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Advanced Microeconomics WS10/11

Problem Set 1

20. Dezember 2010

1 Excercise 1
Question:
For each of the following subsets of the <2 sketch the set, state whether it is open,
closed or neither, and justify your answer based on the corresponding definitions.

Answer:
Definition of a closed set: A set X is closed if for every sequence {(x1 , . . . , xi }i∈N
with xi ∈ N , converging against some limit x∗ then x∗ ∈ X.Consequently a set is
open if a converging sequence of points has its limits outside this set.

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a) {(x, y) : −1 < x < +1, y = 0},
closed set

b) {(x, y) : x ∈ I, ∈ 2I}, I being the set of integers


closed set because it is a set of integers.

c) {(x, y) : x + y = 1},
closed set

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d) {(x, y) : x + y < 1}
open set

e) {(x, y) : x = 0 ∪ y = 0}.
closed set because set includes only the axis

2 Excercise 2
Question:
Prove that if  is a preference relation, then the relation  is transitive and the
relation v is transitive. Also show that if x1 v x2  x3 , then x1  x3 .

Answer:

• Completness: for all x1 and x2 in X, either x1  x2 or x2  x1

• Transitivity: for three elements x1 , x2 , and x3 in X, if x1  x2 and x2  x3


then x1  x3

• Strict Preference: iff x1  x2 and not x2  x1 then x1  x2

• Indifference: iff x1  x2 and x2  x1 then x1 v x2

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Accordingly, if x1  x2 and x2  x3 then transitivity holds if x1  x3 . Verbally,
if x is strictly prefered to x2 and x2 is strictly prefered to x3 then transitivity holds
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if x1 is strictly prefered to x3 . Also, if x1 v x2 and x2 v x3 then the relation will be


transitive if x1 v x3 . Or in words if x1 is indifferent to x2 and x2 is indifferent to x3
then transitivity holds if x1 is indifferent to x3 .

3 Excercise 3
Question:
Sketch a map of indifference sets that are all parallel, negatively sloped straight
lines, with preference increasing northeasterly. We know that preferences such as
these satisfy Axioms 1, 2, 3 and 4 (strict monotonicity). Prove that they also satisfy
Axiom 50 (convexity). Prove that they do not satisfy Axiom 5 (strict convexity).

Answer:

The way we have drawn the lines i.e. parallel, negatiely sloped and straigth we
see that they are allways complete, transitive and continious (i.e. there are no prefe-
rence reversals). Since we drew slim lines we can assume local non-satiation because
there are no zones of indifference or more precicely, in the vicinity of any point there
will allways a point that the individual prefers.

The displayed indifference sets are also strictly monotonic because there every
indifference line (moving outwards i.e. with increasing quantities of one good or

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another) is strictly better then the one before since it contains strictly more goods.
The displayed lines are convex but not strictly convex since a linear combination
of the two goods would not increase the individuals utility but the individual is
indifferent as to the extreme points of only one good or the other or the combination
of the two. Therefore we cannot say that these indifference sets rule out extreme
prefrences as does the strict convexity axiom.

4 Excercise 4
Question:
Sketch a map of indifference sets that are all parallel right angels that kink on
the line x1 = x2 . If preference increases northeasterly, these preferences will satisfy
Axioms 1, 2, 3 and 40 (local non-satiation). Prove that they also satisfy Axiom 50 .
Do they satisfy Axiom 4? Do they satisfy Axiom 5?

Answer:

This set of indifference curves is not strictly monotonic because we can increase
the amount of one good and remain at the same level with the other good. Thererfore
it does not satisfy axiom 4. But they are strictly convex since every combination of
the two goods is possible and would increase the individuals utility. Strict convexity
does imply weak convexity, therefore the indifference set does satisfy axiom 50 and
axiom 5.