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Questions › DSE › DSE 2019 › Q5
0 marksMicroeconomics › Demand theory and elasticity › Hicksian demand, the expenditure function and dualityVery Hardabout 4 min

DSE 2019 Question 5: Demand theory and elasticity

Consider utility functions u1(x,y)={2xif y/x>2max⁡{x,y}if y/x∈[1/2,2]2yif y/x<1/2u_{1}(x,y)=\begin{cases}2x & \text{if }y/x>2\\ \max\{x,y\} & \text{if }y/x\in[1/2,2]\\ 2y & \text{if }y/x<1/2\end{cases}u1​(x,y)=⎩⎨⎧​2xmax{x,y}2y​if y/x>2if y/x∈[1/2,2]if y/x<1/2​ and u2(x,y)={2xif y/x>2x+yif y/x∈[1/2,2]2yif y/x<1/2u_{2}(x,y)=\begin{cases}2x & \text{if }y/x>2\\ x+y & \text{if }y/x\in[1/2,2]\\ 2y & \text{if }y/x<1/2\end{cases}u2​(x,y)=⎩⎨⎧​2xx+y2y​if y/x>2if y/x∈[1/2,2]if y/x<1/2​. Let px>0p_{x}>0px​>0 and py>0p_{y}>0py​>0 be the prices of goods xxx and yyy, and w>0w>0w>0 wealth. For i=1,2i=1,2i=1,2, let hi(px,py,U)h_{i}(p_{x},p_{y},U)hi​(px​,py​,U) denote the set of solutions of: choose x>0x>0x>0 and y>0y>0y>0 to minimise pxx+pyyp_{x}x+p_{y}ypx​x+py​y subject to ui(x,y)≥Uu_{i}(x,y)\ge Uui​(x,y)≥U. Let ei(px,py,U)=pxX+pyYe_{i}(p_{x},p_{y},U)=p_{x}X+p_{y}Yei​(px​,py​,U)=px​X+py​Y, where (X,Y)∈hi(px,py,U)(X,Y)\in h_{i}(p_{x},p_{y},U)(X,Y)∈hi​(px​,py​,U). Then

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Consider utility functions u₁(x,y)={ 2x if y/x>2; max {x,y} if y/x∈[1/2,2]; 2y if y/x<1/2 } and u₂(x,y)={ 2x if y/x>2; x+y if y/x∈[1/2,2]; 2y if y/x<1/2 }. Let pₓ>0 and p_y>0 be the prices of goods x and y, and w>0 wealth. For i=1,2, let hᵢ(pₓ,p_y,U) denote the set of solutions of: choose x>0 and y>0 to minimise pₓx+p_yy subject to uᵢ(x,y)≥ U. Let eᵢ(pₓ,p_y,U)=pₓX+p_yY, where (X,Y)∈ hᵢ(pₓ,p_y,U). Then (A) None of the above hold necessarily. (B) h₁(pₓ,p_y,U)=h₂(pₓ,p_y,U) (C) h₁(pₓ,p_y,U)⊂ h₂(pₓ,p_y,U) (D) h₁(pₓ,p_y,U)⊃ h₂(pₓ,p_y,U)

Also written as: Consider utility functions u_1(x,y)={ 2x if y/x>2; max {x,y} if y/x in [1/2,2]; 2y if y/x<1/2 } and u_2(x,y)={ 2x if y/x>2; x+y if y/x in [1/2,2]; 2y if y/x<1/2 }. Let p_x>0 and p_y>0 be the prices of goods x and y, and w>0 wealth. For i=1,2, let h_i(p_x,p_y,U) denote the set of solutions of: choose x>0 and y>0 to minimise p_xx+p_yy subject to u_i(x,y)>= U. Let e_i(p_x,p_y,U)=p_xX+p_yY, where (X,Y) in h_i(p_x,p_y,U). Then

Demand theory and elasticity has come up 161 times in 7 exams since 2004.

What this question tests

This question is on Hicksian demand, the expenditure function and duality, part of Demand theory and elasticity in Microeconomics.

Compensated demand, the expenditure and indirect utility functions, and the links between them.

TestStop has 9 past-paper questions on this subtopic.

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