0
$\begingroup$

Assume that we have two people with the same utility function of $U_i = x^{1/2} + y^{1/2}$ where $i=1,2$ and $I_i$ is the income. Let $P_x$ denote price of good $x$ and $P_y$ denote price of good $y$.

I'm being asked to derive the aggregate demand function. The only thing I got so far was finding the market demand for each good per person, which is

$x^*_1 = {I_1}/2P_x$ , $y^*_1 = {I_1}/2P_y$, for person 1

$x^*_2 = {I_2}/2P_x$, $y^*_2 = {I_2}/2P_y$ for person 2

Am I missing something? Please help.

Thanks.

| improve this question | | | | |
$\endgroup$
  • 1
    $\begingroup$ Do you know what aggregate means? $\endgroup$ – Giskard Feb 10 at 9:36
  • $\begingroup$ The total demand for a good. So I'm just supposed to just add $x^*_1$ and $x^*_2$ together? $\endgroup$ – user25621 Feb 10 at 9:46
  • $\begingroup$ Well, if a total is the sum of its parts then that certainly makes sense. $\endgroup$ – Giskard Feb 10 at 9:52
0
$\begingroup$

Hint: Aggregate demand is the sum of individual demands.

| improve this answer | | | | |
$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

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