Question

What is the demand function for good x and good y?

Answer 1

A consumer's budget constraint is used with the utility function to derive the demand function. The utility function describes the amount of satisfaction a consumer gets from a particular bundle of goods. Say there are two goods a consumer can choose from, x and y. Assuming no borrowing or saving, a consumer's budget for x and y are equal to income. To maximize utility, the consumer wants to use the entire budget to buy the most x and y possible.

The first part of figuring out demand is to find the marginal utility each good provides and the rate of substitution between the two goods—that is, how many units of x the consumer is willing to give up so she can get more y.