APPENDIX TO CHAPTER 4

λ is the rate of change of the quantity being optimized, with respect to the constraint value .
Questions for practice
Duality
Indirect Utility Function
• The indirect utility function is closely related to the utility maximization
problem.
• In microeconomics, the utility maximization problem is an optimal decision
problem that refers to the problem consumers face with regards to how to
spend money in order to maximize utility.
• The indirect utility function is the value function, or the best possible value of
the objective, of the utility maximization problem.
• The indirect utility function is a degree-zero homogeneous function, meaning
that if prices (p) and income (m) are both multiplied by the same constant the
optimal does not change (it has no impact).
• The function adheres to the law of demand.

• Find the indirect utility function from U(X,Y) = XY subject to budget constraint.
Roy’s Identity

Roy's identity is used to derive a Marshallian demand function for an

individual and a good from some indirect utility function.

Where :
•U* is the indirect utility function
•x* is the generalized demand equation calculated through lagrange
multiplier.