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Lecture 7, September 19
We would also like to account for the possibility that the optimum is not
unique, so that x (q) is not a function.
First, what does it mean for a correspondence to be increasing?
Strong Set Order
Ranking real numbers is easy, but how can we express the idea that one set is
bigger than another set?
Denition
For two sets of real numbers A and B, dene the binary relation s as follows:
for any a 2 A and b 2 B
A sB if
minfa; bg 2 B and maxfa; bg 2 A
A s B reads A is greater than or equal to B in the strong set order.
Example
Suppose A = f1; 3g and B = f0; 2g. Then, A is not greater than or equal to B in
the strong set order.
Non-Decreasing Correspondences
Denition
We say a correspondence g : Rn ! 2R is non-decreasing in q if and only if
x0 > x implies g (x 0 ) s g (x)
Thus, x 0 > x implies that for any y 0 2 g (x 0 ) and y 2 g (x): minfy 0 ; y g 2 g (x)
and maxfy 0 ; y g 2 g (x 0 ).
Larger points in the domain correspond to larger sets in the codomain.
Generalizes the notion of increasing function to correspondences.
Exercise
Prove that if g ( ) is non-decreasing and min g (x) exists for all x, then min g (x) is
non-decreasing.
Exercise
Prove that if g ( ) is non-decreasing and max g (x) exists for all x, then max g (x) is
non-decreasing.
Monotone Comparative Statics: Simplest Case
Set up
Suppose the function f : R2 ! R is the objective function; this is not
necessarily concave or dierentiable, and the optimizer could be set valued.
Let
x (q) = arg max f (x; q); subject to q 2 ; x 2 S(q)
Note: for any strictly increasing h, this problem is equivalent to
x (q) = arg max h(f (x ; q)); subject to q 2 ; x 2 S (q)
h( ) may destroy smoothness or concavity properties of the objective function so
IFT may not work.
For now, assume S( ) is independent of q (ignore the constraints), and that
both x and q are real variables.
Assume existence of a solution, but not uniqueness.
Supermodularity
Denition
The function f : R2 ! R is supermodular in (x; q) if
for all x 0 > x f (x 0 ; q) f (x; q) is non-decreasing in q:
Lemma
A twice continuously dierentiable function f : R2 ! R is supermodular in (x; q) if
and only if Dxq f (x; q) 0 for all (x; q).
Proof.
Let q 0 > q and take x 2 x (q) and x 0 2 x (q 0 ). Show that x (q 0 ) s x (q).
0 0
First show that maxfx; x g 2 x (q )
x 2 x (q) implies f (x ; q) f (minfx ; x 0 g; q) 0.
x 2 x (q) also implies that f (maxfx ; x 0 g; q) f (x 0 ; q) 0
verify these by checking two cases, x > x0 and x0 > x.
0 0 0 0
By supermodularity, f (maxfx ; x g; q ) f (x ; q ) 0,
Hence maxfx ; x 0 g 2 x (q 0 ).
Now show that minfx; x 0 g 2 x (q)
maxfx ; x 0 g 2 x (q 0 ) implies that f (x 0 ; q 0 ) f (maxfx ; x 0 g; q) 0,
or equivalently f (maxfx ; x 0 g; q) f (x 0 ; q 0 ) 0.
maxfx ; x 0 g 2 x (q 0 ) also implies that f (maxfx ; x 0 g; q 0 ) f (x 0 ; q 0 ) 0,
which by supermodularity implies f (x ; q) f (minfx ; x 0 g; q) 0
Hence minfx ; x 0 g 2 x (q).
TopkisMonotonicity Theorem
Denition
The function f : R2 ! R satises the single-crossing condition in (x; q) if for all
x 0 > x, q 0 > q
f (x 0 ; q) f (x; q) 0 implies f (x 0 ; q 0 ) f (x; q 0 ) 0
and
f (x 0 ; q) f (x; q) > 0 implies f (x 0 ; q 0 ) f (x; q 0 ) > 0:
As a function of the second argument, the marginal return can cross 0 at most
once; whenever it crosses 0, as the second argument continues to increase, the
marginal return is going to remain positive.
Theorem
If f satises single crossing in (x; q), then x (q) = arg maxx 2S (q) f (x; q) is
nondecreasing. Moreover, if x (q) is nondecreasing in q for all constraint choice
sets S, then f satises single-crossing in (x; q).
Monotone Comparative Statics
n-dimensional choice variable and m-dimensional parameter vector
Denitions
Suppose x; y 2 Rn .
The join of x and y is dened by
x _ y = (maxfx1 ; y1 g; maxfx2 ; y2 g; : : : ; maxfxn ; yn g):
The meet of x and y is dened by
x ^ y = (minfx1 ; y1 g; minfx2 ; y2 g; : : : ; minfxn ; yn g):
Draw a picture.
Strong Set Order
The meet is in the smaller set, while the join is in the larger set.
One uses this to talk about non-decreasing Rn -valued correspondences.
Exercise
1 Prove that if f is quasi-supermodular in x, then h f is quasi-supermodular in
x for any strictly increasing h : f (Rn Rm ) ! R.
@2 f
2 Suppose f (x; q) is twice dierentiable in x and @xi xj > 0 for all i; j = 1; : : : ; n
with i 6= j. Then f is quasi-supermodular in x.
Single-Crossing Property
Denition
The function f : Rn Rm ! R satises the single-crossing property if, for all
x; y 2 Rn and q; r 2 Rm such that x y and q r:
1 f (x; r) f (y; r) ) f (x; q) f (y; q);
2 f (x; r) > f (y; r) ) f (x; q) > f (y; q):
Exercise
1 Prove that if f satises the single-crossing property, then h f satises the
single-crossing property for any strictly increasing h : f (Rn Rm ) ! R.
2
@ f
2 Suppose f (x; q) is twice dierentiable and @x i xj
> 0 for all i = 1; : : : ; n and
j = 1; : : : ; m. Then f satises the single-crossing property.
Monotone Comparative Statics
Theorem (easy Milgrom and Shannon)
Let f : Rn Rm ! R. Dene x (q) = arg maxx 2R n f (x; q). Suppose jx (q)j = 1
for all q and f (x; q) is quasi-supermodular in its rst argument and satises the
single-crossing property. Then
q r ) x (q) x (r ):
Easybecause it assumes the optimum is unique (thus, the proof does not use
strictquasi-supermodularity and single-crossing).
Proof.
Suppose q r . Then:
f (x (r ); r ) f (x (q) ^ x (r ); r ) by denition of x (q)
) f (x (q) _ x (r ); r ) f (x (q); r ) by quasi-supermodularity in x
) f (x (q) _ x (r ); q) f (x (q); q) by Single Crossing
) x (q) _ x (r ) = x (q) since jx (q)j equals 1
) x (q) x (r ) by Question 2, PS4
What conditions must these observations satisfy for us to conclude they are
the result of the maximizing of a preference relation or a utility function?
Answer: Something similar to, but stronger than, revealed preference.
An Example (from Kreps)
Suppose we observe the following choices among 3 goods
w p x
1 300 (10; 10; 10) (10; 10; 10)
2 130 (10; 1; 2) (9; 25; 7:5)
3 110 (1; 1; 10) (15; 5; 9)
Lemma
Suppose % is locally non-satiated, and let x be an element of Walrasian demand
(therefore x % x for all x 2 fx 2 X : p x w g). Then
x %x when p x =w
and
x x when p x <w
The maximal bundle is weakly preferred to any bundle that costs the same.
The maximal bundle is strictly preferred to any bundle that costs less.
Proof.
The rst part is immediate.
For the second part note that if p x < w by local non satiation (and continuity of
p x) there exists some x 0 such that x 0 x and p x 0 w .
Thus x 0 is aordable and x % x 0 x as desired.
Example Continued
Consumers choices among 3 goods
w p x
1 300 (10; 10; 10) (10; 10; 10)
2 130 (10; 1; 2) (9; 25; 7:5)
3 110 (1; 1; 10) (15; 5; 9)
Since at prices (10; 10; 10), the bundle (15; 5; 9) costs less than (10; 10; 10):
(10; 10; 10) (15; 5; 9).
Since at prices (10; 1; 2), the bundle (9; 25; 7:5) costs as much as (10; 10; 10):
(9; 25; 7:5) % (10; 10; 10).
Since at prices (1; 1; 10), the bundle (9; 25; 7:5) costs less than (15; 5; 9).
(15; 5; 9) (9; 25; 7:5).
Putting these together:
(10; 10; 10) (15; 5; 9) (9; 25; 7:5) % (10; 10; 10)
These observations are not consistent with utility/preference maximization
theory: they violate transitivity.
Directly Revealed Preference
Denitions
Suppose fx j ; p j ; w j gNj=1 is a nite set of demand data that satisfy p j x j wj.
The directly revealed weak preference is dened by
x j %R x k if p j x k w j
The directly revealed strict preference is dened by
x j R x k if p j x k < w j
I
is also dened directly from observation, and maybe dierent than the
asymmetric component of %I .
Exercise
Verify that x j %R x k implies x j %I x k .
Verify that if x j %R x k and x k I x i , then x j I
xi .