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Utility Function Analysis

The document outlines the Cobb-Douglas utility function and its application to demand functions, specifically for goods X and Y. It provides the income consumption curve (ICC) and Engel curve for good X, illustrating how the optimal combination of goods changes with income while keeping prices constant. The final summary includes specific income levels and corresponding quantities for goods X and Y, along with ICC and Engel points.

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jhahmed108697
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32 views3 pages

Utility Function Analysis

The document outlines the Cobb-Douglas utility function and its application to demand functions, specifically for goods X and Y. It provides the income consumption curve (ICC) and Engel curve for good X, illustrating how the optimal combination of goods changes with income while keeping prices constant. The final summary includes specific income levels and corresponding quantities for goods X and Y, along with ICC and Engel points.

Uploaded by

jhahmed108697
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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General Setup (Cobb-Douglas Utility)

Utility Function:

U (x, y) = xα y 1−α
Where:
α ∈ (0, 1) shows the share of utility from good X
1 − α is the share from good Y

🧾 Demand Functions (Optimal Bundle):


Given:
Income = M
Prices = PX , PY
​ ​

Then, the Marshallian demand functions are:

αM (1 − α)M
x= , y=
PX PY
​ ​

​ ​

📌 Apply to Your Case


Your utility function:
1 3
U = x1/4 ⋅ y 3/4 ⇒ α = , 1−α=
4 4
​ ​

Prices:
PX = 3 , PY = 2
​ ​
Plug into the formula:
1 M M 3 M 3M
x= ⋅ = , y= ⋅ =
4 3 12 4 2 8
​ ​ ​ ​ ​ ​

📈 Income Consumption Curve (ICC)


Definition (with α):

The ICC shows how the optimal combination of goods (X, Y) changes as income
(M) increases, keeping prices and preferences (α) constant.

Since:

αM (1 − α)M
x= , y=
PX PY
​ ​

​ ​

This implies:
Both x and y increase linearly with income.
x αPY
The ratio y = (1−α)PX is constant.
​

​ ​

In Your Case:
M 3M
x= 12 ,
​
y= 8
​

ICC points:
M = 24 ⇒ (2, 9)
M = 48 ⇒ (4, 18)
M = 72 ⇒ (6, 27)
So the ICC is a straight line through these points.

📊 Engel Curve for Good X


Definition (with α):

The Engel curve for good X shows the relationship between income (M) and the quantity
demanded of X, keeping prices constant.

From the demand function:

αM PX
x= ⇒M = ⋅x
​

PX α
​ ​

P
This is a straight line with slope αX
​

In Your Case:
1 M M
x= ⋅ = ⇒ M = 12x
4 3 12
​ ​ ​

Linear Engel curve for X, through:


(x = 2, M = 24)
(x = 4, M = 48)
(x = 6, M = 72)

✅ Final Summary (With α):


αM (1−α)M
Income (M) x= PX
​
​ y= PY​
​ ICC Point (x, y) Engel Point (x, M)

24 2 9 (2, 9) (2, 24)

48 4 18 (4, 18) (4, 48)

72 6 27 (6, 27) (6, 72)

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