Axioms of consumer

preference
Dual

Primal
Max U(x,y)
s.t . px x+ py y < I

Min px x+ p yy
s.t. U(x,y) > U

Indirect Utility function

U*= V(p x, p y, I)

Expenditure function
E*= E(p x, py, U)

Marshallian demand
X = dx (p x, p y, I) =
(by Ro y s identity)
V / px

V / I

Hicksian demand
X = hx(px , py, U) =
(by Shepard s lemma)
E

px

Slutsky equation

IC2

IC3

IC1
B

C
A
D

y
Typical case

y
10

I = 500
px= 450
py= 50

1
x







Graph 40

U2
U0 U1

Gift-Giving and Deadweight Loss

b
c

a
$

II
III

U2

U1

U0
a'
Gift Good (G)

c'

b'

Image by MIT OpenCourseWare.

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http://ocw.mit.edu

14.03 / 14.003 Microeconomic Theory and Public Policy

Fall 2010

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