0
$\begingroup$

Sorry if this is a basic question, however I have no idea on how to derive an equation for an income offer curve. All the explanations I'm getting is the graphical one where you just connect the different optimum points. It would be really helpful if someone can explain how do you derive an equation for such given any utility function.

$\endgroup$
  • $\begingroup$ Hint: Solve a utility maximization problem $\max_{x,y}u(x,y)$ subject to budget constraint $p_xx+p_yy\le m$. The optimal solutions, $x^*(m,p_x,p_y)$ and $y^*(m,p_x,p_y)$, are functions of income and prices. Hold prices constant (i.e. slope of budget line is constant) and plot $x^*(m)$ and $y^*(m)$. $\endgroup$ – Herr K. Sep 27 '18 at 16:21
1
$\begingroup$

enter image description here

What I have derived here is more appropriately called Engel curve.

$\endgroup$
  • 1
    $\begingroup$ Thanks for the contribution. But please be aware of the site's policy on the use of scanned images. $\endgroup$ – Herr K. Sep 27 '18 at 21:26

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.

Not the answer you're looking for? Browse other questions tagged or ask your own question.