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Unformatted text preview: where the first term on the rhs represents the change in utility as changes by , and similarly for the second term. As increases by , utility increases by . To stay on the same indifference curve, must decrease by , the effect of which is sufficient enough to offset the effect of on the utility, so that there is no change in utility. The partial derivatives are Similarly, Solving the total derivative equation, we derive 6 Equating the two slopes and using the expression for , we derive and the solution for is . For example, if , , A =1, and , then , , and the maximum utility level is . Method 3. Use computer optimization program We can use Excels SOLVER to find directly the optimum solution for and subject to the budget constraint. See Excel file, Consumption sheet...
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This note was uploaded on 04/05/2012 for the course ECON 445 taught by Professor Staff during the Fall '08 term at Texas A&M.
- Fall '08