Utility maximisation - graphical presentation , Macroeconomics

Assignment Help:

Utility Maximisation:

Graphical Presentation 

Let consider a two-commodity world, x1 and x2 representing good I and good II respectively. p1 and p2 are the prices of good I and good II respectively, where the prices are given to the consumer, i.e., prices are exogenously given and consumer can't change them. Money income of the consumer is M, which is also exogenously given to the consumer. Note that p1x1+p2x2 is the total expenditure of the consumer when she consumes x1units of good I and x2 units of good two. The total expenditure of the consumer can't exceed her money income, therefore  p1x1 + p2x2 ≤ M  ------- (a)  

Equation (a) is known as consumer budget constraint. Let U = U(x1, x2) is the utility function of the consumer. Therefore, consumer must solve the following Maximisation problem(UMP):   

709_Utility Maximisation.png

As consumer objective is to maximise her utility and as larger consumption leads to larger utility, she always wants to consume more of any goods. But she also has to spend some amount of her income to consume larger amount of goods. So ultimately in equilibrium she will spend all her income and M = p1x1+p2x2.  

Consumer Behaviour  Now suppose that the line segment AB represents the budget line. Along AB p1x1 + p2x2 = M  holds. Let initial indifference curve of the consumer is IC0. In IC0, there are many points along that indifference curve such that p1x1 + p2x2 ≤ M holds. Therefore, utility maximising consumer will spend more as she moves to higher indifference curve (say IC1). In IC1 there are still such points along the indifference curve such that p1x1 + p2x2 ≤ M  holds, so again consumer spends more. This process will continue as long as consumer reaches an indifference curve where for no point along the indifference curve p1x1 + p2x2 ≤ M holds and at least one point of the indifference curve is on the budget line. At that point, we have consumer equilibrium, C(x1, x2) = (x1*(M,p1,p2), x2*(M,p1,p2))(in Figure point 'e' is the equilibrium point). Not that at equilibrium, slope of the indifference curve is equal to the slope of the budget line. Therefore, at equilibrium we have 

1) Budget constraint holds with equality sign. 

2) Slope of the indifference curve is equal to the slope of the budget line.   


Related Discussions:- Utility maximisation - graphical presentation

Bop on capital account, BOP on Capital Account: BOP on Capital Account...

BOP on Capital Account: BOP on Capital Account  shows only export and import of capital and  the difference between  the  two represents a country's capital account balance. C

Proportion of students entering a university, Historically, the proportion ...

Historically, the proportion of students entering a university who finished in 4 years or less was 64%. To test whether this proportion has decreased, 122 students were examined an

Determine the term- nominal wages, Determine the term- Nominal wages Th...

Determine the term- Nominal wages The nominal wage is wage per unit of time in currency used in the country- what we mainly just call wage. When we refer to wage in macroeconom

What are the economic reasons for protectionism, Question 1: (a) What ...

Question 1: (a) What are the characteristics of market and command economies? (b) In a number of countries in recent years, there has been a movement towards a greater rel

Calculate the demand and probability, Sally's Silk Screning produces specia...

Sally's Silk Screning produces specialty T-shirts that are primarily sold at special events. She is trying to decide how many to produce for an upcoming event. During the event its

Process of leave, The yeild of Maize is 73429 Hg/Ha, I need to translate it...

The yeild of Maize is 73429 Hg/Ha, I need to translate it into bu/a, and I konw use 56lbs/bu as test weight. Please leave the process so that I know how to do it, thankyou.

Analysis, provide data and analysis for the real GDP (as total and per capi...

provide data and analysis for the real GDP (as total and per capita) and its growth rate then draw a graph and identify the periods of the Malaysia’s business cycle 2007 -2011

Differentiate demand elasticity and supply elasticity, Describe elasticity?...

Describe elasticity? Differentiate demand elasticity and supply elasticity? What is arc elasticity? Please describe graphically with proper mathematical representation?

Determine modified accelerated cost recovery system, Suppose new instrument...

Suppose new instruments for a firm cost $18,000 along with an additional installation fee of $2,000, both of that are depreciable. Complete the depreciation schedule display below

Determine the current in the neutral conductor, A 415V, 3-phase, 4 wires, s...

A 415V, 3-phase, 4 wires, star-connected system supplies three resistive loads as shown in Figure. Determine (a) The current in each line and (b) The current in the neutr

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