Microeconomics

Lecture 5

Recap
Maximise utility subject to budget constraint. Graphical and Mathematical solution. Marshallian demand function: solution to the UMP subject to the budget constraint. Properties of Marshallian demand function.

Indirect Utility Function

Plug the Marshallian demand function in the utility function. v(px, py,M): indirect utility function.

Example of Indirect Utility Function

Cobb-Douglas. Perfect complements Perfect substitutes.

Property-1
Increasing in income, that is Non-increasing in price, that is Roys identity: verification. Homegeneous of degree in prices and income.
v >0 M

v >0 p x

Property: Quasi-convexity
y

The Dual Programme: Expenditure Minimization

Min pxx +pyy Such that u(x,y) u0.
y u0

Iso-cost line x

Expenditure Minimization: Mathematics

Lagrangian. First order condition(s) Solution. Hicksian (constant utility) demand functions. Marshallian and Hicksian demand functions.

Example
Cobb-Douglas. Perfect substitutes. Perfect complements.

Properties of Hicksian Demand Functions

Homogeneous of degree ______ in prices. Increasing in u. Strict quasiconcavity of utility function: unique.

Expenditure Function
The counterpart of indirect utility function. pxxh +pyyh= E(px,py,u0) The minimum amount of money that must be spent in order to obtain a lifestyle implicit in u0, given the current prices.

Examples
Cobb-Douglas. Perfect substitutes. Perfect complements.

Properties
Homogeneous of degree.in prices. Increasing in u and prices. Shephards lemma holds. Concave in prices.