A utility function U(x, y) for two items gives the utility(benefit) to a consumer of x
Chapter 15, Problem 44(choose chapter or problem)
A utility function U(x, y) for two items gives the utility(benefit) to a consumer of x units of item 1 and yunits of item 2. The indirect utility function is the threevariablefunction V (p, q, I) where p and q are the unitprices of the two items. For fixed p, q, and I, the valueV (p, q, I) is the maximum of U(x, y) subject to the constraintpx + qy = I.(a) What is the practical meaning of V (p, q, I)?(b) The Lagrange multiplier that arises in the maximizationdefining V is called the marginal utility ofmoney. What is its practical meaning?(c) Find formulas for V (p, q, I) and if U(x, y) = xy.
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