Micro economics

To find the direct utility function from the indirect utility function, you can use
a process called inverse optimization. The idea is to start with the indirect
utility function and then solve for the utility function that would lead to it.

Here are the steps to find the direct utility function using the indirect utility
function:

1.
Differentiate the indirect utility function with respect to each price and income
variable to get the Marshallian demand functions for each good. The
Marshallian demand function gives the quantity of each good demanded by
the consumer at given prices and income level.
2.
3.
Substitute the Marshallian demand functions into the budget constraint (the
equation that states that the consumer spends all of their income) to obtain
an equation that only depends on prices and income.
4.
5.
Solve the equation obtained in step 2 for the utility function. This is the direct
utility function that gives the consumer's utility level at any given set of prices
and income level.
6.

Here is an example:

Suppose the indirect utility function for a consumer with two goods, x1 and x2,
is given by:

v(p1, p2, y) = (y/p1)^0.5 + (y/p2)^0.5

1. Differentiate the indirect utility function with respect to p1, p2, and y to
obtain the Marshallian demand functions:

x1(p1, p2, y) = y/p1^2 x2(p1, p2, y) = y/p2^2

1. Substitute the Marshallian demand functions into the budget constraint

p1x1 + p2x2 = y to obtain:

p1(y/p1^2) + p2(y/p2^2) = y
1. Solve for the utility function u(x1, x2) that would lead to the given
indirect utility function:

u(x1, x2) = (x1^2p1 + x2^2p2)^2/y

This is the direct utility function for the consumer in this example.

I hope this helps! Let me know if you have any further questions.

Q3 FIRST WAY
a. To find the indirect utility function, we need to solve for the maximum utility
level that the consumer can achieve given their income level and the prices of
the two goods. We can do this by setting up the following optimization
problem:

max u(x1, x2) subject to p1x1 + p2x2 = y

where x1 and x2 are the quantities of goods 1 and 2 consumed, respectively,

p1 and p2 are their respective prices, u is the utility function, and y is the
income level.

We can solve this problem using the Lagrangian method and obtain the
following first-order conditions:

∂L/∂x1 = ∂u/∂x1 - λp1 = 0 ∂L/∂x2 = ∂u/∂x2 - λp2 = 0 ∂L/∂λ = p1x1 + p2x2 - y

=0

where λ is the Lagrange multiplier. Solving for x1, x2, and λ in terms of u, p1,
p2, and y, we obtain:

x1(p1, p2, y, u) = (up1/y)(p1 + p2) x2(p1, p2, y, u) = (up2/y)(p1 + p2) λ(p1, p2,
y, u) = u/(p1 + p2)

Substituting the expressions for x1 and x2 into the budget constraint and
solving for u, we get:

u(p1, p2, y) = y(p1 + p2)/(p1p2)

This is the indirect utility function.

b. To find the direct utility function, we can use the inverse optimization
method. Starting with the indirect utility function, we differentiate it with
respect to each price variable and solve for the Marshallian demand functions:
x1(p1, p2, y) = (y/p1^2)(p1 + p2) x2(p1, p2, y) = (y/p2^2)(p1 + p2)

Substituting the Marshallian demand functions into the budget constraint and
solving for y, we get:

y(p1, p2, u) = u(p1 + p2)^2/(p1p2)

We can then substitute y back into the Marshallian demand functions to

obtain the direct utility function:

u(x1, x2) = (x1x2)^0.5

This is the direct utility function.

2ND WAY

a. To find the indirect utility function, we need to solve for the maximum utility
level that the consumer can achieve given their income level and the prices of
the two goods. We can do this by setting up the following optimization
problem:

max u(x1, x2) subject to p1x1 + p2x2 = y

where x1 and x2 are the quantities of goods 1 and 2 consumed, respectively,

p1 and p2 are their respective prices, u is the utility function, and y is the
income level.

We can solve this problem using the Lagrangian method and obtain the
following first-order conditions:

∂L/∂x1 = ∂u/∂x1 - λp1 = 0 ∂L/∂x2 = ∂u/∂x2 - λp2 = 0 ∂L/∂λ = p1x1 + p2x2 - y

=0

where λ is the Lagrange multiplier. Solving for x1, x2, and λ in terms of u, p1,
p2, and y, we obtain:

x1(p1, p2, y, u) = (up1/y)(p1 + p2) x2(p1, p2, y, u) = (up2/y)(p1 + p2) λ(p1, p2,
y, u) = u/(p1 + p2)

Substituting the expressions for x1 and x2 into the budget constraint and
solving for u, we get:

u(p1, p2, y) = y(p1 + p2)/(p1p2)

This is the indirect utility function.

b. To find the direct utility function, we can use the inverse optimization
method. Starting with the indirect utility function, we differentiate it with
respect to each price variable and solve for the Marshallian demand functions:

x1(p1, p2, y) = (y/p1^2)(p1 + p2) x2(p1, p2, y) = (y/p2^2)(p1 + p2)

Substituting the Marshallian demand functions into the budget constraint and
solving for y, we get:

y(p1, p2, u) = u(p1 + p2)^2/(p1p2)

We can then substitute y back into the Marshallian demand functions to

obtain the direct utility function:

u(x1, x2) = (x1x2)^0.5

This is the direct utility function.