
Economics Economics Forum  Financial Mathematics, Econometrics, Operations Research, Mathematical Finance, Computational Finance 
 LinkBack  Thread Tools  Display Modes 
August 24th, 2013, 07:19 AM  #1 
Senior Member Joined: Sep 2012 Posts: 112 Thanks: 0  necessary & sufficient condition of utility maximization
Q. Given the utility function U= f(x,y) & budget constraint Y=px+p'y. Derive the necessary & sufficient conditions of utility maximisation. [x= quantity of commodity A, y=quantity of commodity B, p=price of A, p'=price of B] I don't know how to derive the necessary & sufficient conditions. I can just solve a problem where the utility function and budget constraint are given( through Lagrange's multiplier and bordered Hessian determinant). But yet, I've tried to derive the necessary condition as follows DERIVATION OF NECESSARY CONDITION Joining the given utility function & budget constraint with the help of Lagrange's multiplier lambda(i don't know how to write lambda here, so i am writing lam. as lambda), we get Z= f(x,y) + lam.(Ypxp'y)…(1) Now, " /> Setting these 3 partial derivatives equal to zero, we get Now, =0" /> These three equations are combinedly the necessary condition. Is my answer correct? If no, then please tell me the correct way to write the answer. 
August 29th, 2013, 11:12 AM  #2 
Newbie Joined: Aug 2013 From: Porto, Portugal Posts: 4 Thanks: 0  Re: necessary & sufficient condition of utility maximization
As far as I can see, you can compute the determinant of the bordered Hessian matrix, which relates the second derivatives of the utility function, and by imposing this determinant to be positive, you have a sufficient condition for a maximum. Possibly some condition on second order derivatives of the function (and concavity normally does exactly this) may make this determinant positive. But the most basic sufficient condition you can state is precisely having a bordered hessian with a positive determinant.

August 29th, 2013, 09:17 PM  #3  
Senior Member Joined: Sep 2012 Posts: 112 Thanks: 0  Re: necessary & sufficient condition of utility maximization Quote:
Please tell me if my answer for the necessary condition is correct or not.  
August 30th, 2013, 03:06 AM  #4 
Newbie Joined: Aug 2013 From: Porto, Portugal Posts: 4 Thanks: 0  Re: necessary & sufficient condition of utility maximization
I think your necessary condition is correct. The only thing i'm not sure about are the corner solution, with x=0 or y=0. I need they need to be checked separately. 
August 30th, 2013, 03:46 AM  #5  
Senior Member Joined: Sep 2012 Posts: 112 Thanks: 0  Re: necessary & sufficient condition of utility maximization Quote:
 

Tags 
condition, maximization, sufficient, utility 
Thread Tools  
Display Modes  

Similar Threads  
Thread  Thread Starter  Forum  Replies  Last Post 
Inverse utility  Pvunderink  Algebra  2  February 7th, 2014 12:22 PM 
Sufficient Sample Size for Binomial Distribution  Code2004  Probability and Statistics  1  August 6th, 2013 12:55 PM 
Minimal sufficient statistic & MLE  wawataiji  Advanced Statistics  0  December 10th, 2012 03:41 AM 
Graphing Utility  kkelley  Algebra  3  June 5th, 2012 10:33 AM 
Inverse utility  Pvunderink  Calculus  0  December 31st, 1969 04:00 PM 