Now to prove lower hemicontinuity consider an open

This preview shows page 28 - 30 out of 73 pages.

Now to prove lower hemicontinuity. Consider an open set V such that V B p,w 6 = . If w = 0, then 0 n V because V has nonempty intersection with B p,w = { 0 n } . But then V B p 0 ,w 0 is nonempty for all p 0 , w 0 because 0 n B p 0 ,w 0 . So, assume without loss of generality that w > 0. Since V is an open set and B p,w has an interior (as w > 0), we can also find a point y V such that y is in the interior of B p,w . But this means p · y < w . But this relationship is maintained in a neighborhood of ( p, w ). So p 0 · y < w 0 for sufficiently close ( p 0 , w 0 ). But then y B p 0 ,w 0 . In other words, y V and y B p 0 ,w 0 , so V B p 0 ,w 0 is nonempty. Problem 5.19. Recall the nonlinear pricing structure of Exercise 5.3. Now, suppose the price of food is p 1 , the price of the first M units of electricity is p 2 , and the price of each unit of electricity over M is q 2 . M is fixed and does not change. Then the budget set is parameterized as B p 1 ,p 2 ,q 2 ,w , which can also be expressed as a correspondence Γ : R 3 ++ × R + R 2 + . Prove that the Walrasian demand is upper hemicontinuous in ( p 1 , p 2 , q 2 , w ). Problem 5.20. Suppose the consumer can choose to move to either Philadelphia or Queens. The price of n goods in Philadelphia is p and the price in Queens is q . She may consume at either the Philadelphia price or the Queens price, whichever makes her better off (so she gets to decide where to move). All of her shopping must take place in one city; she cannot purchase some goods in Philadelphia and other goods in Queens. Suppose the consumer’s utility function u : R n + R is continuous. Prove the following: The Walrasian demand correspondence, which is now defined on two prices and wage, x * : R n ++ × R n ++ × R + R n + , defined by x * ( p, q, w ) = arg max x B p,q,w u ( x ) 28
is upper hemicontinuous; and the indirect utility function, v : R n ++ × R n ++ × R + R , defined by v ( p, q, w ) = max x B p,q,w u ( x ) is continuous. Theorem 5.21 (Implicit Function Theorem) . Suppose A is an open set in R n + m and f : A R n is continuously differentiable. Let D x f refer to the n × n derivative matrix of f with respect to its first n arguments, i.e. ( D x f ) ij = ∂f i ∂x j . If f x, ¯ q ) = 0 n and D x f x, ¯ q ) is nonsingular, then there exists a neighborhood B of ¯ q in R m and a unique continuously differentiable g : B R n such that g q ) = ¯ x and f ( g ( q ) , q ) = 0 n for all q B . Moreover, D q g q ) = - [ D x f x, ¯ q )] - 1 D q f x, ¯ q ) . Proposition 5.22. Suppose u is twice continuously differentiable, locally nonsatiated, strictly qua- siconcave and that there exists ε > 0 such that x * i p, ¯ w ) > 0 if and only if x * i ( p, w ) > 0 , for all ( p, w ) such that k p, ¯ w ) - ( p, w ) k < ε . 13 Let m = { i : x * i p, ¯ w ) > 0 } and reindex R n so the m dimensions come first. If the bordered Hessian H of u with respect to its first m dimensions, i.e. H = " 0 ( D x u ) > D x u D 2 xx u # = 0 u 1 u 2 · · · u m u 1 u 11 u 21 · · · u m 1 u 2 u 12 u 22 · · · u m 2 .

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture