0% found this document useful (0 votes)
70 views8 pages

(,... ,) Diagram For N 2: Lux X M PX

1) The document presents the concepts of Marshallian demand, indirect utility function, Hicksian demand, and expenditure function from consumer theory. 2) It derives Roy's Identity which shows the relationship between the indirect utility function and Hicksian demand functions. 3) It also derives Shephard's Lemma which shows the relationship between the expenditure function and Hicksian demand functions.
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
0% found this document useful (0 votes)
70 views8 pages

(,... ,) Diagram For N 2: Lux X M PX

1) The document presents the concepts of Marshallian demand, indirect utility function, Hicksian demand, and expenditure function from consumer theory. 2) It derives Roy's Identity which shows the relationship between the indirect utility function and Hicksian demand functions. 3) It also derives Shephard's Lemma which shows the relationship between the expenditure function and Hicksian demand functions.
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 8

n

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

n 1 equations, solve for x1 ,..., xn and

xi xˆi (p1 ,.., pn , m)


(Marshallian) demand functions 0 x̂1 m p1
x1
ˆ (p1 ,.., pn , m)
1
xˆi (p1 ,.., pn , m) uˆ u(xˆ1 ,.., xˆn )

uˆ v(p1 ,.., pn , m) the indirect utility function

û xˆ1 xˆ
vm u1 ... un n
m m m
but at the optimum:

ui ˆ pi vm ˆ p1 xˆ1 ... pn xˆn


m m

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 )

uˆ v(p1 ,.., pn , m) the indirect utility function

xˆ1 xˆn
Partial derivative w.r.t pj: vj u1 ... un
pj pj

ui ˆ pi vj ˆ p1 xˆ1 ... pn xˆn


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 )

uˆ v(p1 ,.., pn , m) the indirect utility function

vm ˆ

vj ˆ xˆ
j

vj
xˆ j Roy’s Identity
vm

René François Joseph Roy


(1894-1977)

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

n 1 equations, solve for x1 ,..., xn and


u u

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 )

the indirect utility function the expenditure function


v(p1 ,.., pn , m) e(p1 ,.., pn ,u)

are inverses of each other.

Given p1 ,...pn : u v(p1 ,.., pn , m) if and only if m e(p1 ,.., pn ,u)


vj
in which case: xˆ j x j ej
vm

Shephard’s Lemma

Roy’s Identity
8

You might also like