ECON 6090, Fall 2012 - Final Exam 135 Minutes. FOUR SIDES TO EXAM SHEET If you believe a question is unclear, please state how you interpret the question and we will take this into account during grading. In proofs, please use formal mathematical language wherever possible. You must show all work for partial credit to be awarded. 1. (25 Points) For some ﬁxed ε > 0, suppose the consumer’s choice rule is for some C(B) = (x1 , x2 , x3 ) : u(x1 , x2 , x3 ) + ε ≥ max (x1 ,x2 ,x3 )∈B

u(x1 , x2 , x3 )

for some funtion u from R3 into R. In other words, the + agent chooses all items from u(x1 , x2 , x3 ) that come within ε of providing the maximum utility possible given the options in B. (a) (5 points) Suppose we deﬁne the preference relation as (x1 , x2 , x3 ) (x1 , x2 , x3 ) if u(x1 , x2 , x3 )+ε ≥ u(x1 , x2 , x3 ). Is this preference relation rational for an arbitrary choice of a continuous function u? If so, prove it. If not, provide a counter-example. (b) (5 points) Does this choice rule satisfy WARP for an arbitrary choice of a continuous function u? If so, prove it. If not, provide a counter-example. Suppose u(x1 , x2 , x3 ) = xα ∗ min{x2 , x3 } for some α ∈ 1 (0, 1). (c) (8 points) Solve the utility maximization problem. (d) (7 Points) Use duality results to compute the Hicksian demand given your result in part (c)

1

2. (20 Points) Consider a ﬁrm with the following single-output production function that uses capital (k) and labor (l) as inputs f (k, l) = (k γ + Hlγ )1/(2γ) , γ ∈ 0, 1 2

Assume a unit of capital costs r > 0, a unit of labor costs w > 0, and output is sold at a price p > 0. (a) (2 Points) Write the Lagrangian for the proﬁt maximization problem. (b) (2 Points) Find the ﬁrst order conditions for the proﬁt maximization problem. (c) (8 points) Provide the solution for the proﬁt maximization problem. (d) (5 points) Use Topkis’s theorem to describe k and l as functions of H holding (w, r, p) ﬁxed. (e) (3 Points) Use Topkis’s theorem to...

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1). In the absence of any legally binding enforcement mechanism, individual cartel producers may find it advantageous to cheat on the agreements and engage in secret price concessions.
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