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Online Assignment 1 Math Econ 2021 22

1. The document is an assignment for a Mathematical Economics course consisting of 5 questions and their solutions. 2. Question 1 involves determining if a given relation is a preference relation based on a choice set. Question 2 involves identifying which of two figures represents a preference relation. 3. Question 3 examines which of several utility functions could represent a given preference on a choice set. Question 4 calculates the number of possible preference relations satisfying certain conditions on another choice set. 4. Question 5 compares expected utilities of 3 lotteries using a square root utility function to rank the lotteries from best to worst.

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191 views6 pages

Online Assignment 1 Math Econ 2021 22

1. The document is an assignment for a Mathematical Economics course consisting of 5 questions and their solutions. 2. Question 1 involves determining if a given relation is a preference relation based on a choice set. Question 2 involves identifying which of two figures represents a preference relation. 3. Question 3 examines which of several utility functions could represent a given preference on a choice set. Question 4 calculates the number of possible preference relations satisfying certain conditions on another choice set. 4. Question 5 compares expected utilities of 3 lotteries using a square root utility function to rank the lotteries from best to worst.

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Panagiotis Scordis
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Online assignment 1 Math Econ 2021 22

Mathematical Economics (University of Manchester)

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MATHEMATICAL ECONOMICS I

Assignment 1
Questions ans solutions
1.1. Question. Is the following relation a preference or not?
x  y iff x + y ≤ 5 on the set X = {0, 1, 2, 3}.
Solution: No. One does not have 3  3 which violates completeness.
In other words, 3 6∼ 3.

1.2. Question. (Relationships).


Consider the choice set X = [0, 1]. Denote by Σ ⊆ X × X a subset
of the set of all pairs (x, y) ∈ X × X (X × X is a square).
Define a relation R as follows:
xRy is TRUE iff (x, y) ∈ Σ.
Such a relation can be represented in a figure. Draw a square and
color each point where xRy is TRUE (draw the set Σ using dark color).
Note that solid line represents points included in the relation R.
For which of the figures below is R a preference relation?
(a) Figure (a) is a preference but figure (b) is not.
(b) Figure (b) is a preference but figure (a) is not.
(c) Both of the Figure (a) and figure (b) are preference.
(d) None of the Figure (a) and figure (b) are preference.

(a) Figure (a) (b) Figure (b)

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2 MATHEMATICAL ECONOMICS I

Solution:
(a) No. Is not a preference.
Since the vertical and horizontal lines are solid, the points on them
are included in the relation R. So y = 0.5 and x = 0.5 are a part of
the relation. Consider the example: x = 0.25, y = 0.5, z = 0.75. So
xRy and yRz but not xRz which violates the transitivity.
we must be carefull when we speak about some borders of Σ. If we do
not include vertical line dividing a square into two (but we must leave
the middle point (0.5; 0.5) in Σ for the sake of completeness) then R is
a preference relation: x  y if (x ≥ 0.5) ∨ ((y ≥ x) ∧ (y ≤ 0.5)).
Proof:
x  y, y  z.
If x ≥ 0.5 then x  z.
If x < 0.5 then x ≤ y ≤ 0.5. If y = 0.5 then z = 0.5 and x  z.
If y < 0.5 then y ≤ z ≤ 0.5 and x  z since x ≤ z ≤ 0.5 and x  z.
(b) Yes. R is a preference relation: x  y if ((y ≥ x) ∧ (x + y ≤ 1))∨
((y ≤ x) ∧ (x + y ≥ 1)).
Proof: resembles the proof of (f) in the tutorial 2.

1.3. Question. (Utility Representation).


Consider the preference defined on the set of choices given by X =
{0, 1, 2, 3} such that 2  1 ≺ 0 ≺ 3 (Note that  means ≺ or ∼).
How many of the following utility functions represent this preference?

(a) u(x) = |x − 2|

(b) u(x) = |x − 2| + |x − 1|
3
(c) u(x) = |x − |
2
3
(d) u(x) = |x − | + max(x, 2)
2
(e) u(x) = 2x2 − 7x + 5

(f) u(x) = x3 − 3x2 + x + 2

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MATHEMATICAL ECONOMICS I 3

Solution: Find the value of each function:


(a) u(x) = |x − 2|
u(0) = 2, u(1) = 1, u(2) = 0, u(3) = 1

(b) u(x) = |x − 2| + |x − 1|
u(0) = 3, u(1) = 1, u(2) = 1, u(3) = 3
3
(c) u(x) = |x − |
2
3 1 1 3
u(0) = , u(1) = , u(2) = , u(3) =
2 2 2 2
3
(d) u(x) = |x − | + max(x, 2)
2
7 5 5 9
u(0) = , u(1) = , u(2) = , u(3) =
2 2 2 2
(e) u(x) = 2x2 − 7x + 5
u(0) = 5, u(1) = 0, u(2) = −1, u(3) = 2

(f) u(x) = x3 − 3x2 + x + 2


u(0) = 2, u(1) = 1, u(2) = 0, u(3) = 5

Thus (d) and (f) represent the above preference. So 2 is the answer.
1.4. Question. Consider the space X = {a, b, c, d, e}. How many dif-
ferent preference relations  can be defined on X so that a ∼ b and
c ∼ d?
(a) 3
(b) 6
(c) 10
(d) 13
(e) 16

Solution: 13. Since a ∼ b and c ∼ d, without loss of generality, I


reduce the dimension of the question. Now I am counting the number
of preference on the space {a, c, e} in the following form.
1. Consider cases in which a  c
1.1) a  c  e
1.2) a  c ∼ e
1.3) a  e  c
1.4) e  a  c
1.5) e ∼ a  c

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4 MATHEMATICAL ECONOMICS I

2. Consider cases in which c  a


2.1) c  a  e
2.2) c  a ∼ e
2.3) c  e  a
2.4) e  c  a
2.5) e ∼ c  a

3. Consider cases in which a ∼ c


3.1) a ∼ c  e
3.2) a ∼ c ∼ e
3.3) e  a ∼ c

Thus, the total number of cases (preference relation) is 5+5+3 = 13

1.5. Question. Consider three lotteries:



 3 with probability 0.3
Lottery A : 4 with probability 0.2
5 with probability 0.5


 1 with probability 0.3
Lottery B : 4 with probability 0.4
7 with probability 0.3



 1 with probability 0.3
 3 with probability 0.1


Lottery C : 4 with probability 0.1



 5 with probability 0.1
 7 with probability 0.4
√
If your utility function is U (x) = x, you know the true probabilities
and rank lotteries by expected utility, then:
(a) A ≺ B ≺ C
(b) B ≺ A ≺ C
(c) B ≺ C ≺ A
(d) C ≺ B ≺ A
(e) C ≺ A ≺ B

Solution: We need to compare the expected utility derived from


each of the three lotteries. Thus we calculate U (A), U (B), and U (C).
√ √ √
U (A) = 0.3 3 + 0.2 4 + 0.3 5 ≈ 0.3 · 1.73 + 0.2 · 2 + 0.3 · 2.23 ≈ 2.02

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MATHEMATICAL ECONOMICS I 5
√ √ √
U (B) = 0.3 1 + 0.4 4 + 0.3 7 ≈ 0.3 · 1 + 0.4 · 2 + 0.3 · 2.64 ≈ 1.89
√ √ √ √ √
U (C) = 0.3 1 + 0.1 3 + 0.1 4 + 0.1 5 + 0.4 7 ≈ 0.3 · 1 + 0.1 ·
1.73 + 0.1 · 2 + 0.1 · 2.23 + 0.4 · 2.64 ≈ 1.94

Thus, since U (B) ≤ U (C) ≤ U (A), we conclude that B ≺ C ≺ A

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