Lecture 6

Question 1

Budget constraint

Answer 1

Shows all combinations of goods where total expenditure = income

Question 2

Well behaved utility functions

Answer 2

• Well behaved = Increasing with strictly convex indifference curves
• Check: positive marginal utilities and decreasing MRS (absolute value)

Question 3

How do we find the utility maximising solution ?

Answer 3

• Depends on whether the indifference curves are well behaved (curvy L shaped or not)
• Well behaved: set MRS = MRT (solve pair of simultaneous equations) e.g. Cobb Douglas, Quasilinear
• Not well behaved: use reasoning and diagrams (case by case basis) e.g. Perfect substitutes, perfect complements