6/7/11

Solving a Utility Max problem, a calculus and algabraic approach


 In this question we are trying to optimize an agent's utility.  We are given the following utility function, which consists of choosing between two goods, good Q1, and good Q2.

 This utility function is subject to a budget constraint.  The budget constraint sets the price of Q1 to 2, and the price of Q2 to 5, with an income of 5, or

Given this information, we can solve this problem in two different ways,
we can use calculus, or algebra.  For the calculus solution, we first have to set up the Lagrangian, which is a method used to account for the constraint in the optimization problem.  After this we get the first order conditions by taking partial derivatives with respect to each choice variable, our two different goods:


Then we have to solve both equations for mu (ยต) and set them equal to each other.  At this point we can then solve for 2q1, and plug into the constraint, use this to solve for q2, re-plug that number into the constraint and solve for q1, and you now have the optimal amounts of q1 and q2 to maximize utility subject to the budget constraint.


For the algebraic approach, get the marginal rate of substitution, and the marginal rate of transformation and set them equal to each other,  then follow the above steps after getting rid of the mu.











Spread the knowledge!
Technorati Digg This Stumble Stumble Facebook Twitter

0 comments:

Post a Comment

 

I invite you to join dropbox!

I invite you to join dropbox!
Use the above link for an extra 250MB Free!
All content on this site is the copyright of webmaster. No re-posting is permitted. Powered by Blogger.
VigLink badge

Post Archive

| FreeEconHelp.com, Learning Economics... Solved! © 2009. All Rights Reserved | Template Style by My Blogger Tricks .com | Design by Brian Gardner Back To Top