Recent development in demand analysis, Microeconomics

Assignment Help:

RECENT DEVELOPMENT IN DEMAND ANALYSIS:

For many years economic theorists analysed the optimal behaviour of consumers while econometricians estimated consumer demand and expenditure relations, with little communication between the two. Theorists would provide examples that were of little aid for empirical work, and econometricians would estimates relations that had little connection with the theory of utility maximisation. Fortunately, as days passed on, the gap between theory and empirical evidence has lessened, and a number of theoretically strong examples that allow empirical estimation have been developed. In this section we present one of such examples.  

127_RECENT DEVELOPMENT IN DEMAND ANALYSIS.png

with the domain q11 and q22. The  γ's may be interpreted as minimum subsistence quantities and are positive. The α's are also positive. Applying the positive monotonic transformation U' = U/(α +α ) we get,  

2426_RECENT DEVELOPMENT IN DEMAND ANALYSIS1.png

The coefficients β1 and β21+ β2 = 1) are called "share" parameters. The consumer's objective is to maximise her utility subject to budget constraint. So, she will try to solve the problem given below. 

2482_RECENT DEVELOPMENT IN DEMAND ANALYSIS2.png

We set Lagrange function of the above maximisation exercise as  

1950_RECENT DEVELOPMENT IN DEMAND ANALYSIS3.png

and set its first partial derivatives equal to zero (we assume interior solution of this maximisation problem):  

954_RECENT DEVELOPMENT IN DEMAND ANALYSIS4.png

1724_RECENT DEVELOPMENT IN DEMAND ANALYSIS5.png

It can be easily verified that the second order condition for the maximisation is satisfied. By evaluating the above three equation one can also find out that the marginal utility of income is decreasing. 

Solving the above equations for optimal quantities gives the demand functions,  

563_RECENT DEVELOPMENT IN DEMAND ANALYSIS6.png

Multiplying the first equation of the above two demand functions by p1 and the second by p2 we get the expenditure functions  

1646_RECENT DEVELOPMENT IN DEMAND ANALYSIS7.png

which are linear in income and prices, and thus suitable for linear regression analysis.  


Related Discussions:- Recent development in demand analysis

Microeconomics, Ways in which the markets fail and discuss why government i...

Ways in which the markets fail and discuss why government intervention is justified and whether government intervention works or not.

Elasticity, 1. What are the uses of elasticity to the public sector and pri...

1. What are the uses of elasticity to the public sector and private sector? (20 marks)

Revealed preference theory, discuss the revealed preference theory of consu...

discuss the revealed preference theory of consumer behaviour

Perfect competition, The price at which output is sold in a perfectly compe...

The price at which output is sold in a perfectly competitive market is determined by

Determinants of the income elasticity , Determinants of the Income Elastici...

Determinants of the Income Elasticity of the Demand: The determinants of income elasticity of demand are given below: The Degree of necessity of the commodity.

Sources of external economies of scale, Sources of external economies of sc...

Sources of external economies of scale: Economies of Skilled Labour: This involves upgrading the skills of labour through the provision of education and training faci

Fiat money in europe , Fiat money is not a new idea.  Some European histori...

Fiat money is not a new idea.  Some European historians recognize the first use of fiat money in Europe resulting from gold and silver smiths issuing their customers receipts for g

Determinants of private demand for education, Determinants of Private Deman...

Determinants of Private Demand for Education Rates of return on investment in education is only one of the factors determining the demand for private investment though it is

Least square methods, The least square method is based on the assumption th...

The least square method is based on the assumption that the past rate of change of the variable under study will continue in the future. It is a mathematical procedure for fitting

Is economic development is based on goverment, Is economic development is b...

Is economic development is based on goverment Many governments--mainly unelected governments-aren't that interested in economic development. Giving valuable industrial franchis

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd