Page 145 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes The consumer maximizes his total utility under his restricted income and his utility calculation is—

Maximize U = a log (Q – C ) + ……. + a log (Q – C )
1 1 1 n n n
Subject to Y = ∑P Q
i i
The restricted utility function gives following demand function—
a
i __
Q = C + (Y – ∑P C ) ... (1)

i i P i i
i
Where Q = The demanded quantity of group i
i
C = Minimum quantity of group i product
i
a = Portion of marginal budget means if total income changes by an
i
unit then how much group i increased his expenditure
p = Price sign of group
i
Y = Total income of consumer
(∑P C ) = Life dependent income of consumer
i i
(Y – ∑P C ) = Extra income of consumer
i i
The demand function (1) can also written as follows—

P Q = P C + a (Y – ∑P C )
i i i i i i i
This should read the expenditure of consumer in group i products P Q = P C (his life dependent
i
i
i
i
expenditure) + [a (Y – ∑P C )] his additional expenditure.
i i i
Self Assessment
Multiple choice questions:
4. Consumer goods have five groups—
(a) K, Kh, G, Gh, Ng (b) A, B, C, D and E
(c) A, B, C, D (d) Y, R, L, V
5. The demand curve is ............... if it is drawn by the price of a product and a set of its demand.
(a) fixed (b) variable
(c) best Fit (d) valuable
6. Rest of income is called ................. .
(a) curved Income (b) positive Income
(c) negative Income (d) additional Income
7. The quantity which consumer buys for his life is called ................. .
(a) life units (b) multiple units
(c) dismultiple units (d) curve units

7.3 The Indirect Utility Function

In the words of linear programming techniques, the indirect or direct utility function describes the
problem of utility maximization.

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