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Derive the demand curve for the utility function U= X^2+Y^2. Calculate own price and cross price elasticity. Evaluate these elasticities at M=12, PX=3 and PY=2

2007-10-02 16:22:24 · 1 answers · asked by Angel eyes 2 in Social Science Economics

1 answers

I assume the budget constraint is M=Px X+Py Y.
Then the maximum U subject to the constraint is at the point where the utility curve is tangent to the budget constraint.
that is dY/dX=-Px/Py
and dU/dX=2X and dU/dY=2Y so dY/dX=Y/X
so Y/X=-Px/Py or Px X=-Py Y
(If you have been taught how to you Lagrangian multipliers you should use them to get the answer instead of this non-rigorous method)
Now you can find the quantities by subtitution into the equation for M.

2007-10-02 18:53:58 · answer #1 · answered by meg 7 · 0 0

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