1
$\begingroup$

I do not understand how Mas-Collel, Whinston, and Green derive the Hicksian demand functions in Example 3.E.1 in their textbook.

Allow me to give further background regarding the problem: The authors give us a Cobb-Douglas utility function for L = 2, where L refers to the number of commodities. The function is u(x1, x2) = (k)x1^(α) * x2^(1-α), where k is some positive constant and alpha is some number between 0 and 1. They note that the function is strictly increasing on xi > 0, where i=1,2. Thereafter, they apply an increasing transformation of u(x1,x2) - namely, the natural logarithm. They note that since natural logarithm is strictly concave, it is strictly quasi-concave, which tells us that the Walrasian Demand correspondence will in fact be a function. Moreover, since the utility function is increasing, we know that the consumer has monotone preferences, thus her preferences satisfy local non-satiation, thus the budget constraint holds with equality; that is: p1x1 + p2x2 = w (wealth).

However, when the authors go on to derive the Hicksian demand functions, I am lost. I tried setting up the first-order conditions for minimization, by setting up the Lagrangian function; that is, take the objective function (the utility function) plus Lambda times (u minus (the utility function)). I set the partial derivative of the Lagrangian with respect to the choice variables and set them greater than or equal to zero. Next, there is the partial derivative of the Lagrangian function with respect to lambda, which I set less than or equal to zero. Lastly, there are the complementary slackness conditions.

References: Mas-Colell, Andreu, et al. Microeconomic Theory. Oxford University Press, 1995.

This is not a homework problem, I just wish to have elucidation on this example.

$\endgroup$
  • 3
    $\begingroup$ Welcome to EconSE. Not everyone has a copy of MWG on hand, so you should include all the relevant details from example 3.E.1 in your question. $\endgroup$ – Theoretical Economist Jan 8 '18 at 2:02
  • $\begingroup$ Please don't link to pirated material on this site. If you want to quote from a source then you can do so in accordance with normal academic citation conventions. $\endgroup$ – Ubiquitous Jan 8 '18 at 15:53
  • $\begingroup$ Please write down explicitly what you've tried when trying to solve the minimisation problem, and use MathJax when doing so. $\endgroup$ – Theoretical Economist Jan 8 '18 at 20:21
  • 2
    $\begingroup$ Somebody help - please - anybody $\endgroup$ – Casablancas Jan 10 '18 at 21:47
  • $\begingroup$ Try to use MathJax and give the book or that page reference,since everybody doesn't have the book. $\endgroup$ – Henam Nov 12 '18 at 10:33

Your Answer

By clicking "Post Your Answer", you acknowledge that you have read our updated terms of service, privacy policy and cookie policy, and that your continued use of the website is subject to these policies.

Browse other questions tagged or ask your own question.