Asked by Rachel Dusett on Jun 09, 2024
Verified
The indirect utility function for a consumer with a utility function U(x1, x2)is defined to be a function V(p1, p2, m)such that V(p1, p2, m)is the maximum of U(x1, x2)subject to the constraint that the consumer can afford (x1, x2)at the prices (p1, p2)with income m.
a.Find the indirect utility function for someone with the utility function U(x, y) 2x y.
b.Find the indirect utility function for someone with the utility function U(x, y) min2x, y.Explain how you got your answers.
Indirect Utility Function
A concept in economics that represents the maximum utility a consumer can achieve with a given income and set prices for goods and services.
Income
Cash inflow, customarily obtained at regular periods, as compensation for work or from investment outcomes.
Constraint
A limitation or restriction on the variables of a problem, often seen in economics as budget constraints affecting consumer choices.
- Apply the concept of indirect utility to solve optimization problems in consumer theory.
- Understand the role of prices and budget constraints in consumer optimization problems.
Verified Answer
CR
Cindy RodriguezJun 14, 2024
Final Answer :
a) m/(minp1/2, p2).Consumer spends entire income on x or y depending upon which gives more utility.
b) m/(p1 2p2).To maximize utility, consumer spends income in increments of one x and 2 ys.
b) m/(p1 2p2).To maximize utility, consumer spends income in increments of one x and 2 ys.
Learning Objectives
- Apply the concept of indirect utility to solve optimization problems in consumer theory.
- Understand the role of prices and budget constraints in consumer optimization problems.