Marginal Utility Goods 1 and 2 are available at dollar prices ofp1 per unit of Good 1 and p2 per unit of Good 2. A utility functionU(x1, x2) is a function representing the utility or benefit of consumingxj units of good j . The marginal utility of the j th good is ∂U/∂xj ,the rate of increase in utility per unit increase in the j th good. Provethe following law of economics: Given a budget of L dollars, utility ismaximized at the consumption level (a, b) where the ratio of marginalutility is equal to the ratio of prices:Marginal utility of Good 1/Marginal utility of Good 2 = Ux1 (a, b)/Ux2 (a, b) = p1/p2
Minimization
In mathematics, traditional optimization problems are typically expressed in terms of minimization. When we talk about minimizing or maximizing a function, we refer to the maximum and minimum possible values of that function. This can be expressed in terms of global or local range. The definition of minimization in the thesaurus is the process of reducing something to a small amount, value, or position. Minimization (noun) is an instance of belittling or disparagement.
Maxima and Minima
The extreme points of a function are the maximum and the minimum points of the function. A maximum is attained when the function takes the maximum value and a minimum is attained when the function takes the minimum value.
Derivatives
A derivative means a change. Geometrically it can be represented as a line with some steepness. Imagine climbing a mountain which is very steep and 500 meters high. Is it easier to climb? Definitely not! Suppose walking on the road for 500 meters. Which one would be easier? Walking on the road would be much easier than climbing a mountain.
Concavity
In calculus, concavity is a descriptor of mathematics that tells about the shape of the graph. It is the parameter that helps to estimate the maximum and minimum value of any of the functions and the concave nature using the graphical method. We use the first derivative test and second derivative test to understand the concave behavior of the function.
Marginal Utility Goods 1 and 2 are available at dollar prices of
p1 per unit of Good 1 and p2 per unit of Good 2. A utility function
U(x1, x2) is a function representing the utility or benefit of consuming
xj units of good j . The marginal utility of the j th good is ∂U/∂xj ,
the rate of increase in utility per unit increase in the j th good. Prove
the following law of economics: Given a budget of L dollars, utility is
maximized at the consumption level (a, b) where the ratio of marginal
utility is equal to the ratio of prices:
Marginal utility of Good 1/Marginal utility of Good 2 = Ux1 (a, b)/Ux2 (a, b) = p1/p2
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