Choice and Utility Maximization:
We have now described in detail what the consumer can do and we have also acquired a numerical function representing the consumer’s preferences and we can therefore proceed to analyze the consumer’s optimal choice behavior, using these concepts. The utility function is convenient since we can assume that the consumer make choices as if she tried to maximize this function. We’ve also seen that we can define the consumer’s external rate of exchange as the price ratio (p1/p2), and the consumer’s internal rate of exchange as the ratio of the marginal utilities, or MRS12, (−MU1/MU2). Figure below shows the solution to the consumer’s utility maximization problem, or optimal choice problem. It is obvious from the figure that the optimal condition is such that the external- and internal rate of exchange are equal, or,
MRS12 = - MU1/MU2 = - p1/p2
Example:
As before we assume that the utility function is given by, U(Q1,Q2) = Q1 . Q2. The next step is to find MU1 and MU2. We first define our initial bundle as Q0 = Q01 . Q02 and the new bundle as Q1 = (Q01 + ΔQ1) Q02, the marginal utility of good 1 is then,
Similarly, MU2 = Q01. Hence, MRS12 is equal to,
MRS12(Q0) = MU1/MU2 = Q02/Q01.
We proceed by setting this ratio equal to the price ratio,
Q2/Q1 = p1/p2,
Q2 = p1/p2Q1
This equation shows how they actually consumed quantities of the two goods are related to each other and the goods prices. But it doesn’t help us to pin down what these quantities are, this depends, of course, on how much money the consumer has available, or the budget equation,
p1Q1 + p2Q2 = Y
By using above equation we rewrite the budget equation so that we only have one unknown variable (Q1),
p1Q1 + p2 [(p1/p2) Q1] = Y,p1Q1 + p1Q1 = Y,2p1Q1 = Y
Solving for Q1 gives us the demand function for good 1:
Q1 (Y, p1) = Y/2p1To find the demand function for good 2 we substitute this expression into equation, which gives,
Q2 (Y, p2) = (p1/p2) (Y/2p1)= Y/2p2
For example if p1 = 1, p2 = 2 and Y = 15, the optimal quantities are Q∗1 = 7.5 and Q∗2 = 15/ 2.2 = 3.75. Note that the optimal bundle Q∗ = {7.5, 3.75} cost the consumer 7.5 + 2 x 3.75 = 15, i.e., exactly equal to the consumer’s budget.
Latest technology based Economics Online Tutoring Assistance
Tutors, at the www.tutorsglobe.com, take pledge to provide full satisfaction and assurance in Intermediate Microeconomics homework help via online tutoring. Students are getting 100% satisfaction by online tutors across the globe. Here you can get homework help for Intermediate Microeconomics, project ideas and tutorials. We provide email based Intermediate Microeconomics homework help. You can join us to ask queries 24x7 with live, experienced and qualified online tutors specialized in Intermediate Microeconomics. Through Online Tutoring, you would be able to complete your homework or assignments at your home. Tutors at the TutorsGlobe are committed to provide the best quality online tutoring assistance for Economics homework help and assignment help services. They use their experience, as they have solved thousands of the Economics assignments, which may help you to solve your complex issues of Intermediate Microeconomics. TutorsGlobe assure for the best quality compliance to your homework. Compromise with quality is not in our dictionary. If we feel that we are not able to provide the homework help as per the deadline or given instruction by the student, we refund the money of the student without any delay.
tutorsglobe.com eye care assignment help-homework help by online eye infections tutors
Synthetic Dyes-Fibres tutorial all along with the key concepts of Advantages and Disadvantages of Synthetic Fibre, properties of synthetic substances, tensile strengths
Scanning may be evaluated to our eyes. When reading a book, the eye begins to read from left end and move in the direction of right end.
tutorsglobe.com mitochondria as semi-autonomous assignment help-homework help by online mitochondria tutors
tutorsglobe.com prevention of hiv assignment help-homework help by online emerging viral infections in humans tutors
tutorsglobe.com krebs cycle assignment help-homework help by online plant physiology tutors
tutorsglobe.com interphase assignment help-homework help by online mitotic cell cycle tutors
two inputs basic gates such as nor, nand ,ex-or, using ttl and ic and verify the truth tables.
Rubber is acquired through vulcanizing raw rubber [natural/synthetic].Unimpregnated woven fabrics locate a number of limited uses in electrical insulation.
tutorsglobe.com organ of corti assignment help-homework help by online ear tutors
tutorsglobe.com interest assignment help-homework help by online marginal productivity theory of distribution tutors
rigid body dynamics i tutorial all along with the key concepts of Translational Motion of a Rigid Body, Rotational Motion of Rigid Body, General Motion, Moment of Inertia, Radius of Gyration, Dumbbell, Moments and Couples
tutorsglobe.com types of seed germination assignment help-homework help by online process of seed germination tutors
Variation in plants and animals tutorial all along with the key concepts of introduction to genetics, Genetic variation and How genes determine sex,
build up a 3 phase, single layer concentric type of winding for a 2 pole ac machine comprising 24 slots.
1942526
Questions Asked
3689
Tutors
1480186
Questions Answered
Start Excelling in your courses, Ask an Expert and get answers for your homework and assignments!!