Answer to Question #135207 in Macroeconomics for Sadman Sakif

Question

A consumer has a utility function u(X1, X2) =1/((1/X1) + (4/X2)), with prices of the two goods Px1 and Px2 respectively. If his total income is given by m: (10 marks)

a) Find this consumer’s Marshallian demand function for each good.
b) Find this consumer’s indirect utility function.
c) Find this consumer’s expenditure function.

Answer 1

a) A consumer's Marshallian demand function specifies what the consumer would buy in each price and income or wealth situation, assuming it perfectly solves the utility maximization problem. 

b) A consumer's indirect utility function is a function of prices of goods and the consumer's income or budget. The indirect utility function takes the value of the maximum utility that can be achieved by spending the budget m on the consumption goods with prices p.

c) The expenditure function gives the minimum amount of money an individual needs to spend to achieve some level of utility, given a utility function and the prices of the available goods.