Consider a utility function u(x1; x2) = x1^{1/2}x2^{1/2} . Let the prices of good 1 and good 2 be...


Consider a utility function {eq}u(x_1; x_2) = x_1^{1/2}x_2^{1/2} {/eq} . Let the prices of good 1 and good 2 be p1 and p2, and of course consumer's income is m. Find the demand functions.

Utility Maximization:

Utility maximization studies a consumer's problem with an income M, aiming to maximize her utility given the specific prices of two goods X and Y. Solving the problem can help answer the optimal bundle questions, derive the consumer's demand function for each good, and analyze the effect of income on consumption.

Answer and Explanation: 1

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We solve the utility-maximizing problem subject to budget constraint:

Maximize {eq}u(x_1; x_2) = x_1^{1/2}x_2^{1/2} {/eq} subject to {eq}p_1x_1 +...

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Learn more about this topic:

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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