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cobb-douglas write-up (new)

# cobb-douglas write-up (new) - of the marginal utilities of...

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Microeconomics (Fall 2010) Professor Bowmaker Handout to accompany Lecture 5 Here is the working to solve for the optimal bundle of Good and Goodwith the Cobb-Douglas utility function from Slide 12. Maximize utility function: subject to the budget constraint: Note that 1. The condition for utility maximization is where the marginal rate of substitution (MRS) is equal to the price ratio of the two goods. The MRS is equal to the ratio

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Unformatted text preview: of the marginal utilities of the two goods: MRS = = 2. Let’s solve for and so re-arrange the budget constraint in terms of : 3. We know that the MRS is equal to the price ratio of the two goods, so we can plug this into our budget constraint as follows: 4. Then we can just solve through for: 5. If you follow the same steps for Good, you will be able to findquite easily....
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cobb-douglas write-up (new) - of the marginal utilities of...

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