EPPE6014 : MICROECONOMICS

ASSIGNMENT GROUP

(GROUP 4)

PREPARED FOR:

DR. MUSTAZAR BIN MANSUR

PREPARED BY:

1. NABILAH SYAHIDA BINTI AZAHAR (P89668)

2. NUR AIN BINTI DAROL BAHA (P89721)

3. NATASHA IZREEN BINTI ABD HAKIM (P89705)

4. NOR AYUNI BINTI MOHAMAD ZULKIFLI (P88106)

SUBMISSION DATE:

8 MAC 2017
QUESTION

𝑈(𝑋, 𝑌) = 𝑋 𝛼 𝑌𝛽
𝛼+𝛽 =1
𝐿 = 𝑋 𝛼 𝑌𝛽 + 𝜆(𝐼 − 𝑃𝑋 𝑋 − 𝑃𝑌 𝑌)
𝐿 = 𝑋 𝛼 𝑌𝛽 + 𝜆𝐼 − 𝜆𝑃𝑋 𝑋 − 𝜆𝑃𝑌 𝑌

STEP 1 (DIFFERENTIATE)

𝑑𝐿⁄ = 𝛼𝑋 𝛼−1 𝑌𝛽 − 𝜆𝑃
𝑑𝑥 𝑋
𝑑𝐿⁄ = 0
𝑑𝑥
𝛼𝑋 𝛼−1 𝑌𝛽 − 𝜆𝑃𝑋 = 0 1

𝑑𝐿⁄ = 𝛽𝑌𝛽−1 𝑋 𝛼 − 𝜆𝑃
𝑑𝑦 𝑌

𝑑𝐿⁄ = 0
𝑑𝑦
𝛽𝑋 𝛼 𝑌𝛽−1 − 𝜆𝑃𝑌 = 0 2

𝑑𝐿⁄ = I − 𝑃 𝑋 − 𝑃 𝑌
𝑑𝜆 𝑋 𝑌
𝑑𝐿⁄ = 0
𝑑𝜆
I − 𝑃𝑋 𝑋 − 𝑃𝑌 𝑌 = 0 3

STEP 2 (FIND 𝛌)
FROM

𝛼𝑋 𝛼−1 𝑌𝛽 − 𝜆𝑃𝑋 = 0
𝛼𝑋 𝛼−1 𝑌𝛽 = 𝜆𝑃𝑋
𝛼𝑋 𝛼−1 𝑌 𝛽
= 𝜆
𝑃𝑋
𝛼𝑋 𝛼−1 𝑌 𝛽
𝜆= 4
𝑃𝑋

FROM

𝛽𝑌𝛽−1 𝑋 𝛼 − 𝜆𝑃𝑌 = 0
𝛽𝑌𝛽−1 𝑋 𝛼 = 𝜆𝑃𝑌
𝛽𝑌 𝛽−1 𝑋 𝛼
= 𝜆
𝑃𝑌
𝛽𝑋 𝛼 𝑌 𝛽−1
𝜆= 5
𝑃𝑌

STEP 3 (FIND P Y AND P X)

Y X
Equation 4 = 5

𝛼𝑋 𝛼−1 𝑌 𝛽
𝜆= 4
𝑃𝑋

𝛽𝑋 𝛼 𝑌 𝛽−1
𝜆= 5
𝑃𝑌
 𝛼𝑋 𝛼−1 𝑌𝛽 𝛽𝑋 𝛼 𝑌𝛽−1
=
𝑃𝑋 𝑃𝑌
𝑃𝑌 𝛽𝑋 𝛼 𝑌𝛽−1
=
𝑃𝑋 𝛼𝑋 𝛼−1 𝑌𝛽
𝑃𝑌 𝛽𝑋 𝛼−(𝛼−1) 𝑌𝛽−1−𝛽
=
𝑃𝑋 𝛼
𝑃𝑌 𝛽𝑋 𝛼−𝛼+1 𝑌𝛽−1−𝛽
=
𝑃𝑋 𝛼
𝑃𝑌 βX𝑌 −1
=
𝑃𝑋 𝛼
𝑃𝑌 βX
=
𝑃𝑋 𝛼𝑌
𝑃𝑋 αY
=
𝑃𝑌 𝛽𝑋

𝑆𝑜, 𝑃𝑌 𝑌
𝑃𝑋 αY
=
𝑃𝑌 𝛽𝑋
𝑃𝑋 βX
𝑃𝑌 =
𝛼𝑌
𝑃𝑋 βX
𝑃𝑌 𝑌 = 6
𝛼

𝑆𝑜, 𝑃𝑋 𝑋
𝑃𝑋 αY
=
𝑃𝑌 𝛽𝑋
𝑃𝑌 𝛼𝑌 = 𝑃𝑋 𝛽𝑋
𝑃𝑌 𝛼𝑌
= 𝑃𝑋 𝑋
𝛽
𝑃𝑌 𝛼𝑌
𝑃𝑋 𝑋 = 7
𝛽
STEP 4 (SUBSTITUTE)

𝛼+𝛽 =1 8
𝛼 =1−𝛽
𝛽 =1−𝛼 9

Subs. 9 into 6

𝑃𝑋 βX
𝑃𝑌 𝑌 =
𝛼
𝑃𝑋 (1 − α)X
𝑃𝑌 𝑌 =
𝛼
𝑃𝑋 X(1−α)
𝑃𝑌 𝑌 = 10
𝛼

Subs. 8 into 7

𝑃𝑌 𝛼𝑌
𝑃𝑋 𝑋 =
𝛽
𝑃𝑌 (1 − 𝛽)𝑌
𝑃𝑋 𝑋 =
𝛽
𝑃𝑌 𝑌(1−𝛽)
𝑃𝑋 𝑋 = 11
𝛽
STEP 5 (FIND I)
FROM 3

I − 𝑃𝑋 𝑋 − 𝑃𝑌 𝑌 = 0
I = 𝑃𝑋 𝑋 + 𝑃𝑌 𝑌 12

STEP 6 (FIND X AND Y)

Px (price)
Subs. 10 into 12

I = 𝑃𝑋 𝑋 + 𝑃𝑌 𝑌
𝑃𝑋 𝑋(1 − 𝛼)
I = 𝑃𝑋 𝑋 + ( )
𝛼
1−𝛼
I = 𝑃𝑋 𝑋(1 + )
𝛼 DD
1(𝛼) 1−𝛼
I = 𝑃𝑋 𝑋( + )
1(𝛼) 𝛼 X
𝛼+1−𝛼 0 (quantity of
I = 𝑃𝑋 𝑋( )
𝛼 demand X)
1
I = 𝑃𝑋 𝑋( ) I (income)
𝛼
1
𝐼÷ = 𝑃𝑋 𝑋
𝛼
Engel Curve
𝛼 × 𝐼 = 𝑃𝑋 𝑋
𝛼𝐼 = 𝑃𝑋 𝑋
𝛼𝐼
=𝑋
𝑃𝑋
𝛼𝐼
‫= 𝑋؞‬ X
𝑃𝑋
0 (quantity of
demand X)
 Py (price)

Subs. 11 into 12

I = 𝑃𝑋 𝑋 + 𝑃𝑌 𝑌
𝑃𝑌 𝑌(1−𝛽)
I= + 𝑃𝑌 𝑌
𝛽
1−𝛽 DD
I = 𝑃𝑌 𝑌(1 + )
𝛽
1(𝛽) 1−𝛽 Y
I = 𝑃𝑌 𝑌( + ) (quantity of
1(𝛽) 𝛽 0
𝛽+1−𝛽 demand Y)
I = 𝑃𝑌 𝑌( )
𝛽 I (income)
1
I = 𝑃𝑌 𝑌( )
𝛽
1
𝐼÷ = 𝑃𝑌 𝑌
𝛽
Engel Curve
𝛽 × 𝐼 = 𝑃𝑌 𝑌
𝛽𝐼 = 𝑃𝑌 𝑌
𝛽𝐼
=𝑌
𝑃𝑌
Y
𝛽𝐼
‫= 𝑌؞‬ 0 (quantity of
𝑃𝑌 demand Y)

Any increasing in the price of goods X or Y will reduce the quantity of demand X or Y
that fulfill the demand function and the demand curve that is connected inversely, while
the increasing in income will increase the quantity of demand X or Y shows that income
and the quantity of demand is connected positively in line with Engel curve that
describes the proportion of household income spent on various goods with income.
EXAMPLE
x = $1 Total Income (I) = $8
y = $4

Px = 1
α = β = 0.5
Py = 4 α+β=1
I=8

ANSWER :

𝛼𝐼 𝛽𝐼
𝑥= 𝑦=
𝑃𝑥 𝑃𝑦
0.5(8) 0.5(8)
𝑥= 𝑦=
1 4
𝑥= 4 𝑦= 1

Utility 𝑈 (𝑥, 𝑦) = 𝑥 𝛼 𝑦 𝛽

𝑈 (𝑥, 𝑦) = 40.5 × 10.5

𝑈 (𝑥, 𝑦) = 2 × 1
𝑈 (𝑥, 𝑦) = 2

𝛼−1 𝛽 𝛽𝑋 𝛼 𝑌𝛽−1
𝛼𝑋 𝑌 𝜆=
𝜆= 𝑃𝑌
𝑃𝑋
0.5(4)−0.5 (1)0.5 0.5(4)0.5 (1)−0.5
𝜆= 𝜆=
1 4
1 1
𝜆 = 0.25 @ 𝜆 = 0.25 @
4 4

Changes in income (I) will cause utilities rise by 0.25 or 1/4 of the value. When a
someone has an income by $8 with a quantity of 4 units X and 1 unit Y, then reached
utility by 2. The increasing in income with $8 will increase utility with 2 as predicted
by the fact that λ is 1/4.
INDIFFERENCE CURVES AND BUDGET CONSTRAINTS
Quantity of Y

𝐼
=
𝑃𝑌

8
= 2
4

E
1 U0
I = PXX + PYY
0
𝐼 8
0 4 = = 8 12
𝑃𝑋 1
Quantity of X