Question

Suppose the utility function for a firm manager is Z=2H1H2 and his income is Y=P1H1 + P2H2. derive the demand equation for H1 and H2.

Answer 1

Given

Utility function $Z=2H_1H_2$

and budget constraint as $Y= P_1H_1+P_2H_2$

$MRS( H_1H_2)=-\frac{Mu_1}{Mu_2}$

$Mu_1=-H_1//Mu_2=-H_2$

$-\frac{H_1}{H_2}=-\frac{P_1}{P_2}$

Demand for H₁

$H_1=\frac{Y}{2P_1}$

Demand for H₂

$H_2=\frac{Y}{2P_2}$