practice2

practice2 - Answer to practice problem from lecture 2 1....

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Answer to practice problem from lecture 2 1. Gordon will maximize his preferences U ( a; c ) = a 1 3 c 2 3 subject to the budget constraint M p a a + p c c . His Lagrangian will be L = a 1 3 c 2 3 + ( M ± p a a ± p c c ) @L @a : 1 3 a 2 3 c 2 3 ± a = 0 (1) @L @c : 2 3 a 1 3 c 1 3 ± c = 0 (2) @L : M ± p a a ± ± p c c ± = 0 (3) Gordon uses statements (1) and (2) to remove the Lagrange multiplier occur where the budget constraint holds with equality and 1 3 a 2 3 c 2 3 2 3 a 1 3 c 1 3 = c ± 2 a ± = p a p c c ± = 2 p a p c a ± He plugs this relationship into (3) M = p a a ± + p c c ± = p a a ± + p c 2 p a p c a ± ± = 3 p a a ± a ± ( p a ; p c ; M ) = M 3 p a c ± ( p a ; p c ; M ) = 2 p a p c M 3 p a ± = 2 M 3 p c Then, since the price of an album is $10 while the price of a concert ticket is $30, while Gordon±s monthly income is $300, we know that he optimally
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 09/23/2008 for the course ECON 11 taught by Professor Cunningham during the Summer '08 term at UCLA.

Page1 / 3

practice2 - Answer to practice problem from lecture 2 1....

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online