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Let an agent with utility function $U(x_1,x_2,x_3)=min\{ x_1, x_2 \} +x_3$. We want to maximize $U$ subject to $p_1 x_1+p_2 x_2 +p_3 x_3= I$

First intuitively $x_1^*=x_2^*$ substituting en the budget constraint I have $$x_1^*=x_2^*=\frac{I-p_3 x_3}{p_1+p_2}$$ I don't know how to solve for $x_3$. Then i thought in Kuhn-Tucker but I can't see how to solve it.

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I will give a hint. To increase/decrease utility by 1 unit, you can do two things. Increase $x_1$ and $x_2$ by $\frac{1}{2}$ units and this would cost you $\frac{p_1+p_2}{2}$. The second option is changing $x_3$ by one unit that would cost $p_3$. One other option is of course using a linear combination of the above changes. If you remember from well behaved utility functions, you would like to buy things for which utility per price is higher. Now you would go for a similar reasoning here and would try to buy extra utility at a cheapest price.

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  • $\begingroup$ I think i get it. Thank you, if something happens I shall ask again. $\endgroup$ – Marcos Fabian C Sep 30 '15 at 0:17

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