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Questions › DSE › DSE 2019 › Q50
0 marksMicroeconomics › Budget constraint and consumer equilibrium › Corner solutionsVery Hardabout 4 min

DSE 2019 Question 50: Budget constraint and consumer equilibrium

Scenario 1: Consider utility functions u1(x,y)=2xu_1(x,y)=2xu1​(x,y)=2x if y/x>2y/x>2y/x>2, max⁡{x,y}\max\{x,y\}max{x,y} if y/x∈[1/2,2]y/x\in[1/2,2]y/x∈[1/2,2], and 2y2y2y if y/x<1/2y/x<1/2y/x<1/2; and u2(x,y)=2xu_2(x,y)=2xu2​(x,y)=2x if y/x>2y/x>2y/x>2, x+yx+yx+y if y/x∈[1/2,2]y/x\in[1/2,2]y/x∈[1/2,2], and 2y2y2y if y/x<1/2y/x<1/2y/x<1/2. Let px>0p_x>0px​>0 and py>0p_y>0py​>0 be the prices of goods xxx and yyy, and let w>0w>0w>0 denote wealth (income). Let mi(px,py,w)m_i(p_x,p_y,w)mi​(px​,py​,w) denote the set of Marshallian demands for utility uiu_iui​ and let vi(px,py,w)=ui∘mi(px,py,w)v_i(p_x,p_y,w)=u_i\circ m_i(p_x,p_y,w)vi​(px​,py​,w)=ui​∘mi​(px​,py​,w). Then:

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Scenario 1: Consider utility functions u₁(x,y)=2x if y/x>2, max {x,y} if y/x∈[1/2,2], and 2y if y/x<1/2; and u₂(x,y)=2x if y/x>2, x+y if y/x∈[1/2,2], and 2y if y/x<1/2. Let pₓ>0 and p_y>0 be the prices of goods x and y, and let w>0 denote wealth (income). Let mᵢ(pₓ,p_y,w) denote the set of Marshallian demands for utility uᵢ and let vᵢ(pₓ,p_y,w)=uᵢ∘ mᵢ(pₓ,p_y,w). Then: (A) m₁⊂ m₂ and v₁≤ v₂ (B) m₁⊃ m₂ and v₁≥ v₂ (C) m₁⊂ m₂ and v₁=v₂ (D) m₁⊃ m₂ and v₁=v₂

Also written as: Scenario 1: Consider utility functions u_1(x,y)=2x if y/x>2, max {x,y} if y/x in [1/2,2], and 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], and 2y if y/x<1/2. Let p_x>0 and p_y>0 be the prices of goods x and y, and let w>0 denote wealth (income). Let m_i(p_x,p_y,w) denote the set of Marshallian demands for utility u_i and let v_i(p_x,p_y,w)=u_io m_i(p_x,p_y,w). Then:

Budget constraint and consumer equilibrium has come up 99 times in 7 exams since 2004.

What this question tests

This question is on Corner solutions, part of Budget constraint and consumer equilibrium in Microeconomics.

Optima at the edge of the budget set, where the consumer spends nothing on one good.

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Practise Budget constraint and consumer equilibriumMore on Corner solutions

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