asked 160k views
3 votes
Find Indirect utility function of the following function U = max (X, Y) subject to the budget constraint P₁ X+ P₂ Y = M

a. M/max(P1P2)
b. M²/min(P1P2)
c. M²/P1+P2
d. M/min(P1P2)

asked
User Macness
by
7.5k points

1 Answer

3 votes

Answer:



To find the indirect utility function, we need to solve the utility maximization problem subject to the budget constraint and express the maximum utility achieved as a function of the prices and income.

Given the utility function U = max(X, Y) and the budget constraint P₁X + P₂Y = M, we can solve for X and Y in terms of prices (P₁, P₂) and income (M).

First, let's consider the different cases:

If P₁ ≤ P₂:

In this case, the individual would choose to consume only good X. Therefore, X = M / P₁ and Y = 0.

If P₂ < P₁:

In this case, the individual would choose to consume only good Y. Therefore, X = 0 and Y = M / P₂.

Now, we can express the indirect utility function in terms of the prices (P₁, P₂) and income (M) for each case:

a) If P₁ ≤ P₂:

In this case, the individual maximizes utility by consuming only good X.

Therefore, the indirect utility function is V(P₁, P₂, M) = U(X, Y) = U(M / P₁, 0) = M / P₁.

b) If P₂ < P₁:

In this case, the individual maximizes utility by consuming only good Y.

Therefore, the indirect utility function is V(P₁, P₂, M) = U(X, Y) = U(0, M / P₂) = M / P₂.

c) and d) do not match any of the cases above.

Therefore, among the given options, the correct answer is:

a) M / max(P₁, P₂).

answered
User Vincent Koeman
by
8.0k points
Welcome to Qamnty — a place to ask, share, and grow together. Join our community and get real answers from real people.