Week 3a Lecture_Demand

Week 3a Lecture_Demand - Week 3 Demand (Continued) How to...

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Week 3 Demand (Continued)

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How to find demand given utility and budget set? x 1 x 2 x 1 * x 2 * (x 1 *,x 2 *) is the most preferred affordable bundle.
Solve for Demand 1. Preference is monotonic (utility function increases in each commodity) 2. Preference is strictly convex (utility function is strictly quasi- concave) 3. Indifference curves have no ‘kinks’ (utility function is differentiable everywhere) 4. Prices are strictly positive Then there is a very simple rule based on the graphs: find the tangent point!

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Solve for Demand 1. To find the tangent point, just find (x 1 ,x 2 ) such that MRS = -p 1 /p 2 If both coordinate of this point is positive, then we are done.
Examples of Corner Solutions x 1 x 2 x 1 * x 2 *

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Solve for Demand 1. If one coordinate is negative, then set it to be zero, and set the other coordinate to be such that the point is on the budget line. This point will be at the corner of the budget constraint. 1. Sometimes, you cannot find a tangent point. Then we will need to solve by graph.
Computing Demands - a Cobb- Douglas Example. Suppose that the consumer has Cobb- Douglas preferences, w/ a > 0 and b > 0.

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This note was uploaded on 09/06/2010 for the course FBE ECON2113 taught by Professor Franchsica during the Fall '09 term at HKU.

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Week 3a Lecture_Demand - Week 3 Demand (Continued) How to...

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