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Cobb-Douglas Functions
5
y
3.75
5
3.75
5
3.75
2.5
2.5
2.5
1.25
1.25
z
1.25
0
x
We rarely work with 3-D graphs such as this however; instead we slice it
into various views or projections. The projection onto the XY axis is called an
indierence curve. The projection is made by slicing o the top of the threedimensional utility surface and shinning a light from above. The shadow that
the edge projects on the floor is the indierence curve. These projections are
useful for graphical purposes only; when working with them, we must remember
that we are still using the full Cobb-Douglas equation.
To get the XY projection in the utility function, we simply take a given level
of U = U0 and solve for Y as a function of X
U0 = X Y (1)
Solution is:
Y = U01 X 1
1
but since U01 is a constant along the projection, this is simply an hyperbola.
It has a graph that looks like:
100
75
50
25
10
15
20
x
50
37.5
25
12.5
12.5
25
37.5
50
X
and a similar diagram can be drawn for the projection into the Y, U plane.
1.1
Slopes
For the utility function, the slope of this curve in the X, U plane is just the
marginal utility of X, holding Y constant. For the production function, the
slope is the marginal product of one of the two factors, holding the other constant. Using calculus, the slope is simply the partial derivative of the Cobb-
To get the slope of the indierence curve, we can just add and subtract X1 Y2 to
the last equation and write the result as:
X1 Y1 X2 Y2 + X1 Y2 X1 Y2 = 0
This is a key substitution, one that only works for the square root version of
the Cobb-Douglas. Reorganizing this last expression
X1 (Y1 Y2 ) + (X1 X2 )Y2 = 0
The elements a slope, the rise (Y1 Y2 ) over run (X1 X2 ) are starting to take
shape. Divide both sides by (X1 X2 )
X1
(Y1 Y2 )
+ Y2 = 0
(X1 X2 )
3
Y
X2Y 2
rise
X1Y 1
run
Figure 1:
and call the slope,
X1 + Y2 = 0
Y2
X
1
Y
X
dU =
U
U
dX +
dY
X
Y
U
where X
is a partial derivative, that is the derivative of U with respect to
X holding Y constant, said the partial of U with respect to Y. 1 As we saw
above, along an indierence curve or an isoquant, the change in U , dU = 0. We
then have:
U
U
dX +
dY
X
Y
from which the slope, dY/dX of the indierence curve can be calculated.
0=
dY
U/X
=
dX
U/Y
but since the partial derivative of the Cobb-Douglas function is just
U
U
= X 1 Y 1 =
X
X
and with respect to Y
(1 )U
U
= (1 )X Y 11 =
Y
Y
we have substituting into the definition of the slope:
UY
Y
dY
=
=
dX
(1 )U X
(1 )X
This is the general expression for the slope of the two-dimensional projection of
the the Cobb-Douglas equation into the XY plane. In the special case of the
square root function ( = 0.5) we have:
Y
dY
==
dX
X
which is the same as the expression above.
1.2
Now whether we are talking about maximizing utility or minimizing cost, setting
the slope of the 2-D projection is set equal to the slope of the constraint is gives
one equation for the solution to the maximization problem.
For example, in the maximization of utility problem the slope of the budget
constraint is just the (negative of the ) opportunity cost of X in terms of the good
1 Similarly,
U
Y
B = pX X + pY Y
where B is the budget. Substituting the tangency condition into the budget
constraint for Y , we have:
pX
B = pX X + pY ( X)
pY
Simplifying:
B
X
= 2pX X
= B/2pX
2.5. Check to see that the budget is exhausted. Total utility is U = 12.5The
graphical solution is presented below:
6.25
3.75
2.5
1.25
2.5
7.5
10
x