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Two Properties of Expenditure Functions: Proof That e (P, U) Is A Concave Function of P

The document discusses two properties of expenditure functions: 1) It proves that the expenditure function e(p, u) is a concave function of price vector p. This is shown using properties of utility indifference curves and cost-minimizing consumption bundles. 2) It provides notes on proving Shephard's lemma, which relates the partial derivative of the expenditure function with respect to price to the demand for that good. The proof uses differentiation of the expenditure function and utility maximization conditions.

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Muhammad Bilal A. R
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248 views

Two Properties of Expenditure Functions: Proof That e (P, U) Is A Concave Function of P

The document discusses two properties of expenditure functions: 1) It proves that the expenditure function e(p, u) is a concave function of price vector p. This is shown using properties of utility indifference curves and cost-minimizing consumption bundles. 2) It provides notes on proving Shephard's lemma, which relates the partial derivative of the expenditure function with respect to price to the demand for that good. The proof uses differentiation of the expenditure function and utility maximization conditions.

Uploaded by

Muhammad Bilal A. R
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Two Properties of Expenditure functions

Proof that e(p, u) is a concave function of p.


Proof: We want to show that for any u and any two price vectors p and p0 ,
and for any between 0 and 1,

e(p, u) + (1 )e(p0 , u) e(p + (1 )p0 , u).

Let h = h(p, u) and h0 = h(p0 , u), and let h = h(p + (1 )p0 , u). We note
that u(h) = u(h0 ) = u(h ) since h(p, u) is the cheapest consumption vector
that yields utility u at price vector p. Then e(p, u) = ph(p, u) ph (because
u(h ) = u) Similarly, e(p0 , u) = p0 h(p0 , u) p0 h . It follows from these two
inequalities that

e(p, u) + (1 )e(p0 , u) (p + (1 )p0 )h


= e(p + (1 p0 , u).

Notes on Proving Shepherds lemma.


e(p, u)
= xi (p, u).
pi
pj xhj (p, u). Differentiate this to find that
P
Proof: e(p, u) = j

e(p, u) X xj (p, u)
= xi (p, u) + pj .
pi j
pi

Note also that u(xh (p, u)) = u for all p. Differentiate this
X xh (p, u)
uj (xh (p, u)) = 0.
j
pi

But uj (xh (p, u)) = pj . Now finish proof by substituting uj / for pj in the
above equation and noticing that all the complicated stuff disappears.

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