micro-fall2007-7

micro-fall2007-7 - The Decision Problem of the Household...

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Unformatted text preview: The Decision Problem of the Household The Decision Problem of the Household Choose ( x 1 ; x 2 ) so that u ( x 1 ; x 2 ) is maximized under the constraints p 1 x 1 + p 2 x 2 & y x 1 ¡ x 2 ¡ 0. The solution of the household&s problem determines: The demand functions for good 1 and 2: x ¢ 1 = f 1 ( p 1 ; p 2 ; y ) x ¢ 2 = f 2 ( p 1 ; p 2 ; y ) Ani Guerdjikova ECON 313 Fall 2007 81 / 126 The Decision Problem of the Household The Decision Problem of the Household Choose ( x 1 ; x 2 ) so that u ( x 1 ; x 2 ) is maximized under the constraints p 1 x 1 + p 2 x 2 & y x 1 ¡ x 2 ¡ 0. The solution of the household&s problem determines: The demand functions for good 1 and 2: x ¢ 1 = f 1 ( p 1 ; p 2 ; y ) x ¢ 2 = f 2 ( p 1 ; p 2 ; y ) The indirect utility function u ¢ = v ( p 1 ; p 2 ; y ) Ani Guerdjikova ECON 313 Fall 2007 81 / 126 The Decision Problem of the Household Example Cobb-Douglas utility function u ( x 1 ; x 2 ) = x 1 x 2 ....
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This note was uploaded on 04/30/2008 for the course ECON 3130 taught by Professor Masson during the Fall '06 term at Cornell.

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micro-fall2007-7 - The Decision Problem of the Household...

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