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Assignment 1
Due on: September 03, 2014 (before 04:00 PM)
To be submitted to Mr. Manhar (TA)
IGIDR
2014
Microeconomics I, Assignment 1
change in income and change in prices? Should you suggest the government to
accept the economic advisors proposal? Explain your answer adequately.
3+6+6=15
hours to allocate between work, L, and leisure, l. He buys a con2. A worker has L
sumption goods c which is priced at p. However, he cannot devote his entire income
to his own consumption as he has to remit a fixed amount Rs. k to support his family living in a distant village. Therefore, the worker has to make two labour supply
decisions: one for his own consumption, L1 , and another for his family, L2 , so that
L1 + L2 = L.
While he can freely choose L1 , his choice of L2 is solely dictated by the family needs.
That means, L2 must satisfy k = wL2 . The hourly wage rate w is fixed. The workers
utility function u(c, l) is quasi-concave in c and l.
(a) Write the utility maximization problem of the worker, and graphically illustrate
his choice.
(b) Derive the precise relationship between l and w (i.e.,
l
).
w
In particular, discuss
how the two labour supply curves - L1 , L2 - and aggregate labour supply depend
on w when leisure is an inferior good.
(c) Next, if k increases, how do the workers choices of c, L1 and L change? What
happens, if c is inferior?
(d) Now assume that k is sensitive to p such as k = k(p), k 0 (p) > 0. Derive
c
.
p
5+5+5+5=20
Page 2 of 4
IGIDR
2014
Microeconomics I, Assignment 1
3. Suppose that there are four commodities and that utility can be written in the
form, u(x1 , x2 , x3 , x4 ) = U (f (x1 , x2 ), x3 , x4 ), where the functions U (.) and f (.) are
differentiable.
(a) Show that the marginal rate of substitution between goods 1 and 2 is independent of the amount of good 3.
(b) Construct an example of a utility function of this form such that the marginal
rate of substitution between goods 3 and 4 depends on the amounts of goods 1
and 2.
5+5=10
where a > 0 and (0, 1). Let p1 , p2 and m denote price of good
1, price of good 2 and the consumers money income, respectively. The marginal
utility of money of consumer is one.
(a) Write the consumers utility maximization problem and derive her direct demand functions.
(b) If only the price of good 1 changes, what are the income and substitution effects
of the price change for the consumer?
(c) What is the consumers surplus, if prices are p01 and p02
(d) Can you tell us whether the consumers preferences satisfy the Gorman Form?
(e) Can you derive the expenditure function of the consumer? What are the compensated demand functions of the consumer?
(f) Now suppose that there are n consumers. The utility function of consumer i is
ui (x1 , x2 ) = ai x1 +ai x2
IGIDR
2014
Microeconomics I, Assignment 1
utility function? If no, why? If yes, what will be the (direct) utility function of
the representative consumer? What are the aggregate (direct) demand functions
of good 1 and good 2? Can you calculate the aggregate consumer surplus, if
prices are p01 and p02 ?
3+2+3+4+3+(5+2+3)=25
Page 4 of 4