4. We find that wLLB = 2wKKB; but
the feasibility constraint becomes wKKB + wLLB = 6(3wK + 2wL). Substituting for wLLB, we
obtain wKKB = 2(3wK + 2wL) and therefore wLLB = 4(3wK + 2wL).
Again, we do not do the calculations in detail, but note that the first-order conditions for the
creamery will be satisfied if 2wLLC = wKKC and wKKC + wLLC = 6(wK + 2wL). These conditions are
satisfied when wKKC = 4(wK + 2wL) and wLLC = 2(wK + 2wL).
b) Bakery: production, bKB ,LB   KB 2 LB 2 ; endowment, EB = (24, 0);

1 1
Creamery: production, cKC , LC   KC 2 LC 2 ; endowment, EC = (0, 24).

1 1
For the bakery, the problem is to maximize b = KB 2 LB 2 :wK KB  24 wLLB  0 . The creamery’s
1 1
problem is to maximize c = KC 2 LC 2 :wK KC wL LC  24 0 .

1 1
The first-order conditions are essentially the same as in X21.4. We find that wLLB = wKKB; but
the feasibility constraint becomes wKKB + wLLB = 24wK. Substituting for wLLB, we obtain KB =
12 and therefore wLLB = 12wK.
Again, we do not do the calculations in detail, but note that the first-order conditions for the
creamery will be satisfied if wLLC = wKKC and wKKC + wLLC = 24wL. These conditions are
satisfied when wKKC = 12wL and LC = 12.
 Richard and Seth, who have endowments (KR, LR) and (KS, LS) of capital and labour, form
two companies, a bakery and a creamery, which produce bread and cheese.
 The companies hire factors (KB, LB) and (KC, LC) at prices wK and wL, producing outputs
 1 1
 2
 1 1

2
b  K B 2  LB 2 and c  K C 2  LC 2 , which they sell at prices pB (= 1, so that bread is the
numeraire) and pc.
 Richard’s and Seth’s preferences over consumption bundles may be represented by the
bRcR bScS
payoffs: UR bR ,cR   and US bS ,cS   .
bR  cR bS  cS
 The companies seek to maximize their profits, given the production functions; and Richard
and Seth seek to maximize their utilities, given affordability constraints.
X21.6 We first consider production.

a) Write down an expression for the bakery’s profit, B.
 1 1

2
The bakery makes profits  B  KB 2  LB 2  wK KB  wLLB . With the numeraire, pB = 1, revenue
is simply the level of output.
b) By partially differentiating the expression for profit with respect to the factor inputs, KB
and LB, show that the first-order conditions for profit maximization can be rewritten:
 1 1
 1
pb KB 2  LB 2  KB 2wK  LB 2wL .
1
We have to partially differentiate the profit function with respect to capital and (separately)
with respect to labour, setting both partial derivatives to zero. This yields
 B
K B
1
 1 1

 K B  2 K B 2  LB 2  wK  0 and
 B
LB
1
 1 1

 LB  2 K B 2  LB 2  w L  0 . The result follows on
rearrangement of these expressions.
c) Hence, obtain the equivalent conditions, which hold when the creamery maximizes its
profits.
We do not complete the calculations, but by the symmetry of the situation that the firms
face, writing out the profit function, and obtaining first-order conditions for its maximization,
 1 1
we obtain pc KC 2  LC 2  KC 2 wK  LC 2 wL .  1 1
d) Show that the profit-maximizing conditions found in (b) and (c) imply that:
LB LC
i. the firms employ capital and labour so that KB  KC ;
We write the equalities wLLB½ = wKKB½ and wLLC½ = wKKC½, rewriting them as
1 1
w L LB 2 w L LC 2
1  1 1
. The result follows immediately.
wK KB 2 wK KC 2
LB
ii. writing the total endowments, LB + LC = L and KB + KC = K, KB  KL ;
L L L 1  t 
Say that LC = tLB. Then for the result of part i., KC = tKB. We write L
K
 K BB  KCC  LCB 1  t  ,
and the result follows.
wKwL
iii. wK  wL  pb  pc , so that prices of the two goods have to be equal.
We write KC½ =  L , and then substitute for K in the other first-order conditions
wL
wK C
1
2
C
½
obtained in c): p   1L  w L . Dividing through by the common factor L ,

1
wL 1
2
1
2 2
c wK C L C C
and writing the expression with pC as its subject, the result follows. We repeat the
exercise for the bakery.
e) Hence, confirm that both firms maximize their profits at any allocation for which (KB, LB) =
(K, L) and (KC, LC) = (1 – )(K, L). Sketch an Edgeworth box showing the allocations at
which both firms maximize their profits.
We have already shown above that profit maximization requires the firms to share the factor
inputs in the same proportion as they are in the endowment. Any division in which the
bakery obtains a fraction  of both inputs and the creamery a fraction (1 - ) of them is
consistent with firms achieving profit maximization, exchanging factor inputs to reach this
outcome.
We draw an Edgeworth box with dimensions equal to the endowments of capital and labour,
measuring the division of capital along the bottom edge and the division of labour along the
left edge, with the bakery’s labour represented by the distance from the left edge to the
division and the creamery’s by the distance from the division to the right edge, and likewise
representing the division of capital from the bottom edge for the bakery and from the top
edge for the creamery.
We then obtain the Pareto set as the upward diagonal in the box, with the gradient of the
isoquants that meet at this point equal to the common marginal rate of technical
KL 
1
substitution: MRTSB = MRTSC = 2
.
f) Given the condition that when maximizing profits both firms hire factors so that the value
of the marginal product equals the factor price, show that w K  1   KL 2 and w L  1   KL 2 .
1 1
b

KB
0.5
 LB0.5 
The marginal product of capital for the bakery, MPKB = KB KB0.5
. The value of the
K 
marginal product, VMPKB = pB MPKB = pB 
0.5
 LB 0.5 B
 . We require VMPK = wK, and pB = 1,
B
 K B 0.5
writing KB = K and LB = L,

K
B
0.5
KB
 LB0.5
0.5
  K 0.5
K
 L0.5
0.5
   L 0.5
, so that wK = 1 K 0.5 . The other equalities
B
between factor prices and endowments follow immediately.
X21.7 Continuing with the production process:

a) Rewrite the problem facing the bakery so that it maximizes profit subject to the constraint
of having a feasible production plan. Form the Lagrangean, .
The firm seeks to maximize its profits on the basis that it hires enough factor inputs to
produce its target output. We write its problem as
max
KB , LB

 B  pBb wK KB wLLB : b  KB0.5  LB0.5 , which gives us the Lagrangean, :  2
 b ,KB ,LB ,   pBb  wK KB wLLB  KB0.5  LB0.5  b .   2


b) By solving the first-order conditions for a maximum of , show that:
i. The multiplier,  = pb = 1.
We obtain the first-order conditions by partial differentiation with respect to all four
variables:
 b  pB    0


K B 
  w K  K B 0.5 K B 0.5  LB 0.5  0;  
LB 
  w L  LB  0.5 K B 0.5  LB 0.5  0 

 
 K B 0.5  LB 0.5  b  0
2
It follows that the multiplier  = pB;
ii. For both factors, the (value of the) marginal product is the factor price; and the
 .
1
wK LB
ratio of factor prices, wL  KB
2
Substituting for the multiplier, pKB KB LB wK , so that the value of the 0.5
 0.5 0.5

marginal product is the payment to the factor.
Concentrating on the middle pair of first-order conditions, we obtain the, by now,
familiar result: wKKB0.5 = wLLB0.5, so that the necessary result follows.
c) Similarly, obtain the first-order conditions associated with the profit-maximizing problem
for the creamery, showing that the multiplier equals the price, pc, and the ratio of factor
  . Hence confirm that

1 1
wK LC
1
K 2  L2
prices, wL  KC
2 LB
KB  KLCC  KL , so that the factor prices are wK  1
K2
1 1
K 2  L2
and wL  1 (and the final goods’ prices are pb = pc = 1).
L2
We omit the derivation of the first-order conditions, writing the relevant ones for these
calculations as wK KC
0.5
 
 KC 0.5 LC 0.5 and wLKC 0.5  KC 0.5  LC 0.5 . Equating the left  
  . We already know that   , and
1 1
wK LC wK LB
hand side of these expressions, we obtain wL  KC
2
wL
 KB
2
KB KC KB L KB KC
so LB
 LC
, or KC
 LB . As before, writing (KB, LB) = (K,  L), we obtain the result, LB
 LC
 KL .
C
Lastly, we see that for market clearing, we require wK KC  KC LC ; and we know
0.5
 0.5 0.5

that  = pB = pC = 1. Rearranging the expression so that wK is the subject, we obtain the result
K 0 . 5  L0 . 5 0 .5 0 .5
wK  0 .5
, and similarly w L  K 0.5 L
K L
X21.8 If the firms reach the allocation (KB, LB) = (K, L); (KC, LC) = (1 – )(K, L):
a) Show that MRTSB =   KL 2 = MRTSC; and explain why this ensures that every allocation at
1
which the firms maximize profits is also Pareto-efficient.
We know from X21.7 that MRTSB = 

b
K B

 
K B  0.5 K B 0.5  LB 0 .5 L 
   B 
0 .5
; and that
b
LB LB 
 0 .5 0 .5
K B  LB 
0 .5
 KB 
0.5
 
MRTSC =   LC  . It follows that if the bakery’s share of the endowment, (KB, LB) = (K, L),
 KC 
so that the creamery’s share (KC, LC) = (1 -)(K, L), then the marginal rate of technical
substitution is the same for both firms. We represent this property in an Edgeworth box by
drawing isoquants that share a common tangent. This means that there is no possibility of
either firm increasing its output without the other firm reducing its output, and so production
is Pareto efficient.
1 1
 L2
b) Confirm that for both businesses, VMPK  K
2
1 , and the marginal rate of transformation,
K2
MRT = 1. Interpret this result.
We define the value of the marginal product for each factor (for each firm) as the product of
the output price and the marginal product of the factor: so for the bakery, the value of the
marginal product of capital: VMPKB = pBMPKB. We have already established that pB = pC = 1,
and the result follows.
The marginal rate of transformation MRT =  ppb   1 . As production of bread increases,
c
production of cheese has to be reduced by the same amount. (This is not a general result,
but holds here because of our assumption of constant returns to scale in both production
functions.)
c) In an Edgeworth box, sketch the Pareto set, and the isoquants passing through the
allocation F: (KB, LB) = 13 K , L  and (KC, LC) = 23 K , L  .
In the Edgeworth box, we represent the endowment of capital by its length and the
endowment of labour by its height. At division, F, the bakery’s use of capital is represented by
the distance from the left edge of the box, and its use of labour by the height above the
bottom edge. In this case, the Pareto set is the upward diagonal. We draw the division, F, so
that it is one third of the distance from the bottom, left to the top, right corner of the box.
d) Show that at the allocation H: (KB, LB) =  K , L  and (KC, LC) = 1   K , L  , the bakery
 1 1

2
produces b =  K 2  L2 , while the creamery produces c = 1    K 2  L2  1 1
 2
This result follows directly from the homogeneity property of the production function.
Confirm that:
i. 
total output, b + c = K 2  L2 = y0;
1 1

2
This is simply the sum of the individual firm outputs in the case above. Note that with pB
= pC = 1, the total firm revenue will also be y0.
ii. the value of output, pbb + pcc, equals the cost of production, wKK + wLL;
0 .5 0 .5 0.5 0 .5
The cost of production C = wKK + wLL = K 0.5L K  K 0.5 L L = (K0.5 + L0.5)(K0.5 + L0.5)
K L
= (K0.5 + L0.5)2 = y0.
iii. both firms make zero profits.

Since the revenues and costs are equal, this follows immediately.
e) Sketch the production possibility frontier, illustrating on it point J', corresponding to input
allocation J.
In a diagram with output of bread measured on the horizontal axis and output of cheese
measured on the vertical axis, the production possibility frontier will, in this case, be a
straight line, with equation b + c = y0, so that MRT = -1. At the intersection with the vertical
axis, only cheese is produced; this is the equivalent of the bottom, left corner of the Pareto
set in the Edgeworth box. Similarly, at the intersection with the horizontal axis, only bread is
produced; this is the equivalent of the top, right corner of the Pareto set. For point J, a
proportion  of the distance from the bottom left corner of the diagonal in the Edgeworth
box, point J1 will also be a proportion  from the left hand edge of the production possibility
frontier.
X21.9 Now consider the problem facing Richard and Seth.

a) Write down an expression for Seth’s utility, showing that he consumes the share of output
(of both goods, and so of total output) that Richard does not. [Note: In other words, write
down an expression for Seth’s utility, given that bR + bS = b; cR + cS = c; and b + c = K 2  L2  1 1

2
.]
It will be useful to remember that b = (K0.5 + L0.5)2 and that c= (1 - )(K0.5 + L0.5)2. Then Seth’s
consumption bundle, (bS, cS) = (b – bR, c – cR) = [(K0.5 + L0.5)2 – bR, (1 - )(K0.5 + L0.5)2 – cR].
  K 0 .5  L0 .5 2  b  .  1   K 0.5  L0 .5 2  b 
Seth’s utility is US: U S b S , c S   bb Sc cS    .
R   S 
 
S S K 0.5  L0.5 2  b R  c R
b) Assume that Seth meets a utility target uS(bS, cS) = uS0. Write down an expression for
Richard’s utility maximization problem.
Richard seeks to maximize utility subject to Seth’s utility target. We can write the problem as
max bRcR
bR , cR bR  cR
:UbS ,cS   uS 0 .
c) Calculate Richard’s marginal utilities, MUBR and MUCR, and his marginal rate of substitution,
MRSR. Repeat the calculations for Seth.
For Richard, the marginal utility of bread, MUBR =
UR
bR  bRcRcR  b bRccR 2 
R R
  . In the same
cR 2
bR  cR
  . The marginal
UR b bRcR bR 2
way, we obtain marginal utility of cheese, MUC = R
cR  bR RcR  b 
2 bR  cR
R  cR
rate of substitution, MRSR =  MUBR     . We omit the calculations but confirm that for
MU R
C
cR 2
bR
     . cS 2 c  cR 2
MUB ,S
Seth, the marginal rate of substitution, MRS =  S
MUC ,S bS b  bR
cR
d) Show that if the marginal rates of substitution are equal, then bR  bcSS  bc . Using the
argument developed previously, confirm that these conditions will be satisfied whenever
Another random document with
no related content on Scribd:
and spending a quiet winter in the home of his boyhood. Next spring
came another change; Celestine died on March 9, 1144, and was
succeeded by Lucius II. To Lucius Henry went, and in his eyes he
found at least so much favour that he was acquitted of sundry
charges brought against him by emissaries from Anjou. But the
legation was apparently left altogether in abeyance; if it was not
renewed to Theobald—a point which is not quite clear—it was at any
rate not restored to Henry.[1037]
[1034] Will. Newb., l. i. c. 10 (Howlett, vol. i. p. 43). Cf. Ann.

Waverl. a. 1143 (Luard, Ann. Monast., vol. ii. p. 229).
[1035] “Alumpnus Andegavensium.” Joh. Hexh. (Raine), p.

146.
[1036] Gerv. Cant. (Stubbs), vol. ii. p. 384.
[1037] Joh. Hexh. (Raine), pp. 146, 147.
The tide which had borne both Henry and Stephen to their triumph
was in truth now rising far above their heads. The religious
movement of which Henry had once seemed destined to become a
leader had gone sweeping on till it left him far behind. It was the one
element of national life whose growth, instead of being checked,
seems to have been actually fostered by the anarchy. The only bright
pages in the story of those “nineteen winters” are the pages in the
Monasticon Anglicanum which tell of the progress and the work of
the new religious orders, and shew us how, while knights and
barons, king and Empress, were turning the fairest regions of
England into a wilderness, Templars and Hospitaliers were setting up
their priories, Austin canons were directing schools and serving
hospitals, and the sons of S. Bernard were making the very desert to
rejoice and blossom as the rose. The vigour of the movement
shewed itself in the diversity of forms which it assumed. Most of
them were offshoots of the Order of S. Augustine. The Augustinian
schools were the best in England; the “Black Canons” excelled as
teachers; they excelled yet more as nurses and guardians of the
poor. One of the most attractive features of the time is the great
number of hospices, hospitals, or almshouses as we should call
them now, established for the reception and maintenance of the
aged, the needy and the infirm. Such were the two famous houses of
S. Giles, Cripplegate, and S. Bartholomew, Smithfield; such was the
Hospital of S. Katharine near the Tower, founded in 1148 by
Stephen’s queen Matilda, and served by the canons of Holy Trinity at
Aldgate, to whom the younger “good Queen Maude” was almost as
devoted a friend as her aunt and namesake had been. Such, too,
was another foundation whose white church, nestling amid a clump
of trees in the meadows through which the little blue Itchen goes
winding down to the sea, is the only unmutilated remnant that
Winchester still retains of the handiwork of her legate-bishop Henry.
There, before he built his own fortified house, Henry founded for
thirteen poor old men the Hospital of the Holy Cross; and there,
while the dwelling which he made so strong for himself has perished,
the “Almshouse of noble Poverty” still stands—the hospital indeed
rebuilt by a later bishop to whom it owes its poetical name, but the
church unaltered since its founder’s days—a lasting memorial of that
better, spiritual side of his character which the world least saw and
least believed in. Another class of hospitals was destined for the
reception of poor travellers, especially pilgrims. Such had been, in
far-off Palestine, the original purpose of two societies of pious
laymen which had now made their way back into Europe and even
into England in the shape of two great military orders, the
Hospitaliers or Knights of S. John and the Templars. They, too, lived
by the rule of S. Austin. Another offshoot of the Augustinian order
consisted of the White Canons or Premonstratensians (so called
from their first establishment at Prémontré in the diocese of Laon),
for whom, in the midst of the civil war, Peter de Gousla endowed a
priory at Newhouse in Lincolnshire, while his wife founded a house
at Brodholm in Nottinghamshire for sisters of the same order.[1038]
“What shall we think,” exclaims an inmate of one of the great
Augustinian houses of Yorkshire, William of Newburgh,—“what shall
we think of all these religious places which in King Stephen’s time
began more abundantly to arise and to flourish, but that they are
God’s castles, wherein the servants of the true Anointed King do
keep watch, and His young soldiers are exercised in warfare against
spiritual evil? For indeed at that time, when the royal authority had
lost all vigour, the mighty men of the realm, and whosoever was
able, were all building castles either for their own protection or for
their neighbours’ hurt; and thus while through King Stephen’s
weakness, or rather through the malice of the Devil, who is ever a
nourisher of strife, evils were swarming and abundant, there did yet
more abound and more gloriously shine forth the wise and salutary
providence of the Almighty King, Who at that very time did the more
mightily confound the king of pride by raising up for Himself such
fortresses as beseemed the King of Peace. For in the short while
that Stephen reigned, or rather bore the title of king, there arose in
England many more dwellings of the servants and handmaids of
God than had arisen there in the course of the whole previous
century.”[1039]
[1038] The Augustinian houses are in Dugdale’s Monast. Angl.,

vol. vi. pt. 1; the hospitals, the military orders and the
Premonstratensians in vol. vi. pt. 2.
[1039] Will. Newb., l. i. c. 15 (Howlett, vol. i. p. 53).
It is significant that this enthusiastic outburst of the historian-canon

of Newburgh is called forth by the contemplation not of his own
order, but of three great Cistercian houses, Byland, Rievaux and
Fountains. Buried in their lonely wildernesses, the Cistercians seem
at first glance to have been intent only on saving their own souls,
taking no part in the regeneration of society at large. But the truth is
far otherwise. While the other orders were—if we may venture to
take up the suggestive figure employed by William of Newburgh—
the working, fighting rank and file of the spiritual army, the White
Monks were at once its sentinels, its guides and its commanding
officers; they kept watch and ward over its organization and its
safety, they pointed the way wherein it should go, they directed its
energies and inspired its action. For the never-ending crusade of the
Church against the world had at this time found its leader in a simple
Cistercian monk, who never was Pope, nor legate, nor archbishop,
nor even official head of his own order—who was simply abbot of
Clairvaux—yet who, by the irresistible, unconscious influence of a
pure mind and a single aim, had brought all Christendom to his feet.
It was to the “Bright Valley,” to Clairvaux, that men looked from the
most distant lands for light amid the darkness; it was to S. Bernard
that all instinctively turned for counsel and for guidance. The story of
S. Gilbert of Sempringham may serve for an example. The father of
Gilbert was a Norman holding property in Lincolnshire in the time of
Henry I.; his mother was a woman of Old-English descent. The boy
ran away from school and made his escape to France; there he
repented of his idleness, threw himself zealously into the pursuit of
letters, and after some years came home to set up in his native place
a school for boys and girls. He taught them a great deal more than
mere book-learning; his purity, sweetness and fervour won the very
hearts and souls of all who came under his influence; and there was
something in his lofty yet tender nature which made him seem
peculiarly fitted for a spiritual director of women. Seven maidens first
devoted themselves to the religious life under his guidance; others
soon followed their example; several men did the like. A double
monastery thus grew up at Sempringham, under the protection of
Bishop Alexander of Lincoln, in the earliest years of Stephen’s reign.
For some time it continued subject to no other rule than its founder’s
own will. He saw, however, the necessity for a more lasting basis of
organization; instead of trying to devise one himself, he applied to
the general chapter of Cîteaux and besought them to take charge of
his little flock. They, however, refused; since Gilbert had been
inspired to found a new religious society, they would not presume to
interfere with his mission; he must draw up a rule for his own spiritual
children. He ended by working out his scheme into a composite
institution which aimed at combining the excellencies of all earlier
rules, but in which the Cistercian element strongly predominated.
The Gilbertine priories, when fully constituted, consisted of four
orders of persons: canons, who followed the rule of S. Austin; lay-
brethren, nuns and lay-sisters, all bound by the rule of Cîteaux; while
the whole community was held together by certain additional
regulations specially devised by the founder. The new order spread
rapidly through eastern England; and before S. Gilbert’s own life
reached its close, he had the satisfaction of seeing his spiritual
children take a highly honourable part in the great ecclesiastical
struggle of which the foremost champion and victim was S. Thomas
of Canterbury.[1040]
[1040] On the Gilbertines and their founder see Dugdale,

Monast. Angl., vol. vi. pt. 2, pp. iii*–lix*; and Will. Newb., l. i. c. 16
(Howlett, vol. i. pp. 54, 55).
One sees in this story how instinctively the religious reformers of

the day went to Cîteaux for a model and a guide; and one sees, too,
how little the Cistercians were as yet inclined to abuse their influence
by reaping where they had not sown. The extraordinary position of
Bernard himself was not of his own seeking; the “care of all the
churches” came upon him whether he would or not; as one of his
biographers expresses it, all Christendom looked upon him as a
divinely-appointed Moses of whom the ordained hierarchy and even
the supreme pontiff himself were but subordinate mouthpieces and
representatives.[1041] Like their prototype in the Old Testament, the
Aarons of the time did not always understand the policy or
appreciate the aims of their inspired brother, and the spiritual party in
the Church sometimes found its worst stumbling-block within the
walls of the Lateran. Year by year, however, its influence grew and
spread, till on the death of Pope Lucius II. in February 1145 a
Cistercian, Bernard abbot of S. Anastasius at Rome, was raised to
the chair of S. Peter by the name of Eugene III. With him the anti-
Bernardine party had no chance of a moment’s hearing; threats,
flatteries or bribes were all alike thrown away upon a pontiff whose
glory and whose strength lay in having no will of his own, in being
simply the voice which proclaimed and the hand which executed the
thoughts of his greater namesake at Clairvaux. “They say I am Pope,
not you!” wrote S. Bernard to him,[1042] half playfully, half in gentle
reproach, and Eugene gloried in the saying. A new departure in the
policy of the Roman see was marked by the fulfilment of one of
Bernard’s most cherished schemes, the preaching of a new crusade
for the deliverance of the Holy Land, whence an imploring cry for
help came from the widowed Queen Melisenda—for King Fulk of
Anjou had been cut off suddenly in the midst of his labours, and his
realm, left to the rule of a woman and a child, was rapidly falling a
prey to the Infidels.[1043] At Vézelay, on Easter-day 1146, the young
King Louis of France took the cross from S. Bernard’s own hands
amid a scene of the wildest enthusiasm. The Emperor Conrad soon
followed his example, and at Pentecost 1147 the expedition set out.
[1041] Ern. Bonneval, Vita S. Bernardi, l. ii. c. 4 (S. Bern. Opp.,

ed. Mabillon, vol. ii. col. 1102).
[1042] S. Bernard. Ep. ccxxxix (Opp., Mabillon, vol. 1. col.

235).
[1043] On Fulk’s reign in Palestine see Will. Tyr., ll. xiv. and xv.
The exact date of his death is doubtful; Will. Tyr., l. xv. c. 27, and
l. xvi. c. 2, gives it as November 13, 1142, and says that Baldwin
II. was crowned on the following Christmas-day. But in l. xvi. c. 4
he says that Edessa was lost in the interval between Fulk’s death
and his son’s coronation, and it is known from other sources that
Edessa was taken by the Infidels on Christmas-night 1144.
Moreover there is in Paoli’s Codice Dipl. del S. Mil. Ord.
Gerosol., vol. i. p. 29, a charter of Melisenda dated “1149,
Indictione xii.,” which she calls the fifth year of her son’s reign.
The Chronn. S. Albin. and S. Serg. (Marchegay, Eglises, pp. 35,
146), Chron. Turon. Magn. (Salmon, Chron. Touraine, p. 134),
Chron. Namnet. (Rer. Gall. Scriptt., vol. xii. p. 558) and Ric.
Poitiers (ib. p. 415) all date Fulk’s death 1143; the Chron. S. Flor.
Salm. (Marchegay, Eglises, p. 191) places it in 1141, but couples
it with the death of Pope Innocent, which certainly occurred in
1143. Fulk’s end was characteristic, being caused by his own
impetuosity. He was thrown from his horse in dashing too hastily
after a hare started by some children, as he was riding with
Melisenda outside the walls of Acre (Will. Tyr., l. xv. c. 27). See
the peculiar philosophizing of the Tours chronicler thereon
(Salmon, as above).
As far as its direct object was concerned, this second crusade

failed completely; yet it had not been projected in vain. As said a
friend and biographer of S. Bernard: “If it was God’s will thereby to
deliver, not the bodies of many eastern folk from the bondage of the
heathen, but the souls of many western folk from the bondage of sin,
who shall dare to ask why He has thus done?”[1044] If the movement
did nothing for Palestine, it did something for England. Torn and
exhausted with her internal divisions, she could take no part in it as a
state; but nowhere was it more readily joined by individual
volunteers. The preaching of the Crusade was a spark which kindled
into flame, in the heart of more than one of the troublers of the land,
the smouldering embers of a capacity for better things; it was a
trumpet-call which roused more than one brave knight to forsake the
miserable party-strife with which perhaps in his secret soul he had
long been growing disgusted, and fling into a better cause the
energies which he had been wasting upon his country’s ruin.[1045]
But the movement did more for England than this. It brought to light
among the English people a spirit whose existence at such a time
could otherwise hardly have been suspected. The one success of
the Crusade was achieved by a little independent squadron of one
hundred and sixty-four ships which sailed from Dartmouth on May
23, six days before the feast of the Ascension, 1147. The expedition
consisted of Germans, Flemings and Englishmen, the latter being
the most numerous. Nearly all were men of low degree; they had no
commander-in-chief; each nationality chose its own leader. The “men
of the Empire”—a body of Low-Germans who, for some unknown
reason, chose to be independent of the great Imperial host—
followed Count Arnold of Aerschot, who seems to have been the only
person of rank in the whole assemblage; the Flemings and the men
of Queen Matilda’s county of Boulogne were led by Christian of
Gistelles. The English grouped themselves according to the districts
of their birth under the guidance of four marshals; Hervey of Glanville
led the men of Norfolk and Suffolk; Simon of Dover[1046]
commanded the ships of Kent; a man named Andrew was chief of
the Londoners; and a miscellaneous contingent from other parts of
the country was headed by Saher de Arcelles. The whole company
bound themselves by vows almost as stringent as those of a
religious order; they were pledged to eschew all fine clothes and
personal indulgences, and to help and avenge one another in all
things as sworn brethren; each ship had its own chaplain and its
regular services, as if it were a parish; every man confessed and
communicated once a week; and for the enforcement of all these
rules two men were elected out of every thousand to form a body of
sworn judges[1047] who should administer the common funds and
assist the marshals in maintaining order. These warrior-pilgrims,
sailing down the western coast of the Spanish peninsula on their way
to the Mediterranean Sea, touched at Oporto; at the entreaty of the
Portuguese King Alfonso and his people they exchanged their
intended crusade in Holy Land for one which was perhaps more
useful—a campaign for the deliverance of Christian Portugal from its
Moorish oppressors. The Moors who occupied Lisbon were starved
into surrender by a four months’ blockade; the crusaders entered the
city in triumph; in the hour of temptation English discipline proved
strong enough to control German greed,[1048] and renouncing all
share in the fruit of their victory these single-hearted soldiers of the
Cross made over the future capital of Portugal to its Christian
sovereign and went home rejoicing that they, a few poor men of
lowly birth and no reputation, had been counted worthy to strike a
successful blow for the Faith, while its royal and imperial champions
at the head of their countless hosts met with nothing but disaster and
disgrace.[1049]
[1044] Geoff. Clairvaux, Vita S. Bern., l. iii. c. 4 (S. Bern. Opp.,

Mabillon, vol. ii. col. 1120).
[1045] See, in particular, the cases of William of Cricklade and

Philip of Gloucester, Gesta Steph. (Sewell), pp. 111, 119, 120.
[1046] “Dorobernensis,” Osbern. De Expugn. Lyxbon. (prefixed

to Itinerarium Regis Ricardi, Stubbs), p. cxliv. This ought to mean
Canterbury; but is not Dover more likely in this case?
[1047] “Qui judices et conjurati dicerentur.” Osbern (Stubbs,

Itin. Reg. Ric.), p. cxliv.
[1048] The characteristic way in which the Germans and the

English acted when they got into the city should be noticed in
Osbern (Stubbs, Itin. Reg. Ric.), pp. clxviii.–clxxx.
[1049] Osbern (Stubbs, Itin. Reg. Ric.), pp. clxxxi, clxxxii. See
also a letter in Martène and Durand, Ampliss. Coll., vol. i. cols.
800–802; another in Pertz, Mon. Germ. Hist., vol. xvii. p. 27; and
Hen. Hunt. l. viii. c. 27 (Arnold, p. 281).
There was no need to despair of a country whose middle and

lower classes could still produce men capable of an exploit such as
this. When a spontaneous gathering of poor yeomen, common
sailors and obscure citizens could reveal such a spirit, it was plain
that all England wanted to rescue her from her misery was a
competent leader. S. Bernard, watching over the fortunes of the
English Church through the eyes of his brethren at Fountains and
Rievaux, had seen this already; and he saw, too, that it was vain to
look for such a leader in either the king or the king-maker, Henry of
Winchester. Before the Church of England could rescue the state,
she must be freed from the political entanglements into which she
had been dragged by Henry’s impetuosity, and enabled to resume a
position of spiritual independence under her rightful leader, the
archbishop of Canterbury. With this view the whole Cistercian order
in England, supported and directed by S. Bernard, had set their
faces against William Fitz-Herbert’s appointment to the see of York,
as an attempt of king and legate to override the constitutional rights
of the southern primate and of the Church as a whole. “The bishop of
Winchester and the archbishop of York do not walk in the same spirit
with the archbishop of Canterbury, but go their own way in opposition
to him; and this comes from the old quarrel about the legation”—thus
Bernard summed up the case.[1050] Moreover the saving clause
whereby William of Durham was allowed to swear by proxy in behalf
of his namesake appears to have been interpolated by the latter’s
friends into the Papal decree; for “One William has not sworn, yet the
other is archbishop”[1051] was the burthen of S. Bernard’s cry to the
Pope; and when in 1144 a cardinal-legate, Hicmar, came to England
with a pall for William of York, he promised Bernard not to give it till
he should have received the oath from the bishop of Durham in
person.[1052]
[1050] In a letter to Eugene III., S. Bern. Ep. ccxxxviii. (Opp.
Mabillon, vol. i. col. 234).
[1051] S. Bern. Epp. ccxxxv.–ccxxxvi., both to Celestine II. (as

above, cols. 229–231).
[1052] S. Bern. Ep. ccclx. (as above, cols. 324, 325)—to Abbot
William of Rievaux. See also Joh. Hexh. (Raine), p. 149, and, for
date, note u, ibid.
Neither prelate took any notice of Hicmar’s presence; but when he

was recalled by the death of Pope Lucius and the accession of
Eugene, the archbishop of York suddenly perceived what a blunder
he had made, and hurried to Rome in quest of the pall about which
he had hitherto been so indifferent. Instead of giving it, Eugene
suspended him from all episcopal functions till such time as William
of Durham should have taken the oath required by the sentence of
Pope Innocent. The archbishop hereupon retired to Sicily and took
up his abode there with his fellow-countryman the chancellor, Robert
of Selby or Salisbury,[1053] under the protection of King Roger. As
Roger was then at bitter feud with the Church, this step was not
likely to mend William’s ecclesiastical reputation. His cause, bad
from the first and made worse by his own carelessness, was
presently ruined by his friends. The leaders of the opposition to him
in England were the abbots of Rievaux and Fountains; the latter,
Henry Murdac, was a native of Yorkshire who in Archbishop
Thurstan’s time had given up houses and lands, home and kindred,
to go out to Clairvaux at the call of S. Bernard. In 1135 he was sent
thence to found the abbey of Vauclair;[1054] in 1143 he was
appointed to succeed Abbot Richard II. of Fountains, who had died
at Clairvaux while on his way to attend the general chapter of his
order at Cîteaux.[1055] Henry Murdac went back to his native land
charged with an implied commission to make Fountains an English
Clairvaux and himself an English representative of S. Bernard, and
he fulfilled his charge with true Cistercian zeal and fidelity.[1056] As
soon as William’s suspension became known, his friends attributed it
to the influence of Murdac, whom they sought to punish by making
an armed raid upon his abbey. Plunder, of course, they got little or
none in a freshly-reformed Cistercian house;[1057] so, after a hurried
and unsuccessful search for Murdac himself, they set the place on
fire. Every stone of it perished except the church, which escaped as
by miracle; and the abbot escaped with it, for he had been lying all
the while, unnoticed by the passion-blinded eyes of his foes,
prostrate in prayer before the high altar. The energy of the monks
and the sympathy of their neighbours soon enabled Fountains to rise
from its ashes more glorious than before;[1058] but William’s day of
grace was at once brought to a close by this outrage. At a council
held in Paris in the spring of 1147, the abbot of Fountains and a
deputation from the chapter of York once more formally presented to
the Pope their charges against their primate, and Eugene deposed
William from his episcopal office.[1059] On the eve of S. James the
chapter of York, with the two suffragan bishops of the province—
Durham and Carlisle—met in obedience to a papal mandate for the
election of a new archbishop. The choice of the majority fell upon
Henry Murdac. From Clairvaux, whither he had gone after the
council, the abbot of Fountains was summoned to the papal court at
Trier, and there, on the octave of S. Andrew, he received his
consecration and his pall both at once from Pope Eugene’s own
hand.[1060]
[1053] Joh. Hexh. (Raine), pp. 150–152. Robert was “oriundus

in Angliâ, scilicet in Salesbiâ.” Mr. Raine renders this Selby;
Twysden made it Salisbury; Bishop Stubbs (Lect. on Mediev. and
Mod. Hist., p. 133), leaves the question undecided.
[1054] On the earlier life of Henry Murdac see Dixon and

Raine, Fasti Ebor., pp. 210–213; and Walbran, Memor. of
Fountains, vol. i. p. 84, note 3.
[1055] Walbran, Memor. of Fountains, vol. i. pp. 78, 81–83. S.

Bern. Epp. cccxx, cccxxi (Opp. Mabillon, vol. i. cols. 297, 298).
[1056] Walbran, Memor. of Fountains, vol. i. pp. 84, 85.

[1057] “Ferentes secum spolia, parum quidem pecuniæ, sed
plurimum dampnationis.” Walbran, Memor. of Fountains, vol. i. p.
102.
[1058] Ib. pp. 101, 102.
[1059] On the council of Paris see Labbe, Concilia (Cossart),

vol. xxi., cols. 709, 710. As to the date, it appears from Jaffé
(Regesta Pontif. Rom., pp. 626, 627) that Eugene reached Paris
before Easter (April 20) and was there till June 11; so the council
must fall in the interval. On William’s deposition see Gerv. Cant.
(Stubbs), vol. i. p. 134. “Hoc concilio” ought, by all logical and
grammatical rules, to mean the council of Reims, held in March
1148, and of which Gervase has just been speaking. Accordingly
most of his commentators (including the editors of the Fountains
and Hexham books, and the compilers of the Fasti Eboracenses)
say that William was deposed at the council of Reims; and then,
as his successor was undoubtedly consecrated in December
1147, they are obliged to antedate the council of Reims by a
year. But Gervase himself says, almost in the same breath, that
the deposition took place in Paris. He has confused the two
councils; see Pagi’s note to Baronius, Annales, vol. xix. pp. 7, 8;
and cf. Joh. Hexh. (Raine), p. 154.
[1060] Joh. Hexh. (Raine), pp. 154, 155. Gerv. Cant. (Stubbs),
vol. i. p. 135. Walbran, Memor. of Fountains, vol. i. p. 103. Will.
Newb., l. i. c. 17 (Howlett, vol. i. p. 56). The Hist. Pontif. (Pertz,
Mon. Germ. Hist., vol. xx. p. 518) says Henry was consecrated at
Auxerre, but this is incompatible with dates.
The subsequent conduct of Stephen and Henry of Winchester

proved that their aim in securing the occupation of the northern
primacy had been rightly understood by Eugene and Bernard. They
had staked everything upon the success of their scheme, and when
it failed not only the king but even the once cool and sagacious
bishop completely lost his head. Upon William himself the papal
sentence had the very opposite effect; it woke him from his dreams
of easy dignity and worldly pride; from that moment the idle, showy,
self-indulgent young ecclesiastic changed into an humble saint, and
when he came home next year it was not to renew the strife but to
turn away from the world and possess his soul in patience.[1061] But
his uncles would not hear of submission; Henry took him to live in his
own house, and there persisted in ostentatiously treating him with all
the honours due to the archbishop of York;[1062] and when in the
summer of 1148 the new archbishop also came back to England,
Stephen demanded sworn security for his fidelity before he would let
him set foot in the country.[1063] The citizens of York, instigated by
the treasurer of the see, Hugh of Puiset, who like William was a
nephew of the king, shut their gates in their primate’s face; he
withdrew to Ripon, laid his diocese under interdict and
excommunicated Hugh; but Hugh, strong in the support of his
uncles, defied the interdict and was even impudent enough to return
the excommunication.[1064]
[1061] Joh. Hexh. (Raine), p. 154.
[1062] Ibid. Will. Newb., l. i. c. 17 (Howlett, vol. i. p. 56).
[1063] Ibid. Oddly enough, this York affair is almost the only
one in which William rather inclines to take the part of the king.
[1064] Joh. Hexh. (Raine), p. 158.
In the southern province matters had come to a still more

dangerous crisis. Early in 1148 all the English bishops were
summoned by the Pope to a council which was to meet at Reims on
Mid-Lent Sunday. Three of them—Hereford, Chichester and Norwich
—were sent by Stephen himself; but when the archbishop of
Canterbury made the usual application for leave to quit the country,
the king refused, set a watch at every port to stop his egress, and at
his brother Henry’s instigation swore that if Theobald did go he
should be banished on his return. Theobald however had made up
his mind to go at any cost; he slipped away in an old broken boat
with only two companions—Roger of Pont-l’Evêque and Thomas of
London, the latter of whom had now been for several years the most
trusted medium of intercommunication between the primate and the
court of Rome. The daring voyagers reached their journey’s end in
safety, and Theobald was triumphantly presented to the council by
the Pope as one who had swum rather than sailed across the
Channel for the sake of his duty to the Church.[1065] The bishops
who had failed to attend were all suspended, Henry of Winchester
being specially mentioned by name. His brother, however,—the good
count of Blois who seems to have been at once the scapegoat and
the peacemaker for all the sins of his family, and who was held in the
deepest esteem by both Eugene and Bernard—made intercession
on his behalf, and obtained a relaxation of the sentence against him
on condition of his coming to Rome within six months.[1066] As for
the king, Eugene would have excommunicated him at once; but for
him the other Theobald stepped forward as mediator, like Anselm in
a somewhat similar case, and procured him a respite of three
months.[1067] The intercessor’s reward was the threatened sentence
of banishment, issued as soon as he returned to Canterbury. He
withdrew into France and appealed to the Pope, while Stephen
seized the temporalities of the see and began playing the part of the
Red King on a small scale. Eugene wrote to all the English bishops,
severally and in a body, bidding them summon the king to restore the
primate at once, lay all his dominions under interdict if he refused,
and tell him that he should certainly be excommunicated by the Pope
on Michaelmas day. The bishops however were all on the court-side;
the interdict, duly published by Theobald, was unheeded save in his
own diocese; and the king remained obstinate.[1068] But his wiser
queen, aided by William of Ypres, who, however he may have sinned
against others, was unquestionably Stephen’s truest friend, made an
effort to restore peace; and at their request Theobald removed to St.
Omer, as being a more accessible place for negotiation than his
French retreat.[1069]
[1065] Hist. Pontif. (Pertz, Mon. Germ. Hist., vol. xx.), p. 519;
Gerv. Cant. (Stubbs), vol. i. p. 134. Both accounts seem to be
derived from a letter of S. Thomas (Ep. ccl., Robertson, Becket,
vol. vi. pp. 57, 58). Thomas’s presence at the council is distinctly
stated in Hist. Pontif. (as above), p. 522, and so is that of Roger
of Pont-l’Evêque.
[1066] Hist. Pontif. (as above), p. 520. Cf. Gilb. Foliot, Ep.
lxxvi. (Giles, vol. i. p. 92).
[1067] Hist. Pontif. (as above), p. 519.
[1068] Hist. Pontif. (Pertz, Mon. Germ. Hist., vol. xx.), pp. 530,
532.
[1069] Gerv. Cant. (Stubbs), vol. i. p. 135.
Matilda of Boulogne doubtless saw what Theobald must have

known full well, that the quarrel involved a great deal more than
strictly ecclesiastical questions. The issue which the ordeal of battle
had failed to decide was on its trial now in a different form and before
another tribunal. The most curious symptom of this feeling, perhaps,
was the action of Brian Fitz-Count, who, after having been for years
Matilda’s most devoted and most successful champion in the field,
suddenly exchanged the sword for the pen and brought out a
defence of his Lady’s rights in the shape of a little treatise which
gained the approval of one of the cleverest men and greatest
scholars of the time, Gilbert Foliot, abbot of Gloucester.[1070]
Geoffrey Plantagenet, with his Angevin quickness, was the first
openly to proclaim the true position of affairs by sending to Stephen,
through Bishop Miles of Térouanne, a formal challenge to give up his
ill-gotten realm and submit to an investigation of his claims before
the papal court. Stephen retorted by a counter-challenge, calling
upon Geoffrey to give up his equally ill-gotten duchy before he would
agree to any further proceeding in the matter.[1071] Geoffrey took him
at his word, but in a way which he was far from desiring. He did give
up the duchy of Normandy, by making it over to his own son, Henry
Fitz-Empress.[1072]
[1070] Gilb. Foliot, Ep. lxxix. (Giles, vol. i. pp. 94–102).
[1072] Chron. S. Albin. a. 1149 (Marchegay, Eglises, p. 36).

But the story of Gilbert Foliot’s consecration shews that the
cession must really have taken place in 1148.
The crisis was now close at hand; Stephen was at last face to face
with his true rival. He appears to have consented, as if in
desperation, to the proposed trial at Rome. It seems at first glance
as if the envoys whom he sent to represent him there must indeed
have been driven to their wits’ end for an argument in his behalf
when they raked up again a scandal which S. Anselm had laid to rest
half a century ago, as to the validity of the marriage between
Matilda’s father and mother.[1073] Yet such was the argument
publicly put forth by many voices against the legality of her claims to
the crown; and though one account of the proceedings states that
her adversaries were triumphantly confuted by Bishop Ulger of
Angers,[1074] another, written by an eye-witness whose own opinions
were wholly in her favour, declares that her advocates answered
never a word.[1075] The trial seems to have ended without any
decision;[1076] it was however quickly followed by a very significant
event. The witness just referred to was Gilbert Foliot, a Cluniac monk
who since 1139 had been abbot of Gloucester, and whose reputation
for learning, wisdom and holiness had secured to him the confidence
of the primate and the consideration of all parties alike in Church and
state. He had reluctantly and after some delay obeyed Theobald’s
summons to join him at the papal court; once there, he seems to
have flung all his energies into the organization of the new policy of
which Theobald was to be the leader.[1077] During the session of the
council at Reims the bishop of Hereford died.[1078] The Pope at once
appointed Gilbert Foliot vicar of the diocese;[1079] in September he
was consecrated by Theobald at St. Omer, with the consent and
approval of the young duke of the Normans, given on the express
condition that he should do homage for the temporalities of his see
to the duke and not to the king.
[1073] Gilb. Foliot, Ep. lxxix. (Giles, vol. i. p. 101). Hist. Pontif.
(Pertz, Mon. Germ. Hist., vol. xx.), p. 543.
[1075] Gilb. Foliot, Ep. lxxix. (as above).
[1076] From the way in which this trial is brought into the Hist.
Pontif., it would at first glance seem to have taken place in 1151.
But the presence of Bishops Ulger of Angers and Roger of
Chester, both of whom died in 1149, and the account of the
proceedings written by Gilbert Foliot to Brian Fitz-Count clearly
prove the true date to be 1148.
[1077] Gilb. Foliot, Epp. vi., vii., lxxvi. (Giles, vol. i. pp. 13, 14,
92).
[1078] Hist. Monast. S. Petr. Glocestr. (Hart), vol. i. p. 18.
[1079] “G. gratiâ Dei abbas, et Herefordiensis ecclesiæ

mandato Domini Papæ vicarius,” runs the salutation of his Ep.
lxxviii. (Giles, vol. i. p. 93).
The very first thing Gilbert did was to break this promise;[1080] but
that Theobald should have consecrated such a man on such terms
was a sign of the times which Stephen could hardly fail to
understand. Theobald himself soon afterwards ventured back to
England; crossing from Gravelines, he landed at Gosford in the
territories of Hugh Bigod, by whom he was hospitably received; the
bishops of London, Chichester and Norwich, with several barons,
came to meet him at Hugh’s castle of Framlingham; the king was
reconciled, the primate restored, the interdict raised, and the
suspended prelates, all save one, allowed to resume their functions.
[1081] The exception was Henry of Winchester, who by neglecting to
go to Rome within the prescribed six months had necessarily fallen
under the sentence pronounced against him by Eugene at the
council of Reims. Even to him, however, Theobald was willing at
Stephen’s request to hold out the hand of fellowship and
forgiveness.[1082] But Henry of Winchester’s days of king-making
were over. It was time for another Henry to appear upon the political
scene, to take his cause into his own hands and stand forth as the
champion of his own claims against the man who had supplanted
him on his grandfather’s throne.
[1080] Hist. Pontif. (Pertz, Mon. Germ. Hist., vol. xx.), pp. 532,
533.
[1081] Gerv. Cant. (Stubbs), vol. i. pp. 136, 137.
[1082] Joh. Hexh. (Raine), p. 152.

CHAPTER VIII.
HENRY DUKE OF THE NORMANS.
1149–1154.
No loving hands have done for the early life of Henry Fitz-Empress
what they did for that of his contemporary, his friend, his opponent
Thomas of London; we have no stories of his boyhood, no picture of
his home. Home indeed, in the full sense of the word, he never had
and never could have. That instinctive attachment to one particular
spot, or at the least to one particular country, which is innate in most
men, was to a child of Geoffrey and Matilda simply impossible.
Geoffrey was the son of an Angevin count and a Cenomannian
countess; Matilda was the daughter of a king born in England of a
Norman father and a Flemish mother, and of a queen whose parents
were the one a Scottish Celt, the other a West-Saxon with a touch of
High-German blood. In the temper of the Empress the Norman
element was undoubtedly the strongest; no trace can be seen in her
of the gentle spirit of her mother; and it is clear that no lingering
regrets for the land of her birth[1083] haunted the girl-bride of the
Emperor in her palace at Aachen as they haunted the monk Orderic,
from boyhood to old age, in his cell at Saint-Evroul. Yet when she
came to Normandy in her twenty-third year, she came there
unwillingly and as a complete stranger. If Henry was to inherit any
national or patriotic feeling at all, it could not be from his mother;
what she transmitted to him instead was a sort of cosmopolitanism
which saved the future duke of Normandy and king of England from
the too exclusive influence of the demon-blood of Anjou, not by
making him a Norman, still less an Englishman, but by rendering his
nationality a yet more insoluble problem than her own. Even in his
father, too, there are signs of a divided national sentiment. The son
of Aremburg of Maine, the grandson and heir of Elias, could not cling
to the black rock of Angers with the exclusive attachment of its
earlier counts; a share of his patriotic affection and pride must have
been given to that other, red rock above the Sarthe which had held
out so long and so bravely against both Normandy and Anjou, to that
Cenomannian land of heroes which Norman and Angevin alike had
counted it their highest glory to overcome and win. It may have been
by chance, or it may have been of set purpose, that Geoffrey and
Matilda were at Le Mans when their first child was born; no other
spot could have been half so appropriate. The land which Normans
and Angevins and even Englishmen[1084] had done their utmost to
wipe out of the list of states, the land whose claim to a separate
existence, ignored or denied by them all, had yet proved the
insurmountable stumbling-block which forced them into union:—that
land was the most fitting birth-place for the child who was to be
neither Norman, nor Angevin, nor English, and yet was to be all three
at once. The vengeance of Maine upon her conquerors formed a
characteristic close to her national career. They had swallowed her
up at last; but they had no sooner done it than she gave a master to
them all.
[1083] She was born in London: Will. Fitz-Steph. (Robertson,

Becket, vol. iii.), p. 13.
[1084] Eng. Chron. a. 1073.
If, then, Normandy, England and Anjou had each a part in Henry,
Le Mans had two parts, as being at once the home of his father’s
mother and the scene of his own birth. His earliest recollections,
however, must rather have been associated with Normandy. His first
journey thither was made when he was about twelve months old,
when he accompanied his mother on a visit to King Henry in the
spring 1134. His brother Geoffrey was born at Argentan on June 1,
and the two children narrowly escaped being left motherless under
their grandfather’s care.[1085] Possibly this made them all the dearer
to him; he certainly found in them his last earthly pleasure, of which

Download Intermediate Microeconomics 1st Edition Mochrie Solutions Manual all chapters

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Download Intermediate Microeconomics 1st Edition Mochrie Solutions Manual all chapters

Uploaded by

Copyright:

Available Formats

Intermediate Microeconomics 1st

Edition Mochrie Solutions Manual

Intermediate Microeconomics 1st Edition Mochrie Test

Workouts in Intermediate Microeconomics 9th Edition

Intermediate Microeconomics and Its Application 12th

Intermediate Microeconomics and Its Application 11th

Intermediate Microeconomics with Calculus A Modern

Microeconomics Australian 1st Edition Perloff Solutions

Intermediate MACRO 1st Edition Barro Solutions Manual

Microeconomics Canadian 1st Edition Karlan Solutions

Solutions Manual: Part V

Assume that they agree to trade 1 kg of carrots for 2 kg of broad beans.

  ; and marginal utility of carrots, MU =

the result follows. bM*,cM *  2 , 2

c) Explain why we can write Lukas’s problem as having two constraints:

d) By obtaining the first-order conditions, confirm that cL *  2 .

The first-order conditions for an optimum can be written as

X20.13 Assume that Rachel’s maximization problem can be written as:

Taking the first two, we see that 

from cross-multiplying terms.

b) Hence or otherwise, demonstrate that Rachel’s most preferred affordable bundle is

c) Show that as the relative price, , increases, cR increases, but bR decreases.

d) Sketch Rachel’s price offer curve.

bS*,cS *  23 12  12 , 13 12  12 81 1 , 41  .

with a total of 24 kg of both goods in every division.

     0 , so that      . Then since the right hand side of these

For Rachel, marginal rate of substitution, MRS : MRS(bR, cR) =

X20.27 We can write Rachel’s problem formally as:

  0 ,and    0 , so that        . From the latter

Sonja: utility, US bS ,c S   bS 3 c S 3 , endowment ES = (6, 12).

We write the Lagrangean, , for Sonja’s constrained optimization as:

   0 ,and    0, so that        . From the latter

6(2 + ) = 3bS, so that we obtain bS *,c S *   2 1  2 , 42    .   

We now return to Rachel’s problem, which we simplify as:

the quadratic formula, we obtain   1  22177  0.60 .

b) Rachel: utility, UR bR ,cR   bR 2 cR 2 , endowment ER = (24, 0);

Sonja: utility, US bS , cS   bS 2 c S 2 , endowment ES = (0, 24).

We write the Lagrangean, , for Sonja’s constrained optimization as:

   0 ,and    0, so that        . From the latter

24 =2cS, so that we obtain bS *, c S *   12

We now return to Rachel’s problem, which we simplify as:

On differentiating, we obtain the first-order condition:

iii. Mr Crusoe maximizes profit by just breaking even; and

iv. Robinson maximizes utility given the production constraint.

Writing the Lagrangean for both of these problems separately, we have

a) Bakery: production, bKB ,LB   KB 3 LB 3 ; endowment, EB = (18, 12);

Creamery: production, cKC ,LC   KC 3 LC 3 ; endowment, EC = (6, 12).

creamery’s problem is to maximize c = KC 3 LC 3 :wK KC 6 wL LC 12  0 .

b) Bakery: production, bKB ,LB   KB 2 LB 2 ; endowment, EB = (24, 0);

Creamery: production, cKC , LC   KC 2 LC 2 ; endowment, EC = (0, 24).

problem is to maximize c = KC 2 LC 2 :wK KC wL LC  24 0 .

X21.6 We first consider production.

obtained in c): p   1L  w L . Dividing through by the common factor L ,

writing KB = K and LB = L,

between factor prices and endowments follow immediately.

X21.7 Continuing with the production process:

 b ,KB ,LB ,   pBb  wK KB wLLB  KB0.5  LB0.5  b .   2

It follows that the multiplier  = pB;

  . Hence confirm that

which the firms maximize profits is also Pareto-efficient.

We know from X21.7 that MRTSB = 

iii. both firms make zero profits.

X21.9 Now consider the problem facing Richard and Seth.

[1034] Will. Newb., l. i. c. 10 (Howlett, vol. i. p. 43). Cf. Ann.

the result follows. bM,cM   2 , 2

bS,cS   23 12  12 , 13 12  12 81 1 , 41  .

6(2 + ) = 3bS, so that we obtain bS ,c S   2 1  2 , 42    .   

24 =2cS, so that we obtain bS , c S   12