Demand (L4)

Question 1

lagrange

Answer 1

utility-lambda(p1x1+p2x2-m)

Question 2

-MRS

Answer 2

p1/p2

Question 3

formula for demand of x1 (cobb Douglas)

Answer 3

x1=a/p1 x m

Question 4

formula for demand of x2

Answer 4

x2=(1-a)m/p2

Question 5

expenditure share of good 1

Answer 5

am

Question 6

perfect substitute graphs

Answer 6

2 straight lines, MRS is steeper
consume just good 2 or just good 1
optimal MRS=p1/p2
MRS>p1/p2 (MRS is steeper), optimal to only buy good 1
MRS<p1/p2 MRS is flatter than budget line, only buy good 2

Question 7

perfect compliments graphs

Answer 7

demand is at a kink (corner)
x1=ax2 at optimum

Question 8

engel curve for perfect compliments

Answer 8

m=(p1+p2/a)x1
demand becomes x1=am/ap1+p2
x2=m/ap1+p2

Question 9

engel curve

Answer 9

shows change in income
just solve for m to find it using x1

Question 10

normal good

Answer 10

as income increases, you buy it more

Question 11

inferior good

Answer 11

as income increases, demand decreases

Question 12

how to explain inferior good graphically

Answer 12

curves are bunched to one side, shows one good is being bought more than the other when income increases

Question 13

how to find price offer curve

Answer 13

draw tangents to the indifference curves, it goes horizontally

Question 14

giffen good

Answer 14

demand decreases if price decreases

Question 15

substitutes

Answer 15

demand for good 2 increases when price of good 1 increases

Question 16

compliments

Answer 16

demand for good 1 decreases if price of good 2 increases