ECON 11 Study Guide - Midterm Guide: Engel Curve, Inferior Good, Expenditure Function
Document Summary
Economics 11: solutions to practice first midterm - version b. 2 (a) derive the mrs. (b) show that preferences are convex. = x2 x1 (b) we can show preferences are convex by showing the mrs is decreasing in x1 along the indi erence curve. 2 = k. rearranging, we get x2 = k2/x1. Given any two cars, i always prefer the one that is bigger and faster. It"s unclear how i rank two cars a and b, where a is faster and b is bigger. Assume that preferences satisfy the usual axioms (transitivity, completeness and continuity). Question 4 (a) de ne the expenditure function (either mathematically or in words). (b) intuitively explain why the expenditure function is concave in prices. Solution (a) the expenditure function is the minimal expenditure needed to attain a target utility level. (b) suppose p1 rises. If i keep my demands constant then i attain the same utility level and my expenditure rises linearly.
