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Unformatted text preview: ch job should the economist
500. This is much lower than the utility in Des
Moines, so the economist should take the Des Moines job. In Figure 1, the comparison is
between (2000,500) on indifference curve with U=1259.9 versus (500,500) on indifference
curve with U=500.
B3) Suppose the firm in San Francisco wants to make an offer that will leave the economist
indifferent between the job in Des Moines and the job in San Francisco. They ask you to
predict the lowest income that they would have to pay? To do this, set up the Lagrangian
for the minimum income required to reach the same level of utility in as in Des Moines,
given the prices of housing and food in San Francisco.
B4) Derive the first order conditions for the minimum expenditure. .
B5) Solve for the levels of food F and housing H that minimize expenditure necessary to reach
the same level of utility as in Des Moines.
Using the first two first-order conditions, we have → ∙ → . Note that this is the same form for the first-order conditions we obtained when we maximized utility subject to the budget constraint in B1)....
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- Fall '07