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1. Give the algebraic formulas of the Hicksian demand function of the following four types of
utility functions.
(1) u(x1, x 2 ) = min [α1 x1, α2 x 2], α1, α2 ∈ N
The EMP: min p1 x1 + p2 x 2 s.t. u(x1, x 2 ) ≥ u, x1 ≥ 0,x 2 ≥ 0
x1,x 2
If α1 x1 ≠ α2 x 2, we can always nd a smaller expenditure without changing utility. WLOG,

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assuming α1 x1 < α2 x 2, we can consume less x 2 and u(x1, x 2 ) wouldn’t change, but the expenditure
decreases. Obviously, the expenditure will be minimized only when α1 x1 = α2 x 2.
u u
So α1 x1 = α2 x 2 = u, x1 = , x2 = .
α1 α2

(2) u(x1, x 2 ) = β1 x1 + β2 x 2, β1, β2 ∈ N

The EMP: min p1 x1 + p2 x 2 s.t. u(x1, x 2 ) ≥ u, x1 ≥ 0,x 2 ≥ 0
x1,x 2
Lagrangian: L = − ( p1 x1 + p2 x 2 ) + λ[u − (β1 x1 + β2 x 2 )] − μ1 x1 − μ2 x 2
∂L
KKT conditions: = 0, i = 1,2; λ, μ1, μ2 ≥ 0; u − (β1 x1 + β2 x 2 ) ≤ 0, − x1 ≤ 0, − x 2 ≤ 0;
∂xi
λ[u − (β1 x1 + β2 x 2 )] = 0, μ1 x1 = 0, μ2 x 2 = 0.
u

{−p2 − λβ2 − μ2 = 0
x1 = β
{x 2 = 0
−p1 − λβ1 = 0 p1 p2
a. When μ1 = 0, μ2 ≠ 0, we have ⇒ > , and 1
β1 β2
x1 = 0
{−p2 − λβ2 = 0 {x 2 = β2
−p1 − λβ1 − μ1 = 0 p1 p2
b. When μ1 ≠ 0, μ2 = 0, we have ⇒ < , and u
β1 β2
p1 p
c. When μ1 = 0, μ2 = 0, we have = 2 , and all x ∈ {x ∈ X | β1 x1 + β2 x 2 = u} are
β1 β2
optimal.

(3) u(x1, x 2 ) = x1γ x21−γ , γ ∈ (0,1)

The EMP: min p1 x1 + p2 x 2 s.t. u(x1, x 2 ) ≥ u, x1 ≥ 0,x 2 ≥ 0
x1,x 2
Lagrangian: L = p1 x1 + p2 x 2 + λ(x1γ x21−γ − u)
∂L
∂x1
= p1 + λγ x1γ−1 x21−γ = 0 p1 γ x2 p (1 − γ)
⇒ = ⇒ x2 = 1 x1
∂L
= p2 + λ(1 − γ)x1γ x2−γ = 0 p2 (1 − γ)x1 p2 γ
∂x 2
p1(1 − γ) 1−γ u u
And we have x1γ ( x1) = u ⇒ x1 = p (1 − γ) , so x 2 = p (1 − γ)
p2 γ ( 1 p γ )1−γ ( 1 p γ )−γ
2 2

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1
(4) u(x1, x 2 ) = (x1ρ + x2ρ) ρ , 0 ≠ ρ < 1
The EMP: min p1 x1 + p2 x 2 s.t. u(x1, x 2 ) ≥ u, x1 ≥ 0,x 2 ≥ 0
x1,x 2
1
Lagrangian: L = p1 x1 + p2 x 2 + λ((x1ρ + x2ρ) ρ − u)
∂L 1
∂x1
= p1 + λ ρ1 (x1ρ + x2ρ) ρ −1 ρx1ρ−1 = 0 p1 x p 1
⇒ = ( 1 ) ρ−1 ⇒ x1 = ( 1 ) ρ − 1 x 2
∂L 1 1
= p2 + λ ρ (x1ρ + x2ρ) ρ −1 ρx2ρ−1 = 0 p2 x2 p2
∂x 2
p1 ρ 1 u u
And we have [( ) ρ − 1 x2ρ + x2ρ] ρ = u ⇒ x 2 = ρ , so x1 = ρ
p2 p 1
[( p1 ) ρ − 1 + 1] ρ
p 1
[( p2 ) ρ − 1 + 1] ρ
2 1

2. Describe all dual relations among Marshallian demand function, indirect utility function,
Hicksian demand function, and expenditure function. Verbally explain the relations.
i. x ( p, I ) = x h( p, v( p, I ))
The quantity demanded calculated using a Marshallian demand for a given level of income will be
identical to the quantity demanded calculated using a Hicksian demand for the utility level that
has been achieved by the choices made using the values obtained by Marshallian demands.
ii. x h( p, u) = x ( p, e( p, u))
The quantity demanded calculated using a Hicksian demand for a xed utility level will be
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identical to the quantity demanded calculated using a Marshallian demand if income is the
minimum expenditure needed to remain at that xed utility.
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iii. e( p, v( p, I )) = I
The expenditure calculated for the utility level that has been achieved by the choices made using
the values obtained by Marshallian demands for a given level of income will be identical to the
income.
iv. v( p, e( p, u)) = u
The indirect utility calculated for the income level that has been calculated by the choices made
using the values obtained by Hicksian demands for a given level of utility will be identical to the
utility.

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3. Show that if ≿ is quasilinear with respect to good 1 (admits a utility function u( ⋅ ) of the form
u(x) = x1 + ϕ(x 2, . . . , xL )), the Hicksian demand functions for good 2,3,⋯, L do not depend
on u. What is the form of the expenditure function?
u(x) = x1 + ϕ(x 2, . . . , xL ))
The EMP: min p1 x1 + p2 x 2 s.t. u(x1, x 2 ) ≥ u, x1 ≥ 0,x 2 ≥ 0
x1,x 2
Lagrangian: L = p1 x1 + p2 x 2 + ⋯ + pL xL + λ(x1 + ϕ(x 2, . . . , xL )) − u)
∂L
∂x1
= p1 + λ = 0 ∂ϕ p
FOC: ⇒ = i , so Hicksian demand functions for good
∂L
= pi + λ ϕ′i = 0, i = 2,3,⋯, L ∂xi p1
∂xi

2,3,⋯, L only depends on price (p1, p2, ⋯, pL).
∂ϕ p
Assuming the solution of = i is xih, then x1h = u − ϕ(x2h, x3h, ⋯, xLh ), so the expenditure
∂xi p1
L
ϕ(x2h, x3h, ⋯, xLh )) xih pi.
∑
function e = p1(u − +
i=2

4. Show that if the Marshallian demand function is generated by a rational preference relation,
then it must satisfy the weak axiom of revealed preference.
Let Marshallian demand function be denoted as x ( p, I ), and x1 = x ( p1, I1), x 2 = x ( p2, I2 ).
Assuming x1 ≻R x 2, then we have p1 x 2 ≤ p1 x1 ≤ I1 and u(x1) > u(x 2 ).
If p2 x1 ≤ p2 x 2 ≤ I2, then as u(x1) > u(x 2 ), this will contradict that x 2 is the solution of UMP when
( p1, I2 ). So p2 x1 > p2 x 2 and WARP is satis ed.
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5. Show that if a consumer chooses bundle to maximize a strictly quasi-concave and strictly
increasing utility function, his demand behavior satis es the strong axiom of revealed
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preference.
Suppose x 0 ≻R x 1, x 1 ≻R x 2, ⋯, x k−1 ≻R x k.
As the consumer chooses bundle to maximize a strictly quasi-concave and strictly increasing utility
function, these choices must be unique solutions to the consumer's utility maximization problem.
So we have u0 > u1 > u 2 > ⋯ > uk as ui = u(x i ), i = 0,1,⋯, k.

If x k ≻R x 0, then we have pk x 0 ≤ pk x k = Ik; and as per above, u0 > uk. This contradicts that x k is
the Marshallian demand. Therefore x k /≻R x 0 and SARP holds.

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6. Are the following choices consistent with WARP?

i. At prices ( p1, p2 ) = ($2,$2) the choice is (x1, x 2 ) = (10,1)
ii. At prices ( p1, p1) = ($2,$1) the choice is (x1, x 2 ) = (5,5)
iii. At prices ( p1, p1) = ($1,$2) the choice is (x1, x 2 ) = (5,4)
Price/Choice (10,1) (5,5) (5,4)

($2,$2) 22 20 18

($2,$1) 21 15 14

($1,$2) 12 15 13
At prices ( p1, p2 ) = ($2,$2) the choice is (x1, x 2 ) = (10,1); and (x1, x 2 ) = (5,4) is affordable, so we
know x 1 ≻R x 3;
At prices ( p1, p1) = ($1,$2) the choice is (x1, x 2 ) = (5,4); and (x1, x 2 ) = (10,1) is affordable so we
know x 3 ≻R x1.
So these choices violate WARP.