ECON 3215 / 4215

Fall term 2008

The document, last updated November 10, is now complete and contains information
about all the ten seminars, weeks 37 - 46.
Seminars
There are three parallel seminars:
Friday 08:15 -10:00, Room 201 Harriet Holters hus
Thursday 08:15 -10:00, Room 101 Harriet Holters hus
Tuesday 16:15 -18:00, Room 150 Harriet Holters hus
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

September 9, 11 and 12
September 16, 18 and 19
September 23, 25 and 26
September 30, October 2 and 3
October 7, 9 and 10
October 14, 16 and 17
October 21, 23 and 24
October 28, 30 and 31
November 4, 6 and 7
November 11, 13 and 14

1. Seminars in week 37, September 9, 11 and 12

Seminar leader: Aanund Hylland
Discussion of the multi-product case; Cowell pages 40 - 44.
2. Seminars in week 38, September 16, 18 and 19
Seminar leader: Aanund Hylland
A

Cowell problem 2.5 (pages 46 - 47)

Cowell problem 2.4 (page 46). In addition to answering the questions asked
there, find the marginal and average cost. Under what condition does profit
maximization make sense? In this case, find the unconditional demand function
for input 1, the supply function and the profit function. Find expressions for the
substitution and output effect of a change in an input price.

3. Seminars in week 39, September 23, 25 and 26

Seminar leader: Simen Pedersen
A

Cowell problems 3.1 and 3.5 (pages 63 and 65)

Chapter 3 has not been discussed thoroughly at the lectures, but the students
should nevertheless be acquainted with the material.

Cowell problem 4.2 (page 96)

Which of the following utility functions represent the same preferences:

u1(x1,x2) = x1 + x2
u2(x1,x2) = x1 x2
u3(x1,x2) = log x1 + log x2

4. Seminars in week 40, September 30, October 2 and 3

Seminar leader: Aanund Hylland
A

Cowell problem 4.7 (page 97)

Cowell problem 4.12 (page 98)

Cowell problem 5.4 (pages 119 - 120)

If time allows: Cowell problem 5.8 (page 121)

5. Seminars in week 41, October 7, 9 and 10

Seminar leader: Simen Pedersen
A

Cowell problem 5.8 (page 121)

The problem was assigned for last week, but we did not have time to discuss it.

Cowell problem 6.7 (page 143)

Cowell problem 7.1 (page 174)

Cowell problem 7.3 (page 174)

6. Seminars in week 42, October 14, 16 and 17

Seminar leader: Simen Pedersen
A

Cowell problem 7.4 (page 174 - 175)

Cowell problem 7.10 (page 176 - 177)

In this connection, you should look at problems 2.14 (page 49) and 6.4 (page
142 - 143.

Cowell problem 7.5 (page 175)

Cowell problem 7.6 (page 175)

7. Seminars in week 43, October 21, 23 and 24

Seminar leader: Simen Pedersen
A

Basic concepts
(i)

Explain what we mean by "an act", "a state of the world", "the probability
of a state" and "an outcome". Discuss the reasonableness of assuming that
a decision maker (a) knows the set of states and (b) is able to assign
probabilities to each of the possible states.

(ii)

What is the Expected Utility Theorem? Explain the assumptions

underlying this result and discuss their reasonableness.

(iii)

Explain what is meant by a decision maker being, respectively, risk

averse, risk loving and risk neutral. What is the mathematical
characterization of a utility function which represents, respectively, risk
aversion, risk attraction and risk neutrality?

(iv)

Which attitude towards risk is implied by the following utility functions:

(a)
u(x) = log x
(b)
u(x) = ex
(c)
u(x) = a+bx, where a and b are positive constants
(d)
u(x) = x2

(v)

Consider the utility function u(x) = a+bx+cx2 . Which conditions must be

imposed on this function for it to represent a risk averse agent who derives
utility from x? Is the function valid for any value of x?

Cowell problem 8.1 (page 219)

A farmer has at his disposal 100 hectares of land. (A hectare, abbreviated ha, is
10,000 square meters.) The land may be used for growing wheat or barley. The
wheat yield depends on the weather (such as the occurrence of frost), while the
barley yield does not. If the weather is good the farmer receives a yield on wheat
land worth NOK 4500 per ha, whereas if the weather is bad the value of the wheat
crop is NOK 1500 per ha only. The probability of bad weather is 1/3. The yield
on barley is NOK 2500 per ha in any case. Irrespective of the choice of crop, the
cost of fertilizers, seeds et cetera is NOK 1000 per ha.
(i)

Assume the farmer choose to produce wheat only. Show that in this case
his expected net income equals NOK 250,000.

(ii)

If the farmer only considers the two extremes, "all barley" or "all wheat",
should he then choose all wheat? Explain!

(iii)

Assume the farmer has preferences that satisfy the Expected Utility
Theorem and that his (von Neuman-Morgenstern) utility function is u(x),
where x is net income. What are the expressions for the farmers expected
utility in the two cases considered in (ii)?

(iv)

Assume now that the farmer may choose a mix between wheat and barley.
Let Y denote the number of hectares of land used for barley. Net income
in good weather conditions is denoted xG while net income in bad weather
conditions is xB. Show that
xG = 350,000 2,000 Y
xB = 50,000 + 1,000 Y

(v)

Derive the expression for the farmers expected utility and show how it
depends on Y. Explain how we may (in principle) find the optimal value
of Y.

(vi)

What is the optimal value of Y if the utility function is the natural

logarithm, that is, u(x) = log x.

8. Seminars in week 44, October 28, 30 and 31

Seminar leader: Simen Pedersen
A

This problem is a continuation of Seminar 7, problem C. The farmer described

there lives in the East of the country. There is another farmer, living in the West,
who is equal to the first one in all relevant aspects (farm size, income for the
various crops under different weather conditions, costs). The probability of bad
weather is the same in the West as in the East, namely 1/3, and these events are
independent. Both farmers have the utility function u(x) = log x.

(vii)

Assume that both farmers use Y hectares of land for barley. Before the
growing season, they can trade in contingent goods. What are the
contingent goods in this case? Describe the initial ownership structure.

(ix)

Find the competitive equilibrium in the market for contingent goods

described in (vii).

(x)

Suppose that the two farmers make a joint decision about Y. Formulate
the expression they would want to maximize. Will the optimal value of Y
be smaller than, equal to or greater than the solution to (vi)?

Cowell problem 8.11 (pages 222 - 223)

Cowell problem 8.13 (page 223)

9. Seminars in week 45, November 4, 6 and 7

Seminar leader: Simen Pedersen
A

Cowell problems 8.14 and 8. 15 (pages 223 - 224)

Consider a pure exchange economy with two consumers, A and B, and two goods.
The utility functions are:
u A ( x1 , x 2 ) x1a x 2b ,
u B ( x1 , x 2 ) min( x1 , x 2 ) .
The parameters a and b are both positive.
a) Calculate the Marshallian (uncompensated) demand function for each of
the consumers.
b) There are 10 units of each good in the economy. Characterize the Pareto
efficient (Pareto optimal) allocations. Draw an Edgeworth box to illustrate
the result.
c) If A initially owns the 10 units of good 1 while B owns the 10 units of
good 2, and the goods are traded competitively, what are the market
clearing prices and the equilibrium allocation?
d) Answer part c) if initial ownership is opposite, that is, A owns the 10 units
of good 2 while B owns the 10 units of good 1.
1
e) Assume now in additional that a b 2 . Find the welfare maximizing
allocation when the welfare function is given by
W (u A , u B ) u A 14 u B .

Externalities: Cowell problem 9.1 (pages 264 - 265)

10. Seminars in week 46, November 11, 13 and 14

Seminar leader: Simen Pedersen
A

Completion of problem C from Seminar 9:

Externalities: Cowell problem 9.1 (pages 264 - 265)

In the following normal-form game, which strategies survive iterated elimination

of strictly dominated strategies? Find the pure-strategy Nash equilibria.

Player 1

U
M
D

Player 2
C
5,1
4,6
3,5

L
6,3
0,1
2,1

Duopoly: Cowell problem 10.7 (pages 323 - 324)

If time allows: Cowell problem 10.8 (page 324)

R
0,2
6,0
2,8