Problem Set 5 - Graduate Microeconomics II

Prof. Leandro Arozamena

TA: Matías Cersosimo

2017

Exercise 1 (M.W.G. 17.B.4)B

Suppose that there are J rms whose production sets Y1 , . . . , YJ ⊂ RL are closed, strictly convex, and
bounded above. Suppose also that a strictly positive consumption P bundle is producible using the initial
endowments and the economy's aggregate production set Y = j Yj (i.e., there is an x̄ >> 0 such that
x̄ ∈ { i ωi } + Y ). Show that the production inclusive aggregate excess demand function ẑ (p) in (17.B.3)
P
satises properties (i) to (v) of Proposition 17.B.2.
  P
xi p, p · ωi + j θij πj (p) − i ωi − j yj (p).
P P P
Equation 17.B.3: z̄ (p) = i

Proposition 17.B.2: Suppose that, for every

P consumer i, Xi = R+ and i is continuous, strictly convex
L

and strongly monotone. Suppose also that i ωi >> 0. Then the aggregate excess demand function z (p),
dened for all price vectors p >> 0, satises the properties:

(i) z (·) is continuous.

(ii) z (·) is homogeneous of degree zero.
(iii) pz (p) = 0 for all p (Walras' law).
(iv) There is an s > 0 such that z` (p) > −s for every commodity ` and all p.
(v) If pn → p, where p 6= 0 and p` = 0 for some `, then max {z1 (pn ) , . . . , zL (pn )} → ∞.

Exercise 2 (M.W.G. 17.B.5)A

Suppose that there are J rms. Each rm produces a single output under conditions of constant returns.
The unit cost function of rm j is cj (p), which we assume to be dierentiable. The consumption side of the
economy is expressed by an aggregate excess demand function z (p). Write down an equation system similar
to (17.B.4)-(17.B.5) for the equilibria of this economy.

αj aj = 0.
P
Equation 17.B.4: z (p) − j
and
Equations 17.B.5: p · aj ≤ 0, αj (p · aj ) = 0 for all j .

1
Exercise 3 (M.W.G. 17.F.14)B

Consider a rm that produces good 1 out of goods ` = 2, . . . , L by means of a production function
f (ν2 , . . . , νL ). Assume that f (·) is concave, increasing and twice continuously dierentiable. We say that `
2
and `0 are complements at the input combination ν = (ν2 , . . . , νL ) if ∂∂νf` ν(ν)
`0
> 0.

(a) Verify that for the Cobb-Douglas production function f (ν2 , . . . , νL ) = ν2α2 ×· · ·×νLαL , α2 +· · ·+αL ≤ 1,
any two inputs are complements at any ν .
(b) Suppose that f (·) is of the constant returns type. Show that at any ν and for any ` there is an `0 that
is a complement to ` at ν .
(c) Suppose now that f (·) is strictly concave and that any two inputs are complements at any ν . Let
ν` (p1 , . . . , pL ) be the input demand functions. Show that, for any `, ∂p
∂ν`
> 0, ∂p
∂ν`
< 0, and ∂p
∂ν`
<0
1 ` `0
for `0 6= `.
(d) Discuss the implications of (a) to (c) for uniqueness theorems that rely on the gross substitute property.

Exercise 4 (M.W.G. 17.F.3)B

There are four goods and two consumers. The endowments of the consumers are ω1 = (ω1 1 , ω2 1 , 0, 0) and
ω2 = (ω1 2 , ω2 2 , 0, 0). Consumer 1 spends all his wealth on good 3 while consumer 2 does the same on good
4. Specify some values of ω1 and ω2 for which the corresponding excess demand of this economy does not
satisfy the weak axiom of revealed preference.

Exercise 5 (M.W.G. 17.F.9)B

Consider an economy with a single constant returns production convex set Y . Preferences are continuous,
strictly convex, and strongly monotone. Suppose that the feasible consumptions (x1 , . . . , xI ) are associated
with a Walrasian equilibrium. Assume, moreover, that no trade is required to attain these consumptions
if Y is freely available to all consumers; that is, xi − ωi ∈ Y for all i. Show then that those are the only
possible equilibrium consumptions.

Exercise 6 (M.W.G. 18.B.1)A

Show that Walrasian allocations are in the core for the model with a constant returns technology described
in Section 18.B.

Model 18.B: Formally, we consider an economy with I consumers. Every consumer i has a consumption set
+ and endowment vector ωi ≥ 0, and a continuous, strictly convex, strongly monotone preference relation
RL
i . There is also a publicly available constant returns convex technology Y ⊂ RL . For example, we could
have Y = −RL+ , that is, a pure exchange economy. All of these assumptions are maintained for the rest of
the section.
As usual, we say that an allocation x = (x1 , . . . , xi ) ∈ RL,I
+ is feasible if i ωi for some y ∈ Y .
P P
i xi = y +
Any nonempty subset S ⊂ I is then called a coalition.

2
Exercise 7 (M.W.G. 18.B.2)B

Exhibit an example of a nonequal-treatment core allocation in a three-consumer exchange economy with

continuous, strictly convex, strongly monotone preferences. Can an example be given with only two con-
sumers?