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A consumer has a utility function of the type U(x1, x2) = max (x1, x2). What...

A consumer has a utility function of the type U(x1, x2) = max (x1, x2). What is the consumer’s

demand function for good 1?

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Answer #1

As we can see, this utility function implies that the consumer will choose that good which gives him maximum level of utility, therefore, the consumer will choose good one if it gives maximum level of satisfaction as compare to good two. So, the demand function for good one will be equal to money income divided by the price of good one, and here we are supposing that price of good one is less than the price of good two. If the price of good two is less than the price of good one, it implies the consumer will spend the whole money on the consumption of good two, and if the price of good one is less than the price of good two it implies that the consumer will spend whole money income on the good one.

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