# Imagine that preferences of a given individual are presented with U(X1 ,x 2 )=X 1 -e^ ? x 2....

## Question:

Imagine that preferences of a given individual are presented with {eq}U(x_{1},x_{2})=x_1-e^{-x_2} {/eq}. Assume that the prices of the two goods consumed by this individual are given by {eq}p_1 {/eq} and {eq}p_2 {/eq}. Normalize the price of the first good to 1. Furthermore, assume that the individual earns income, {eq}I {/eq}.

(a) Derive the demand of the individual for the two goods

(b) Plot the indifference curves as a function of income.

## Utility Maximization:

In economic theory it is assumed that the primary objective of the consumer is to maximize utility subject to a budget constraint. The allocation of an individuals income between goods depends on the consumers preferences. There are several methods to solve utility maximization problems including the Lagrangian method, dynamic programming and numerical methods.

## Answer and Explanation: 1

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View this answer**(a) Derive the demands of the individual for the two goods**

Starting with the utility function we must first set-up the Lagrangian with the budget...

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Chapter 3 / Lesson 2Learn about utility maximization. Discover various types of utility, examine utility maximizing rules, and study examples of maximizing utilities in economics.

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