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Midterm Microeconomics 1 2012-13

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2012-2013

Course Questions. Let L be the finite number of commodities.

1. Write the utility maximization problem (UMP) of the consumer and give the definition of the

demand of the consumer.

2. Write the first order conditions (FOC) associated to (UMP) and give the assumptions under which

(FOC) are necessary and sufficient conditions to solve (UMP).

3. State the proposition which relates the supply of a firm and the derivatives of the cost function.

Exercise 1. Let L = 2 be the number of commodities. A consumer has preferences described by the

following utility function

x1 x2

x1 + x2

which is dierentiable and quasi-concave on R2++ .

u(x1 , x2 ) =

1. Show that (2, 1) is the demand of the consumer for the price system p = (1, 4) and the wealth

w = 6.

2. Determine a price system p0 and a wealth w0 such that (3, 1) is the demande of the consumer for

the price system p0 and the wealth w0 .

Exercise 2. Let L = 2 be the number of commodities. A firm produces the commodity 2 using the

commodity 1 as an input. The production function of the firm is given by

f (y 1 ) = max {0, y 1

1} with y 1 0

2. Draw the production set Y determined by the production function f .

3. Verify if the production set Y satisfies the following three assumptions: possibility of inaction,

impossibility of free production, convexity.

4. Write the profit maximization problem of this firm.

5. Using the iso-profit lines and the shape of the production set Y , determine the supply and the

profit function of this firm.

Exercise 3. Let L = 2 be the number of commodities. A firm produces the commodity 2 using the

commodity 1 as an input. The production function f of the firm is a continuous function from R to

R such that f (0) 0.

1. Write the cost minimization problem of the firm and give the definition of the cost function.

p1 y 2

2. Assume now that the cost function of the firm is given by C(p1 , y 2 ) =

with y 2 0. Determine

2

the supply and the profit function of this firm.

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