Presentation on theme: "Lagrange Method. Why do we want the axioms 1 – 7 of consumer theory? Answer: We like an easy life! By that we mean that we want well behaved demand curves."— Presentation transcript:
So the Demand Curve for x when U=x 2 y 3 If M=100: PxPx xDxD 104 85 58 220
Recallthat: U = x 2 y 3 Let: U = x a y b For Cobb - Douglas Utility Function
Note that: Cobb-Douglas is a special result In general: For Cobb - Douglas:
Why does the demand for x not depend on p y ? Share of x in income = In this example: Constant Similarly share of y in income is constant: So if the share of x and y in income is constant => change in P x only effects demand for x in C.D.
So l tells us the change in U as M rises Increase M Increase from U 1 to U 2 in constraint Constraint Objective fn in objective fn
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