Chapter 4 Appendix:

The Calculus of Utility Maximization

and Expenditure Minimization

1. For the following utility functions,

• Find the marginal utility of each good.
• Determine whether the marginal utility decreases as consumption of each good increases (i.e., does the utility
function exhibit diminishing marginal utility in each good?).
• Find the marginal rate of substitution.
• Discuss how MRS XY changes as the consumer substitutes X for Y along an indifference curve.
• Derive the equation for the indifference curve where utility is equal to a value of 100.
• Graph the indifference curve where utility is equal to a value of 100.
a. U(X,Y ) = 5X + 2Y
b. U(X,Y ) = X 0.33Y 0.67
c. U(X,Y ) = 10X 0.5 + 5Y

1. a. U(X,Y ) = 5X + 2Y
∂U(X,Y )
MU X = _ = 5
∂X
∂U(X,Y )
MU Y = _ = 2
∂Y
Marginal utility is constant for each good.
MU X _
MRS XY = _ =5
MUY 2
MRS is__constant so indifference curves will have a constant slope (i.e., they are linear).
For U = 100,
__
U(X,Y ) = U = 100 = 5X + 2Y
2Y = 100 – 5X
Y = 50 – 2.5X

50

0 x
20

b. U(X,Y ) = X 0.33Y 0.67

∂U(X,Y )
MUX = _ = 0.33X – 0.67Y 0.67
∂X
∂U(X,Y )
MUY = _ = 0.67X 0.33Y – 0.33
∂Y

45

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 46 Part 2 Consumption and Production

The marginal utility of X decreases as the quantity of X increases, holding the quantity of Y constant. Also, the
marginal utility of Y decreases as the quantity of Y increases, holding the quantity of X constant. You can get this
result by inspecting the marginal utilities or by checking the signs of the derivatives of these marginal utilities.
MYX
_ 0.33X –  0.67Y 0.67 = _
MRS XY = = __ Y
MUY 0.67X 0.33Y –  0.33 2X
MRS XY decreases as the consumer increases consumption of X along an indifference curve so the indifference
curves__
are convex.
For U = 100,
__
U(X,Y ) = U = 100 = X 0.33Y 0.67
1,000,000 = XY 2
1,000,000
Y2 = _
X
Y = 1,000X – 0.5
y

100

0 x
100

c. U(X,Y ) = 10X 0.5 + 5Y

∂U(X,Y )
MU X = _ = (0.5)10X – 0.5 = 5X – 0.5
∂X
∂U(X,Y )
MUY = _ = 5
∂Y
The marginal utility of good X decreases as more X is consumed. The marginal utility of good Y is constant:
MU X _ – 0.5
MRS XY = _ = 5X = X – 0.5
MUY 5
MRS decreases as the consumer increases consumption of X along an indifference curve so the indifference curves
are convex.
__
For U = 100,
__
U(X,Y ) = U = 100 = 10X 0.5 + 5Y
5Y = 100 – 10X 0.5
Y = 20 – 2X 0.5

20

0 x
100

Note: This type of utility function is known as a “quasi-linear” utility function. The indifference curves for quasi-
linear utility functions are parallel. In other words, the slopes of the indifference curve are the same, given a value
of X.

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 Appendix: The Calculus of Utility Maximization and Expenditure Minimization Chapter 4 47

2. Suppose that Maggie cares only about chai and bagels. Her utility function is U = CB, where C is the number of cups
of chai she drinks in a day, and B is the number of bagels she eats in a day. The price of chai is $3, and the price of
bagels is $1.50. Maggie has $6 to spend per day on chai and bagels.
a. What is Maggie’s objective function?
b. What is Maggie’s constraint?
c. Write a statement of Maggie’s constrained optimization problem.
d. Solve Maggie’s constrained optimization problem using a Lagrangian.

2. a. max CB
C, B
b. Income = PC C + PB B or 6 = 3C – 1.5B or 6 – 3C – 1.5B = 0
c. max CB s.t. 6 – 3C + 1.5B
C, B
d. Write out the Lagrangian for the problem in part (c):
max (C, B, λ) = CB + λ(6 – 3C – 1.5B)
C, B, λ
FOC:
_
∂
= B – 3λ = 0
∂ C
_
∂
= C – 1.5λ = 0
∂ C
_
∂
= 6 – 3C – 1.5B = 0
∂λ
From the first two conditions,
λ=_
B =_C
3 1.5
B = 2C
Substituting into the third FOC, we get
6 – 3C – 1.5B = 6 – 3C – 1.5(2C ) = 6 – 6C = 0
C* = 1
Then B* = 2.
So, Maggie buys 1 cup of chai and 2 bagels per day.

3. Suppose that there are two goods (X and Y ). The price of X is $2 per unit, and the price of Y is $1 per unit. There are
two consumers (A and B). The utility functions for the consumers are
UA(X, Y ) = X 0.5Y 0.5
UB(X, Y ) = X 0.8Y 0.2
Consumer A has an income of $100, and Consumer B has an income of $300.
a. Use Lagrangians to solve the constrained utility-maximization problems for Consumer A and Consumer B.
b. Calculate the marginal rate of substitution for each consumer at his or her optimal consumption bundles.
c. Suppose that there is another consumer (let’s call her C ). You don’t know anything about her utility function or her
income. All you know is that she consumes both goods. What do you know about C’s marginal rate of substitution
at her optimal consumption bundle? Why?

3. a. For A,
max X 0.5Y 0.5 s.t. 100 = 2X + Y
X,Y
max  = X 0.5Y 0.5 + λ(100 – 2X – Y )
X,Y, λ
FOC:
_
∂
= 0.5X – 0.5Y 0.5 – 2λ = 0
∂X
_
∂
= 0.5X 0.5Y – 0.5 – λ = 0
∂Y
_
∂
= 100 – 2X – Y = 0
∂λ

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 48 Part 2 Consumption and Production

From the first two conditions,

λ = 0.25x – 0.5Y 0.5 = 0.5X 0.5Y – 0.5
Y = 2X
Substituting into the third FOC, we get
100 – 2X – 2X = 0
X A = 25
Then YA = 50.
For B,
max X 0.8Y 0.2 s.t. 300 = 2X + Y
X, Y

max  = X 0.8Y 0.2 + λ(300 – 2X – Y )

X, Y, λ
FOC:
_
∂
= 0.8X – 0.2Y 0.2 – 2λ = 0
∂X
_
∂
= 0.2X 0.8Y – 0.8 – λ = 0
∂ Y
_
∂
= 300 – 2X – Y = 0
∂λ
From the first two conditions,
λ = 0.4X – 0.2Y 0.2 = 0.2X 0.8Y – 0.8
y = 40.5x
Substituting into the third FOC, we get
300 – 2X – 40.5X = 0
X B = 120
Then YB = 60.
b. The first terms in the first two FOCs are MUX and MUY, respectively. Therefore,
MU X _ – 0.5 0.5 YA
MRS AXY = _ = 0.5X 0.5 Y– 0.5 = _ =_
50 = 2
MUY 0.5X Y X A 25

MU
_X = 0.8X
_ –  0.2 0.2 4YB _ 4(60)
MRS BXY = Y = _ = =2
MU Y 0.8 – 0.8
0.2X Y X B 120
c. First, notice that A and B both have MRS equal to 2, even though their utility functions and their incomes are dif-
ferent. C’s MRS will be equal to 2, just like A and B. In fact, the MRS for all consumers will be equal to 2 as long
as all consumers consume both goods (i.e., if they have an interior solution). This is because all consumers face
the same prices and all consumers maximize their utilities where their MRS is equal to the price ratio.

4. Katie likes to paint and sit in the sun. Her utility function is U(P, S ) = 3PS + 6P, where P is the number of paint
brushes and S is the number of straw hats. The price of a paint brush is $1 and the price of a straw hat is $5. Katie has
$50 to spend on paint brushes and straw hats.
a. Solve Katie’s utility-maximization problem using a Lagrangian.
b. How much does Katie’s utility increase if she receives an extra dollar to spend on paint brushes and straw hats?

4. a. Write out the maximization problem and the Lagrangian:

max 3PS + 6P s.t. 50 = P + 5S
P, S

max  = 3PS + 6P + λ(50 – P – 5S )

P, S, λ

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 Appendix: The Calculus of Utility Maximization and Expenditure Minimization Chapter 4 49

FOC:
_
∂
= 3S + 6 – λ = 0
∂P
_ = 3P – 5λ = 0
∂
∂ S
_
∂
= 50 – P – 5S = 0
∂λ
From the first two conditions,
λ = 3S + 6 = 0.6P

S = 0.2P – 2
Substituting into the third FOC, we get

50 – P – 5S = 50 – P – 5(0.2P – 2) = 60 – 2P = 0

P = 30
Then S = 4.
b. We need to solve for the Lagrange multiplier λ. From above,

λ = 3S + 6 = 0.6P
Substituting for the optimal values of S or P gives λ = 18. Therefore, Katie’s level of utility would increase by
18 units if she receives an extra dollar to spend.

5. Suppose that a consumer’s utility function for two goods (X and Y ) is

U(X,Y ) = 10X 0.5 + 2Y

The price of good X is $5 per unit and the price of good Y is $10 per unit. Suppose that the consumer must have 80
units of utility and wants to achieve this level of utility with the lowest possible expenditure.
a. Write a statement of the constrained optimization problem.
b. Use a Lagrangian to solve the expenditure-minimization problem.

5. a. min X,Y 5X + 10Y s.t. 80 – 10X 0.5 – 2Y = 0

b. Write out the Lagrangian and the first-order conditions:
min  = 5X + 10Y + λ(80 – 10X 0.5 – 2Y )
X, Y, λ
FOC:
_
∂
= 5 – 0.5λ 10X – 0.5 = 5 – 5λ X – 0.5 = 0
∂X
_ = 10 – 2λ = 0
∂
∂Y
_ = 80 – 10X 0.5 – 2Y = 0
∂
∂λ
Solve for λ in the first two conditions and set these two expressions equal to one another:

λ = X 0.5 and λ = 5
X 0.5 = 5
X = 25
Substituting 25 for X in the third constraint yields Y = 15.
Then the minimum expenditure is $5(25) + $10(15) = $275.

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