lOMoARcPSD|1904111

ECOs312-001 Namel\,-lrtl iolr,,: l-lco:ix,

ExamII
19 November2013

I. Definition: Defineand/orexplainthe followingterm:

1. Equivalent
variationmeasureof consumer surplus

Revealed Preference
2. a. Illustrategraphically
(in a 2 goodworld)a pairof choicesthat is consistentwith
the weakaxiom.
b. Illustrategraphically
(in a 2 goodworld)a pairof choicesthat violates WARP.

3. Considerthreeconsumption bundlesXo,Xt, andx2,whicha consumerpurchases at price

p0,
vectors pt, p2
and respectively. Eachbundlerepresents consumption
levelsof three
separategoods. Letx/ = (xi, xi, x3),y' = (p'r,pt, pI),j = 0,L,2.

po- 13,2,t1 xo- 7L,2,31

pt = (2,2,I) y.t = (2,1,2)
p2=(I,2,I) f=(3,5,1)
a. Usethe algebraicstatement of the weakaxiomto determine(demonstrating
work):
i) Is bundle0 revealedpreferred
to bundle1? Is 1 revealedpreferredto 0?
ii) Is bundle1 revealedpreferred
to bundle2? Is 2 revealedpreferredto 1?
iii) Is bundle2 revealed to bundle0? Is 0 revealedpreferredto 2?
preferred

b. Dothesechoicessatisfythe weakaxiomof revealedpreference? Explain.

c. Dothesechoicessatisfythe strongaxiomof revealedpreference? Explain.
d. Arethesechoicesconsistent with the hypothesis
that the consumermaximizes
with the usualapplicable
utilitysubjectto a budgetconstraint axioms?Explain.

III. Graphicalderivation
4. Givena consumer with well-behaved preferences and utilityfunctionU(x,y),let the initial
choicebe (xo,yo) whenthe priceof good X is pi, Thensuppose that the priceof goodX
increasesto p]. Graphicallyderivethecorresponding Marshallian andHicksian demand
(anchored at Uo)curuesfor thisconsumer if X is an inferiorgood. Indicatethe (ownprice)
and incomeeffectsin yourdiagrams,
substitution

5. In problem5 above,illustrate
the changein consumer surplus(appropriately
measuredl)
with the givenchangein prices.Whatis this measurecalled?Brieflyexplain
associated
why"the other"possibleareain 5 is inappropriate.

ry. Slutsky Equation

a. Statethe own priceSlutskyequationfor goodi. Identiff the parbs: Total Effect,
Effect,andIncomeEffect.
Substitution

b. Slutskyequationfor goodj givena changein pricep,.

Statethe generalized

c. Suppose a consumer with wellbehavedpreferences consumes onlytwo goods,x,

andx, , Suppose p, is decreasedwith m and p, unchanged.Usingthe Slutsky
equation,demonstrate whatyoucandeduceaboutthe natureof the two goods
(normal,inferior,Giffen)and determinethe relativestrengthsof Substitution
and
Income effectsin the followingcase: x, decreases
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V. Eachof the statementsis either trueor false.Tf"true", so state,and providea general"proof' to

demonstratewhy the statementis true; if "false", so stateand demonstratewhy the statementis
not (necessarily)
true.

7. Whenpricesare (p,,pr)= (L,4),the consumer

demandsbundle(xr,xJ = (3,2). Therefore
whenpricesare (p' p) = may not demand(xi, x) = (4,t).
(2,3),this consumer

Statements B-9referto a consumer preferences,

with well-behaved consuming n>Z goodsat
strictlypositivepricesand income.Thesetwo questionsare related- the conclusion
you makein
questionB maybe used(with reference) to answerquestion9.

8. Giventhat n) 2,it dx/1p,> 0 andif 4 is normal,then4 and4 mustbe netsubstitutes.

9. Again,giventhat n >2 and0x/6p,> 0, if 4 is normaland>,q

is inferior,then4 and4can
only be grosssubstitutes.

VI. ConsumerProblemApplication

10, a. StateRoy'sIdentity,(Besureto includethe arguments.)

b. StateShephardb Lemma.(Besureto includethe arguments.)

. Nowconsiderthe indirectutilityfunction:

V(p,,pr,m)= ( m+ p, )2
4prp,

c. Derivethe expenditure
function.
d. demandfunctionfor good1.
Derivethe Hicksian
e. demandfunctionfor good2.
Derivethe Marshallian
f, Demonstrate whetherthe two goodsare net substitutes
or net complements.
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