Utility Maximization. Continued July 5, 2005. Graphical Understanding. Normal Indifference Curves. Downward Slope with bend toward origin. Graphical. Non-normal Indifference Curves. Y & X Perfect Substitutes. Graphical. Non-normal. Only X Yields Utility. X & & are perfect
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July 5, 2005
Downward Slope with
bend toward origin
Y & X Perfect Substitutes
Only X Yields Utility
Eg: Y = IPx/Py(1/(Px+Py))
Let’s derive this in class
I=100CES Demand | Px=5
Px=5CES | I = 100
As income increase (decreases) the
demand for X increase (decreases)
As income increases the demand
for X decreases – so X is called
an inferior good
Here the price of X changes…the
budget line rotates about the
vertical intercept, m/Py.
This time the Marshallian or ordinary
demand function will have a positive
instead of a negative slope. Note that
this is similar to working with an
In this example our utility function is: U = X.5Y.5. We change the price of X from 5 to 10.