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Instructions
1. Do not read the rest of the pages until I ask you to do so.
2. You have 120 minutes to solve this exam.
3. Write your name in all pages. Number all pages. In the first page, specify the total
number of pages you hand in.
4. You can use a dictionary. You can use a calculator.
5. You cannot use books, notes or classmates.
6. Provide justification for all your answers.
7. The answer should be clear from what is written. In other words, what is written
should suffice.
8. Do not hand in draft answers.
9. Spend the first 15 minutes reading the whole exam, so you can ask all necessary
questions during those first 15 minutes.
10. The questions are ordered in my subjective order of difficulty. Attempt the easy ones
first.
1. Jane has locally non-satiated, strictly convex, rational preferences. She consumes
only apples (A) and bananas (B). In period 1, prices were ( PA , PB ) = (2, 1), while in
period 2 prices were ( PA , PB ) = (1, k). Her chosen bundles were:
Apples
Bananas
t=1
10
20
t=2
5
25
B
40
(5, 25)
(10, 20)
20
xyxy.
Show that if preferences < are monotone, a straight line from the origin crosses each
indifference curve at most once.
L and x 0 R L be any two distinct points in the same straight
Answer: Let x R+
+
line. Then, x 0 = x for some 0 and 6= 1. If > 1, then x 0 x and so by
monotonicity, x 0 x. If < 1, then x x 0 and so by monotonicity, x x 0 . In either
case, x 6 x 0 .
1
min { x, y} .
2
u=3
u=6
if p x < py
px , 0
w
w
x A ( p x , p y , w ), y A ( p x , p y , w ) =
if p x = py
p x , 0 or 0, py
0, w
if p x > py
py
4
3
u=3
u=6
3
,0
if p x < py
px
B
B
w
x ( p x , py , w), y ( p x , py , w) = anything such that x + y = px if p x = py
0, w
if p > p
py
So in most cases it will be impossible to tell from choices whether choices were
made by Alex or Bob.
4. Preferences are separable in the first J goods if they can be represented by a utility
function of the following form:
!
J
u ( x ) = v l ( x l ) + V x J +1 , . . . , x L
l =1
(a) Show first that if L = 2 and u( x ) = v1 ( x1 ) + v2 ( x2 ), then for all x1 , x10 , x2 , x20 ,
( x1 , x2 ) x10 , x2 x1 , x20 x10 , x20 .
(b) Now, generalize the result for L goods. Let a J and a0J be vectors of the first J
0 be vectors of the remaining L J goods. Show
goods. Similarly, let b J and b
J
0 ,
that for all a J , a0J , b J , b
J
0 0
0
a
,
b
.
( a J , b J ) a0J , b J a J , b
J
J J
(c) Show that if preferences are not separable, the previous result may not hold.
Answer:
(a) Let L = 2 and u( x ) = v1 ( x1 ) + v2 ( x2 ). By the definition of the utility function,
( x1 , x2 ) x10 , x2 u ( x1 , x2 ) u x10 , x2
v1 ( x1 ) + v2 ( x2 ) v1 x10 + v2 ( x2 )
v1 ( x1 ) v1 x10
v1 ( x1 ) + v2 x20 v1 x10 + v2 x20
u x1 , x20 u x10 , x20
x1 , x20 x10 , x20
And thats what we wanted to show.
(b) Now, in general,
0
0
( a J , b J ) a J , b J u ( a J , b J ) u a J , b J
!
!
J
J
+ V b J +1 , . . . , b L
vl ( al ) + V b J +1 , . . . , bL vl a0l
l =1
J
vl ( al )
l =1
J
vl ( al )
l =1
vl
+V
a0l
l =1
b0J +1 , . . . , b0L
l =1
vl
l =1
0
0 0
u
a
,
b
u a J , b
J
J J
0
0 0
a J , b
J a J , b J
And again, thats what we wanted to show.
6
!
0
al
+V
b0J +1 , . . . , b0L
but
u (2, 3) 6 u (3, 3)
u (2, 3) < u (3, 3)
min {2, 3} < min {3, 3}
2<3