Free Flashcard From EC201 MT definitions
Find uncompensated demand with Quasilinear utility. I.e. utility function of form u(x1,x2)= V(x1) + x2
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!