The Roadmap to computing Individual's demand Functions
Here is how to find Individuals' demand functions in 6 steps.
Here are some Important Terms;
MRS; Marginal Rate of Substitution.
Px; Price of good X.
Py; Price of good Y.
- Compute the MRS.
- Set MRS = -Px/Py (The optimal bundle).
- Solve for one of the variables "X" or "Y"
- Plug into the Budget line; Px*X + Py*Y = M
- Find good X or Y as a function of (Px,Py, M)
- Take the demand function and solve for the next Variable.
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