Derivation of compensated demand curve, Microeconomics

Derivation of compensated demand curve: 

Hicksian compensated demand function for x1 is given by x1=x1(p1, p2, U), where Hicksian compensated demand curve for a good represent the relationship between price of that good with its own demand quantity for given prices of other goods and real income in terms of utility.  

 

1522_Derivation of compensated demand curve.png

We now derive this graphically. Suppose,  initial equilibrium is attained at e0 in Figure A where price of good on is p10 and price of good two is p20 respectively and utility is fixed at U0. Corresponding indifference curve is IC0. Compensated Hicksian demand for x1 is at x10. Expenditure line is AB at initial equilibrium with absolute slope p10/p20. Plot this x10 and p10 in Figure B. Suppose, for given utility and p2, p1 decreases to p11. Therefore, absolute slope of the budget line decreases, i.e., expenditure line become flatter. Since utility is constant, the indifference curve remains the same as before. Therefore, expenditure is minimised for given utility at point e1 in Figure A, as indifference curve is downward sloping strictly convex to the origin. So compensated Hicksian demand for good I increases to x11 plot p11 and x11 in Figure B. By joining all such pair of p1 and x1 in Figure B, we have a downward sloping curve in p1-x1 plane, for given p2 and utility. This downward sloping demand curve is the Hicksian compensated demand curve. This is shown in the above Figure B.  

Posted Date: 10/26/2012 3:25:29 AM | Location : United States







Related Discussions:- Derivation of compensated demand curve, Assignment Help, Ask Question on Derivation of compensated demand curve, Get Answer, Expert's Help, Derivation of compensated demand curve Discussions

Write discussion on Derivation of compensated demand curve
Your posts are moderated
Related Questions
3. Which of the following would not be an expansionary fiscal policy? a.Increased welfare payments to the poor b.Decreases in federal taxes on corporations c.A balanced budget d.I

What is main difference between nominal money supply and real money supply?  Real money supply is the supply of real money in the economy. Real money is supplied considering th

Seaports and Airports: Seaports India has 12 major ports and about 185 minor ports over its coastline spread over 7,000 kms. Major ports are managed by the Central Government

True public goods are those goods which can't be provided to one group of consumers, without being provided to any other consumers who desire them. Thus they are "non-excludable."

RATIONAL EXPECTATIONS AND ECONOMIC THEORY : We assumed above that the role of economic theory is not to provide quantitative predictions about the future. Suppose we assume ins


Question: i) Explain the main problems with government intervention. ii) Why and how do governments seek to control monopolies? iii) A country should specialise in the pr

Market supply and Increase in supply: Market supply is the total quantity of a product that all firms in an industry are willing to offer for sale at a given market price an

Suppose an economy has four sectors, Agriculture (A), Energy (E), Manufacturing (M), and Transportation (T). Sector A sells 10% of its output to E and 25% to M and retains the rest

Figure 3.7 in the above textbook. Using the figure in guide, determine the approximate size of the market surplus or shortage that would exist at a glance of a) $40 b) $20