A household has the budget constraint y = px1 + x2 where the price of good is normalized to one....


A household has the budget constraint {eq}y = px_1 + x_2{/eq} where the price of good is normalized to one. The utility function is given by:

{eq}U(x_1, x_2) - Min \left [ x_1, 4x_2 \right ]{/eq}

Solve the demand function {eq}x_1 {/eq} and {eq}x_2 {/eq} and utility {eq}U(x_1, x_2) {/eq} as functions of y and p.

Utility Function

A utility function comprises a set of goods that define the utility level of the consumer. Any rational consumer seeks to maximise his utility under a given budget constraint. A point of tangency between the utility function and the budget constraint gives the optimum bundle to be consumed.

Answer and Explanation: 1

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The given utility function can be also represented as:

{eq}{x_1} = 4{x_2} {/eq}

Because the given function represents the perfect complimentary...

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Utility Maximization: Budget Constraints & Consumer Choice


Chapter 3 / Lesson 2

Learn about utility maximization. Discover various types of utility, examine utility maximizing rules, and study examples of maximizing utilities in economics.

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