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EC201 MT definitions

Question:
Find uncompensated demand with Quasilinear utility. I.e. utility function of form u(x1,x2)= V(x1) + x2
Answer:
1. State problem.
Utility function.
Budget contraint.
Non-negativity constraint.

2. What is the solution a function of?
Prices and income

3. Check for nonsatiation and convexity.
Nonsatiation - partial derivatives strictly greater than zero
Convexity - second derivative weakly greater than zero

4. USe tangency and budget line to find MRS=p1/p2
NB: as V is only a function of x1, MRS only depends on x1

5. Draw a diagram based on tangency and budget line conditions

6. Remember what you are trying to find

7. Write down equations to be solved
Budget line p1x1+ p2x2=m
MRS= p1/p2

8. Solve!
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Last update by mandeville46 on 05/08/2014
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EC201 MT definitions
EC201 MT definitions
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Definitions for the LSE course EC201 (Microeconomic Principles 1)
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Free Flashcard From EC201 MT definitions
Question: Find uncompensated demand with Quasilinear utility. I.e. utility function of form u(x1,x2)= V(x1) + x2
Answer: 1. State problem.Utility function.Budget contraint.Non-negativity constraint.2. What is the solution a function of? Prices and income3. Check for nonsatiation and convexity.Nonsatiation - partial derivatives strictly greater than zeroConvexity - second derivative weakly greater than zero4. USe tangency and budget line to find MRS=p1/p2NB: as V is only a function of x1, MRS only depends on x15. Draw a diagram based on tangency and budget line conditions6. Remember what you are trying to find7. Write down equations to be solvedBudget line p1x1+ p2x2=mMRS= p1/p28. Solve!