(,... ,) Diagram For N 2: Lux X M PX
(,... ,) Diagram For N 2: Lux X M PX
L u( x1 ,..., xn ) m pi xi
i 1 diagram for n=2
L x2
ui pi 0 for each i 1,..., n
xi
m p2
n
L
m pi xi 0
i 1
x̂2
û xˆ1 xˆ
vm u1 ... un n
m m m
but at the optimum:
xˆ1 xˆ dm
p1 xˆ1 ... pn xˆn m p1 ... pn n 1
m m dm
differentiate totally w.r.t. m
vm ˆ
2
xˆi (p1 ,.., pn , m) uˆ u(xˆ1 ,.., xˆn )
xˆ1 xˆn
Partial derivative w.r.t pj: vj u1 ... un
pj pj
xˆ1 xˆ
p1 xˆ1 ... pn xˆn m xˆ j p1 ... pn n 0 dm 0
pj pj
differentiate totally w.r.t. pj
xˆ1 xˆ
p1 ... pn n xˆ j
pj pj
vj ˆ xˆ
j
3
xˆi (p1 ,.., pn , m) uˆ u(xˆ1 ,.., xˆn )
vm ˆ
vj ˆ xˆ
j
vj
xˆ j Roy’s Identity
vm
4
vm ˆ v1 ˆ xˆ1
x2 x2
m p2 m p2
x̂2 x̂2
u v(p1 , p2 , m) u v(p1 , p2 , m)
0 x̂1 m p1 0 x̂1 m p1
x1 x1
5
minimise expenditure subject to u(x1 ,..., xn ) u
n
L pi xi u u(x1 ,..., xn )
i 1
x2
L
pi ui 0 for each i 1,..., n
xi
L
x2 u u(x1 ,..., xn ) 0
xi xi (p1 ,.., pn ,u )
0 x1 Hicksian demand functions
x1
(p1 ,.., pn ,u )
6
xi (p1 ,.., pn ,u ) p1 x1 ... pn xn e(p1 ,.., pn ,u ) the expenditure function
x1 x
Partial derivative w.r.t pj: ej xj p1 ... pn n
pj pj
x1 xn
pi ui xj u1 ... un
pj pj
x1 x
u(x1 ,..., xn ) u u1 ... un n 0 du 0
pj pj
differentiate totally w.r.t. pj
ej xj Shephard’s Lemma
7
For any given utility function u(x1 ,..., xn )
Shephard’s Lemma
Roy’s Identity
8