Microeconomics II (ITEA) – PS1
April 14, 2021
1. Consider a consumer whose utility can be represented by u(x, m) = ln(x) + m where x is the
amount of the good X and m is money available for other goods. Assume that consumer’s income
is I > 1 and let pm = 1 (this is just to say that one euro “costs” one euro). In addition, suppose
2
there is one firm that can produce X at a total cost c(x) = x2 .
(a) Derive the demand of the consumer for X, and the supply of the firm. Find the (partial)
competitive equilibrium.
2
(b) Now suppose there are 2 identical firms (the cost function of each firm is c(x) = x2 ), and
2 identical consumers (with utility function u(x, m) = ln(x) + m). Calculate the aggregate
demand and supply in the market of X and find the (partial) competitive equilibrium.
(c) Generalize the above to the case where there are n firms and k consumers.
(d) Now, instead of solving for a competitive equilibrium, consider the central planner’s problem:
construct the lists S and D as we illustrated in our first class. Show that producing x⇤ such
that S(x⇤ ) = D(x⇤ ) is Pareto efficient.
2
2. Assume there are k identical consumers whose utility function is u(x, m) = 10x x2 + m (the
interpretation of this quasilinear utility function is identical to the one in the previous question).
In addition, there are n firms, each of which can produce X at the total cost c(x) = 12x + x2 .
Find a (partial) competitive equilibrium in market X.
3. Consider the example of the drivers we discussed in the end of the first class. Do there exist
equilibria in which only one route is used? If no, explain; if yes, describe these equilibria.
4. Consider an exchange economy where the consumers’ utility functions are uA (xA , yA ) = x2A yA
and uB (xB , yB ) = xB yB . Assume that, in total, there is 2 units of X and 2 unit of Y in the
economy. Find the Pareto set.
5. Consider an exchange economy in which both agents’ preferences satisfy strong monotonicity.
Show that the two origins OA , and OB belong to the Pareto set. Is it true if we only assume
that the players’ preferences satisfy monotonicity?
PROBLEM SET I
Demand : maximize Mt lncx) s t ✗ + m = I
px
.
- .
maximize in Cx) -1 I -
px -
✗
f- 0 dcpx )
¥ demand function of individual
→
derivative : -
p×* = ✗ = an consumer
S: max
✗
ltlx) =
p×
- ✗ -
ccx ) =
p×
✗ -
¥
derivative pxt -
✗
* =O →
xscpx ) =
Px demand function of the firm
P
h I
s
,
i competitive equilibrium
-
g- -
+ •
,
I
1 D
'
> ×
Ii
integral of marginal utility
social planar want to maximize this area
For K consumers : ✗ = I
px
✗ ( p×)= { ✗ i Cpx )
For firms : ✗ ( ) E ✗i
Lpx ) npx
n = =
px
-1kt
p÷ YET
:
Equilibrium hpxt * •
= ✗
-
p✗ =
,
=
.
2
✗
U (X ,
M ) = 10 ✗ -
+ M
2-
n firms
→ ccx 1 = 12×-1×2
Mucx ) = 10
-
✗ -
✗ = to -
MU
d ( Dx ) Px demand
✗ = 10 -
for one individual consumer
MCCX ) = 12-1 2x -
✗ scpx
)=P×¥ supply function
^
g
12
-_
10
d
>
If we increase the number of consumer or suppliers there won't be an equilibrium
solution : { ✗
*
= 0 ,
10 Ep
*
I 12 4
Tis = 30 -12K
TH= 60
We have 1<=15
TH
Tb to
find equilibrium
-
=
60=30 +
2k -
K = IS time = 60
?
So ,
+*
if * < is
15
TB if K >
drivers road the
Imagine all of the take the B .
Although travel
time is the same for all of them , this is not an equilibrium
because all the drivers can
improve if at least 85 of them take the
highway
n ow , imagine all drivers choose to take the
highway . This is not an
equilibrium either because they will have the incentive to m ove to
the B road until
they a re 485 ,
154
In both cases we see that the distribution
systems to
go to 485,15 4
which is an
inefficient equilibrium
At Xp = 2
YA + YB = 2
%?z
ZYA
MRSA ( Xa Yal = =
In
,
MR Snc ✗n , YB ) =
"÷ ,
MRSA ( ✗ A , YA ) = MRSBLXB ,
YB )
4¥ 241¥
,
=
→
ZIA
2- ✗ A
=
YET -
2¥
2- Ya
=
2-x.nl/A--zyaXn---4-2Ya-2xn-+Xn- Ya
*
=÷¥÷
÷="÷÷ -
=÷÷ .
4 ✗B
Pareto set -
feasible allocations such that ya = 4-2 '
% =
2 + ✗a ¥2
AN / DX d"
2y×,a
A 2
MRSA ✗ Ya
{
=
-
=
-
→ YA = Ua = a
du / dy ✗a
2
0=2 ✗ A YA -
dxa + ✗A
dega
| MRSB =
2¥_a Zxy dy - - o dyldx
VA ( ✗
a. Ya I = I
2
1 = ✗ a
dy
a.
=
= -
¥ .
MRSA = - dy
d-✗
• OB
UBILVB
'
un
' ⑨
YA •
1
Where pareto set → ,
intersects up !
NA
•
✗a
the origins
beÉ the Pareto set
and it will
without loss of generality we can
prove it for Oa
be
identically for OB
Take point 0A
for t ( ✗ a. Ya I t B sit .
CXA ,
Ya I =/ 0A
Weg ✗a > 0 ✗
→ ✗ ☐
<
UB ( OA ) = UB ( ✗ 4) < UB ( XB 4ps ) ± UB ( ✗ B , YB )
, ,
( =
for 9ps = y )
UB ( OA ) YB ) Oa E P
→
UB ( ✗ m ,
→
