Usual Utility Maximization
Not what you're looking for?
In the context of usual utility maximization problems involving two goods, prove that:
a) All goods must have one net substitute.
b) An inferior good must have at least one gross substitute.
Purchase this Solution
Solution Summary
Proving that for all goods there must be one net substitute, and for inferior goods there must be one gross substitute. Exploration of the substitution and income effects.
Solution Preview
This question hinges on the difference between net and gross substitutes, which in turn depends on the income and substitution effects. Recall that the consumer theory uses indifference curves to describe how consumers make choices. Given a certain amount of income, consumers allocate their money between two or more goods so as the maximize their utility (U=U(x1,x2)). The income constraint can be described mathematically as I = px1(x2) + px2(x2). In other words, the total available income is allocated between the two available goods.
The income effect describes how consumers react to an increase in purchasing power. For example, if the price of a good one normally buys falls, it leaves one with more money to buy other things. The substitution effect describes how consumers reallocate consumption of goods in response to changes in ...
Purchase this Solution
Free BrainMass Quizzes
Elementary Microeconomics
This quiz reviews the basic concept of supply and demand analysis.
Economics, Basic Concepts, Demand-Supply-Equilibrium
The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.
Economic Issues and Concepts
This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.
Pricing Strategies
Discussion about various pricing techniques of profit-seeking firms.
Basics of Economics
Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.