ajaz_204_2013_2014_HW_2

Due to a small change in 4 university of toronto

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Unformatted text preview: t of Economics, ECO 204, 2013 - 20143 We know that which means that we can calculate change in applying the envelope theorem on: due to a small change in a parameter by [ ) ) (d) Derive an equation for ) in terms of the parameters. What does this equation tell us about the parameter From the FOCs we have: By the envelope theorem, we know this is: It tells us that as . For what value of is maximized? When: That is, with when unconstrained solution (i.e. convince yourself of what’s going on here. Question 3 Consider the function defined on (a) Solve the problem (a special case of Where the parameter [ from ). You should draw and ). Assume the parameters ) ) where ) ): . We solve inequality constrained problems by the “Kuhn-Tucker method”: [ [ 5 University of Toronto, Department of Economics, ECO 204, 2013 - 20143 Start with [ this will be true when either and/or . Case A: Suppose If this is the solution then we need to see if/when . From the FOC: Thus, so long as and the solution will be . Case B: Suppose If this is the solution then we need to see if/when Thus, so long as the solution will be (b) All else equal, what is the change in “case” separately. . From the FOC: and . due to a small change in Hint: You will have to consider each Case A: When You should think about the last result – why is it that a, suppose, one unit increase in also makes increase by 1 unit? Case B: Suppose 6 University of Toronto, Department of Economics, ECO 204, 2013 - 20143 (c) All else equal,...
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This homework help was uploaded on 02/15/2014 for the course E 204 taught by Professor Ajaz during the Winter '13 term at University of Toronto- Toronto.

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