ECON 2100 Lecture Notes - Lecture 3: Proof By Exhaustion, Budget Constraint, Indifference Curve
8 May 2016
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The consumer"s optimal choice (x*1,x*2) is the solution to the problem. There are three methods to solve this problem: 1) brute force method, use-the-graphs method, and the. Brute force method: least favorable method; involves manipulating the budget formula to x2=(m-p1x1)/p2. Then plugging it into u(x1, {m-p1x1}/p2) to eliminate the second variable. Use-the-graphs method: we observe where the indifference curve is tangent to the budget line and note that point as mrs=p1/2. We combine this equation with the budget constraint equation, p1x1+p2x2=m to solve for the two unknowns (x*1,x*2). In this function is a special variable called the lagrange multiplier. Cobb-douglas method applies to when the utility function is as follows x1^a. Individual demand for a good depends on three independent variables. We focus on using static comparison, which is changing one variable at a time and measuring it. Engel curve is a graph that shows the desired consumption of a good as a function of income. (normal or inferior goods)
