NAME: SHYANA

SHANNU VARMA

ONLINE ACTIVITY 2 STUDENT ID:

S11157681
 ACTIVITY 2
OPTIMAL CONSUMER CHOICE
SUBSITUTION METHOD
2𝑥 2 𝑦 2 = Utility Function
Step 1: Differentiate Utility Function

ⅆ𝐔
= 𝟒𝐗𝐲 𝟐  Exactly the same as the Marginal Utilities of X and Y
ⅆ𝐱
ⅆ𝐔
= 𝟒𝐱 𝟐 𝐲
ⅆ𝐲

Step 2: Budget Line

Px =$2 Py = $6 I = $600

𝐏𝐱 𝐱 + 𝐏𝐲 𝐲 = 𝐈

$𝟐𝐱 + $𝟔𝐲 = $𝟔𝟎𝟎

Step 3: Optimal Consumption Rule

𝐌𝐔𝐱 𝐏𝐱
=
𝐌𝐔𝐲 𝐏𝐲
𝟒𝐱𝐲 𝟐 𝟐
=
𝟒𝐱 𝟐 𝐲 𝟔
𝐲 𝟐
=
𝐱 𝟔
𝟔𝐲
=𝐱
𝟐
𝟑𝐲 = 𝐱
 Step 4: Substitute
$2x + $6y = $600 3y = x  Optimal consumption choice for Janet :
 150 units of good x
2(3y) + 6y = 600 3(50)=
 50 units of good y
x
6y + 6y = 600 150 = x
12y = 600
Y = 50
Lagrangian Method
𝐔 = 𝟐𝐱 𝟐 𝐲 𝟐
𝑩𝒖𝒅𝒈𝒆𝒕 𝒍𝒊𝒏𝒆 − 𝟐𝐱 + 𝟔𝐲 = 𝟔𝟎𝟎
𝓛 = 𝒖 + 𝝀 (𝑰 − 𝑷𝒙𝑿 − 𝑷𝒚𝒀)
ℒ = 𝟐𝒙𝟐 𝒚𝟐 + 𝝀 ( 𝟔𝟎𝟎 − 𝟐𝒙 − 𝟔𝒚)
ℒ = 𝟐𝐱 𝟐 𝐲 𝟐 + 𝟔𝟎𝟎 𝛌 − 𝟐𝐱𝛌 − 𝟔𝐲𝛌

Step 1: Differentiate the Lagrangian expression and equate to zero

𝛛𝓛
= 𝟒𝐱𝐲 𝟐 − 𝟐𝛌 = 𝟎
𝛛𝐱
𝛛𝓛
= 𝟒𝐲 𝟐 𝐲 − 𝟔𝛌 = 𝟎
𝛛𝐲

𝛛𝓛
= 𝟔𝟎𝟎 − 𝟐𝐱 − 𝟔𝐲
𝛛𝛌
=𝟎

Step 2: Make 𝛌 subject of the formula

𝟒𝐱𝐲 𝟐 − 𝟐𝛌 = 𝟎 𝟒𝐱 𝟐 𝐲 − 𝟔𝛌 = 𝟎

𝟒𝐱𝐲 𝟐 𝟒𝐱 𝟐 𝐲
=𝛌 =𝛌
𝟐 𝟔

𝟐𝐱𝐲 𝟐 = 𝛌 𝟐 𝟐
𝐱 𝐲=𝛌
𝟑

Step 3: Equate

𝛌 =
𝛌

𝟐
𝟐𝐱𝐲 𝟐 = 𝟑 𝐱 𝟐 𝐲
𝐱
=𝟎
𝟑𝐲

𝟑𝐲 = 𝐱
Step 4: Substitute in the third derivative
𝟔𝟎𝟎 − 𝟐𝐱 − 𝟔𝐲 = 𝟎 3y = x
𝟔𝟎𝟎 − 𝟐(𝟑𝐲) − 𝟔𝐲 = 𝟎 3(50) = x
𝟔𝟎𝟎 − 𝟔𝒚 − 𝟔𝒚 = 𝟎 150 = x
𝟔𝟎𝟎 = 𝟏𝟐𝐲
𝐲 = 𝟓𝟎

 Optimal consumption choice:

 150 units of good x
 50 units of good y

Hence, it is evident that the quantity of optimal consumption choice for Janet being 50 units for
good Y and 150 units for good X which gives her the maximum level of satisfaction keeping in
mind her budget constraint. These are the exact values calculated from both of the two methods.