119123, 137 PM Microeconomic Theory: Basic Principles and Extensions ~ 9780324421620 - Exercise 12 | Quizlet Social Science / Economics / Microeconomic Theory: Basic Principles and Extensions (10th Edition) Exercise 12 Chapter 4, Page 135 (@MB Microeconomic Theory: Basic Principles and Exten: ISBN: 9780324421620 Table of contents Solution @ Verified ‘Answered 8 months ago Step1 lof 12 In the following exercise, we must answer each question using the Stone- Geary utility function. Step 2 2ofl2 The Stone-Geary utility function is the following: U(x,y) — x0)" y? Where, a + 8 =1. tps: quilt. comvexplanations/texbook-solutansimicroecanomic shaory-basie-prncples-and-extensions-1Oth-edtion-9780324421620ichapler-4-r. sno‘vrs, 137 PM. Microeconomic Theory: Base Principles and Extensions -9780324421620- Exerese 12 | Quiet Step 3 Sof @ In the following exercise, we must show that when the level of income (I) is greater than the price of x9 multiply by x, (I >P,-Xo), the individual will maximize his utility spending a (I—p,X9)*p,. Xo for good x, and 6 (I— PX) on good y. Where, x is the amount of food, and x9 is the amount to remain alive. Therefore, once the individual has acquired the units of xg required to survive, he will be able to obtain utility from other goods y. The budget constraint is the following: IT=p,%+yYPy Where there is also the restriction to acquire first p,,.x9. Therefore, the budget constraint can be rewrite as the following: I-p,xo = p,X + yPy It can rewrite again as the following: I—p,x0 — p,X — Pyy =0 tps: quilt. comvexplanations/texbook-solutonsimicroecanemic-sheory-basie-pinciples-and-extensions-1Oth-edton-9780324421620/chaper-4-pr... 2/10‘93, 137 PM. Microeconomic Theory: Base Principles and Extensions -9780324421620- Exerese 12 | Quiet Step 4 ofl To maximize the individuals’ utility subject to the budget constraint, we can use the following Lagrangian expression (L): L = U(X Y15 4) Xn Yn) + ACL = Pik = Pry, — +++ — PaXn — Pr¥n) We can substitute the Stone-Geary utility function and the corresponding budget constraint in (L). L = (x ~ x0)" y? + A(I = p,x0 — PX — Py) tps: /quilst.comvexplanations/texbook-solutonsimicroecanemic-sheory-basie-pinciples-and-extensions-1Oth-edton-9780324421620/chaper-4-pr... 3/10‘1923, 137 PM Meroeconomie Theory: Basie Principles and Extensions ~ 9780324421620 Exercise 12 | Quzet Step 5 ofl We can obtain the first-order conditions, calculating the partial derivate for x, y, and A from (L). Derivating for x. aL au Be De OH)? + A= Paro — Pa — Py) = ax ly? — rp, = 0 Derivating for y. z 7 z = (x — x0) y? + ACL — pexo — Pax — Py) = Bxty?t — Apy =0 Derivating for A. aL ; py = 7 x0)" y’ + A(1— p,Xo — PX — PyY) DX Do ae Dyas 0 hitpssquilst.comvexplanations/texbook-solutonsimieroecanemic-sheory-basie-pinciples-and-extensions-1Oth-edion-9780324421620/chapler-4-pr... 4/10,‘vrs, 137 PM. Microeconomic Theory: Base Principles and Extensions -9780324421620- Exerese 12 | Quiet Step 6 bof We can equate wu and a and solve for y. hitpssquilst.comvexplanations/texbook-solutonsimieroecanemic-sheory-basic-pinciples-and-extensions-10th-editon-9780924421620/chapler-4-pr... 5/10‘1923, 137 PM Meroeconomie Theory: Basie Principles and Extensions ~ 9780324421620 Exercise 12 | Quzet Step7 Tot We can substitute the y term in the initial budget constraint and solve for the demand function of x (x)*. Lets remember that a + 8 =1. I—p,X0 = P2X + yPy X] I~ p,X0 Sree a apy I—p,Xo x = — P: (2 + 1) _ (= pp x0) P,(8 + @) _ (=p, x0)e Pz tps: quilt. comvexplanations/texbook-solutonsimieroecanemic-sheory-basie-pinciples-and-extensions-1Oth-edton-9780324421620/chaper-4-pr... 6/10,‘1923, 137 PM Meroeconomie Theory: Basie Principles and Extensions ~ 9780324421620 Exercise 12 | Quzet Step 8 ofl Now, we can substitute the demand function of x (x)* in the y term to obtain the demand function of y (y)*. Lets remember that a + 8 =1. ae Bx, ap, — 6P2_I—P,X0 OPy p, ( ar 1) (1= p.x0)B p,(6 +) y" (I= p,X0)8 Py tps: quilt. comvexplanations/texbook-solutonsimicroecanemic-theory-basie-pinciples-and-extensions-1Oth-edton-9780324421620/chapter-4-pr... 7/10‘1923, 137 PM Meroeconomie Theory: Basie Principles and Extensions ~ 9780324421620 Exercise 12 | Quzet Step 9 9ofl2 We can substittute x* in the term of the budget constraint that depends on the level of food to remain alive. PX" + P,Xo = 0 io pp Pee pay =0 ze (I= p,X0)@ + P»Xo |= 0 We can see that when I >p,xo, the individual maximize utility for x when (I p,X0)a + P,Xo. We can see that a will determine the amount of income that will be consumed on other goods after acquiring the necessary goods to survive. Step 10 lof 2 We can substittute y* in the term of PyY to determine the utility from food from other goods (y). pyy’ =0 J— py! PrX0)B _ 0 Py (I p,x0)8|=0 We can see that when I >p,Xo, the individual maximize utility for y when (I — p, xo) 8. 8 will determine the proportion of revenue going to other goods y. hitpssquilst.comvexplanations/texbook-solutonsimieroecanomic-sheory-basie-pinciples-and-extensions-1Oth-edon-9780924421620/chapter-4-pr... 8/10,‘1923, 137 PM Meroeconomie Theory: Basie Principles and Extensions ~ 9780324421620 Exercise 12 | Quzet Step 11 Not (b) In the following exercise, we must prove that the ratios a and Py change as income increase. We can substitute the value of p,,x obtained in exercise (a). The ratio for the variable x will be: 1 oe De wae a = (I— p,x0)a I We can apply the limit to the previous function to know its trend as its parameters increase. lim = T-+00 tps: quilt. comvexplanations/texbook-solutonsimicroecanomic-sheory-basie-pinciples-and-extensions-1Oth-edon-9780324421620/chaper-4-pr... 9/10‘1923, 137 PM Meroeconomie Theory: Basie Principles and Extensions ~ 9780324421620 Exercise 12 | Quzet Step 12 Rofl We can substitute the value of Pyy obtained in exercise (a). The ratio for the variable y will be: 1 8 Py (=p, x0)8 Py _ I I — (—p,%0)8 I We can apply the limit to the previous function to know its trend as its parameters increase. _ (=p. X0)8 I>0 I =|8 We can see that as the individual's income increases, the parameters a and [3 are the ones that will show a positive change, being a the parameter that represents the quantities of good x and (3 those of good y < Exercise 11 Exercise 13 > Privacy Terms tps: quilt. comvexplanations/texbook-solutonsimicroecanemic-sheory-basie-pinciples-and-extensions-10th-edion-9780324421620/chapler-4-p... 10/10,