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We have a utility function U = aln(x) + (1 - a)ln(Y) subject to the budget...

We have a utility function U = aln(x) + (1 - a)ln(Y) subject to the budget constraint: Px'X + Py'Y = I

Please use the Lagrange Multiplier method to find the demand function for goods X and Y given the above information about I (income), Px (price of goods X), Py (prices of good Y)

Please interpret the meaning of the Multiplier.

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Answer #1

Lagrange Multiplier is a strategy for finding the local maxima and minima of a function subject to equality constraint. The basic idea is to convert a constrained problem into a form such that the derivative test of an unconstrained problem can still be applied.

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