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hicksiandemandslides - Hicksian Demand Consumer Choice:...

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Hicksian Demand
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Consumer Choice: Constrained Expenditure Minimization “dual problem” to constrained utility maximization minimize expenditures subject to a fixed level of utility, where E = p 1 x 1 + p 2 x 2 + … +p n x n (identical to our budget line) derive demand equations from FOC of constrained expenditure minimization U ̄ x 1 x 2 E 1 /P X 1 * X 2 * E 1 /P 2 E 0 /P 1 E 0 /P 2 E 2 /P 1 E 2 /P 2 Exp Min Rule: MRS = -(p 1 /p 2 ) 0 ) , ( 0 0 : FOC )) , ( ( min 2 1 2 2 2 1 1 1 2 1 2 2 1 1 = - = = - = = - = - + + = x x U U x U p x x U p x x x U U x p x p λ L L L L 2 2 1 1 p U p U = ) , , ( ) , , ( ) , , ( 2 1 * 2 2 * 1 1 2 2 1 * 2 1 2 1 * 1 U p p E x p x p E h U p p x h U p p x = + = = =
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Hicksian “Compensated” Demand Demand function derived from constrained expenditure minimization: example of h 1 Consumer is compensated for the price change, thus maintaining fixed utility (optimum moves from A to B) Every point on Hicksian demand curve is a point of expenditure minimization Minimum expenditures decrease
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hicksiandemandslides - Hicksian Demand Consumer Choice:...

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