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Problem Set 6

The document is a problem set for a Graduate Microeconomics II course, covering various exercises related to consumer behavior, envy-free allocations, fair allocations, and firm strategies in subsidy games. It includes specific exercises on Pareto optimality, Walrasian equilibria, and the relationship between core and equilibria in an economy. Additionally, it discusses the conditions under which firms have dominant strategies in subsidy games.

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1 views2 pages

Problem Set 6

The document is a problem set for a Graduate Microeconomics II course, covering various exercises related to consumer behavior, envy-free allocations, fair allocations, and firm strategies in subsidy games. It includes specific exercises on Pareto optimality, Walrasian equilibria, and the relationship between core and equilibria in an economy. Additionally, it discusses the conditions under which firms have dominant strategies in subsidy games.

Uploaded by

bautista vidal
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Problem Set 6 - Graduate Microeconomics II

Prof. Leandro Arozamena


TA: Matías Cersosimo

2017

Exercise 1 (M.W.G. 18.B.5) B

Consider an economy composed of 2I + 1 consumers. Of these, I each own one right shoe and I + 1 each
own a left shoe. Shoes are indivisible. Everyone has the same utility function, which is min {R, L}, where R
and L are, respectively, the quantities of right and left shoes consumed.

(a) Show that any allocation of shoes that is matched (i.e., every individual consumes the same number
of shoes of each kind) is a Pareto optimum, and conversely.
(b) Which Pareto optima are in the core of this economy? (This time, in the denition of the core allow
for weak dominance in blocking.)
(c) Let pR and pL be the respective prices of the two kinds of shoes. Find the Walrasian equilibria of this
economy.
(d) Comment on the relationship between the core and the Walrasian equilibria in this economy.

Exercise 2 (Extra) (J. & R. 5.40)


In a pure exchange economy, consumer i envies consumer j if xj i xi . (Thus, i envies j if i likes j 's bundle
better than his own.) An allocation (x1 , . . . , xI ) is therefore envy free if xi i xj for all i and j . We jnow
that envy-free allocations will always exists, because the equal division allocation, xi = I1 Ii=1 ωi , must be
P
envy free. An allocation is called fair if it is both envy free and Pareto ecient.

(a) In an Edgeworth box, demonstrate that envy-free allocations need not be fair.
(b) Under Assumption 5.1 on utilities, prove that every exchange economy having a strictly positive ag-
gregate endowment vector possesses at least one fair allocation.

Assumption 5.1: Utility ui is continuous, strongly increasing, and strictly quasiconcave on RL+ .

1
Exercise 3 (Extra) (J. & R. 5.42)
There are two consumers with the following characteristics:

u1 (x1 1 , x2 1 ) = 2x1 1 + x2 1 and ω1 = (1, 6)


u2 (x1 2 , x2 2 ) = x1 1 + x2 1 and ω1 = (3, 4)

Find a fair allocation of goods to consumers.

Exercise 4 (M.W.G. 8.B.1) A

There are I rms in an industry. Each can try to convince Congress to give the industry a subsidy. Let
hi denote the number of hours of eort put in by rm i, and let ci (hi ) = wi (hi ) , where wi is a positive
2

constant, be the cost of this eort toPrm i. When


Q the eort levels of the rms are (h1 , . . . , hI ), the value of
the subsidy that gets approved is α i hi + β ( i hi ), where α and β are constants.

Consider a game in which the rms decide simultaneously and independently how many hours they will each
devote to this eort. Show that each rm has a strictly dominant strategy if and only if β = 0. What is rm
i's strictly dominant strategy when this is so?

Exercise 5 (M.W.G. 8.B.7) B

Show that any strictly dominant strategy in game [I, {∆ (Si )} , {ui (·)}] must be a pure strategy.

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