Andrea maximizes the following utility function: subject to the budget constraint u(x1, x2) = x ² x ² P1x1 + ₂x2 = I where p1, p2, x1, x2, I > 0 (a) Find the (x₁, x2) that maximizes u(x₁, x2). (b) Show that the maximizer x (P1, P2, I) is decreasing in p2 and increasing in I (Hint: Use the partial derivatives). (c) Does x (P1, P2, I) change if p₁ changes? (Hint: partial derivatives).

Algebra & Trigonometry with Analytic Geometry
13th Edition
ISBN:9781133382119
Author:Swokowski
Publisher:Swokowski
Chapter9: Systems Of Equations And Inequalities
Section9.4: Linear Programming
Problem 1E
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Andrea maximizes the following utility function:
subject to the budget constraint
1 3
u(x₁, x₂) = x 1 x₂
P₁x₁ + P₂x2 = I
where P1,
1, P2, X1, X2, I >0
(a) Find the (x₁, x2) that maximizes u(x₁, x2).
(b) Show that the maximizer x*(p1, P2, I) is decreasing in på and increasing in I (Hint:
Use the partial derivatives).
(c) Does x (P1, P2, I) change if p₁ changes? (Hint: partial derivatives).
Transcribed Image Text:Andrea maximizes the following utility function: subject to the budget constraint 1 3 u(x₁, x₂) = x 1 x₂ P₁x₁ + P₂x2 = I where P1, 1, P2, X1, X2, I >0 (a) Find the (x₁, x2) that maximizes u(x₁, x2). (b) Show that the maximizer x*(p1, P2, I) is decreasing in på and increasing in I (Hint: Use the partial derivatives). (c) Does x (P1, P2, I) change if p₁ changes? (Hint: partial derivatives).
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