Consider the classic consumer's choice problem of an individual who is allocating Ý dollars of wealth amongst two goods. Let c1 denote the amount of good 1 that the individual would like to consume at a price of P per unit and c2 denote the amount of good 2 that the individual would like to consume at a price of P2 per unit. The individual's utility is defined over the consumption of these two goods (only). Suppose we allow the individual's happiness to be measured by a utility function u(c1, c2) which is increasing and strictly concave in both goods while also satisfying the Inada condition, limcı→0 du(cı,c2) = limcı→0 du(c1,c2) dc2 = ∞. %3D dci The Inada conditions simply say that the slope of the utility function becomes vertical in the direction of the good that has its consumption level go to zero. By assuming increasing and strictly concave utility in both directions, we are assuming that the shape of the utility function is such that, holding constant the amount of one good, as the
Consider the classic consumer's choice problem of an individual who is allocating Ý dollars of wealth amongst two goods. Let c1 denote the amount of good 1 that the individual would like to consume at a price of P per unit and c2 denote the amount of good 2 that the individual would like to consume at a price of P2 per unit. The individual's utility is defined over the consumption of these two goods (only). Suppose we allow the individual's happiness to be measured by a utility function u(c1, c2) which is increasing and strictly concave in both goods while also satisfying the Inada condition, limcı→0 du(cı,c2) = limcı→0 du(c1,c2) dc2 = ∞. %3D dci The Inada conditions simply say that the slope of the utility function becomes vertical in the direction of the good that has its consumption level go to zero. By assuming increasing and strictly concave utility in both directions, we are assuming that the shape of the utility function is such that, holding constant the amount of one good, as the
Chapter3: Preferences And Utility
Section: Chapter Questions
Problem 3.15P
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