Intermediate Microeconomics I

Chapter 01
Theory of Consumer Behavior
Marshallian and Hicksian Demand Functions

Marshallian and Hicksian demands stem from two ways

of looking at the same problem- how to obtain the utility
we crave with the budget we have. Consumption duality
expresses this problem as two sides of the same coin:
keeping our budget fixed and maximising utility (primal
demand, which leads us to Marshallian demand curves) or
setting a target level of utility and minimising the cost
associated with it (dual demand, which gives us Hicksian
demand curves).

Marshallian demand curves simply show the relationship

between the price of a good and the quantity demanded of
it. Hicksian demand curves show the relationship between
the price of a good and the quantity demanded of it
assuming that the prices of other goods and our level of
utility remain constant.

Marshallian and Hicksian demand curves meet where the

quantity demanded is equal for both sides of the consumer
choice problem (maximising utility or minimising cost).

❖ Deriving Marshallian Demand Function:

Given, Utility Function- U= 𝑞1 𝑞2 ------------- (i)
Budget Constraint- Y˚ = 𝑝1 𝑞1+ 𝑝2 𝑞2 ---------- (ii)
Using lagrange multiplier method –
V= 𝑞1 𝑞2 + λ (Y˚ ̵ 𝑝1 𝑞1- 𝑝2 𝑞2 ) ------------- (iii)
To obtain first order condition of utility maximization, we take first order derivatives of V with
respect to 𝑞1 , 𝑞2 , and λ and set them equal to 0.
𝜕𝑉
= 𝑞2 ̶ λ 𝑝1 = 0 ----------------- (iv)
𝜕𝑞1
𝜕𝑉
= 𝑞1 ̶ λ 𝑝2 = 0 ----------------- (iv)
𝜕𝑞2
𝜕𝑉
= Y˚ ̶ 𝑝1 𝑞1 ̶ 𝑝2 𝑞2 = 0-------------- (v)
𝜕λ

Dividing equation (iv) by (v) we get-

𝑞2 λ𝑝
= λ 𝑝1
𝑞1 2
Or, 𝑝1 𝑞1= 𝑝2 𝑞2 --------------- (vi)
From equation (v) and (vi) we get-
Y˚ ̶ 𝑝1 𝑞1 ̶ 𝑝1 𝑞1= 0
Or, Y˚ ̶ 2 𝑝1 𝑞1 = 0
Y˚
Or, 𝑞1 = 2 𝑝
1
This is ordinary or Marshallian Demand function for 𝑞1 good. In the same way we can
Y˚
calculate that 𝑞2 = 2 𝑝 for good 𝑞2
2
1
❖ Properties of Marshallian demand function
1. First order derivatives of ordinary demand functions are negative, that is
corresponding demand curves are downward slopping.
Y˚
We know, 𝑞1 = 2 𝑝
1
𝜕𝑞1 𝜕 Y˚
Or, 𝜕𝑝 = 𝜕𝑝 (2 𝑝 )
1 1 1
𝜕𝑞 1
Or, 𝜕𝑝1 = - 2 Y˚𝑝1−2
1
𝜕𝑞1 Y˚
Or, =− < 0 [ as, Y˚ > 0 and 𝑝1> 0]
𝜕𝑝1 2𝑝12
𝜕𝑞 Y˚
Similarly, 𝜕𝑝2 = − < 0 [ as, Y˚ > 0 and 𝑝2> 0]
2 2𝑝22

2. Ordinary demand function has unitary price elasticity.

Price elasticity of 𝑞1 is-
𝜕𝑞 𝑃
E𝑃1 = 𝜕𝑃1 × 𝑞1
1 1
Y˚ 𝑃1
=− × Y˚
2𝑝12
2 𝑝1
Y˚ 2𝑝12
=− ×
2𝑝12 Y˚
= -1
Similarly, E𝑃2 = -1
Unitary elasticity means that change in price is exactly matched by equal proportionate
change in quantity demanded. It leaves total expenditure unchanged due to the change
in price.

3. Ordinary demand functions have unitary income elasticity.

Income elasticity of 𝑞1 is-
𝜕𝑞 𝑦
Ey = 1 ×
𝜕𝑦 𝑞1
1 𝑦
= 2𝑝 × y
1 2 𝑝1
=1
Same formula is applicable for 𝑞2

4. Ordinary demand function exhibits zero cross elasticity.

Cross elasticity of 𝑞1 is-
𝜕𝑞 𝑝
E𝐶1 = 𝜕𝑝1 × 𝑞 2
2 1
𝑝2
=0 × Y˚
2 𝑝1
=0
Same formula is applicable for 𝑞2 .

5. Ordinary demand functions are homogenous of degree zero in price and income. It
means if all prices and income change in the same proportion, the quantities demanded
remain unchanged.
Given, Utility Function- U= 𝑞1 𝑞2 ------------- (i)

With the same proportionate change in budget and income, the Budget Constraint becomes-
kY˚ = 𝑘 𝑝1 𝑞1+ 𝑘 𝑝2 𝑞2 ---------- (ii)

2
Using lagrange multiplier method –
V= 𝑞1 𝑞2 + λ (kY˚ ̵ 𝑘 𝑝1 𝑞1+𝑘 𝑝2 𝑞2 ) ------------- (iii)
To obtain first order condition of utility maximization, we take first order derivatives of V with
respect to 𝑞1 , 𝑞2 , and λ and set them equal to 0.
𝜕𝑉
= 𝑞2 ̶ λk 𝑝1 = 0 ----------------- (iv)
𝜕𝑞
1
𝜕𝑉
= 𝑞1 ̶ λk 𝑝2 = 0 ----------------- (iv)
𝜕𝑞2
𝜕𝑉
= kY˚ ̶ 𝑘 𝑝1 𝑞1 ̶ 𝑘 𝑝2 𝑞2 = 0-------------- (v)
𝜕λ
Dividing equation (iv) by (v) we get-
𝑞2 kλ𝑝
= k λ 𝑝1
𝑞 1 2
Or, 𝑝1 𝑞1= 𝑝2 𝑞2 --------------- (vi)
From equation (v) and (vi) we get-
kY˚ ̶ 𝑘 𝑝1 𝑞1 ̶ 𝑘 𝑝1 𝑞1 = 0
Or, Y˚ ̶ 2𝑘 𝑝1 𝑞1 = 0
Y˚
Or, 𝑞1 = 2 𝑝
1
This is ordinary or Marshallian Demand function for 𝑞1 good.
Y˚
In the same way we can calculate that 𝑞2 = 2 𝑝 for good 𝑞2 .
2

❖ Derivation of Hicksian Demand function:

Given, Utility Function- U˚= 𝑞1 𝑞2 ------------- (i)
Budget Constraint- Y = 𝑝1 𝑞1+ 𝑝2 𝑞2 ---------- (ii)
Using lagrange multiplier method –
L = 𝑝1 𝑞1+𝑝2 𝑞2 + μ (U˚ ̶ 𝑞1 𝑞2 )------------- (iii)
To obtain first order condition of utility maximization, we take first order derivatives of L with
respect to 𝑞1 , 𝑞2 , and μ and set them equal to 0.
𝜕𝐿
= 𝑝1 ̶ μ 𝑞2 = 0 ----------------- (iv)
𝜕𝑞 1
𝜕𝐿
= 𝑝2 ̶ μ 𝑞1 = 0 ----------------- (iv)
𝜕𝑞2
𝜕𝐿
= U˚ ̶ 𝑞1 𝑞2 = 0-------------- (v)
𝜕μ

Dividing equation (iv) by (v) we get-

𝑞2 𝑝1
=
𝑞1 𝑝2
Or, 𝑝1 𝑞1= 𝑝2 𝑞2
𝑝 𝑞
Or, 𝑞2 = 𝑝1 1----------- (vi)
2
From equation (v) and (vi) we get-
𝑝 𝑞
U˚ ̶ 𝑞1 1 1 = 0
𝑝2
𝑝1 𝑞12
Or, U˚ = =0
𝑝2
𝑈° 𝑝2
Or, 𝑞1 =√ 𝑝1
𝑈° 𝑝1
This is compensated demand function for 𝑞1 . Similarly we can derive 𝑞2 =√ 𝑝2

3
❖ Properties of compensated demand function:
1. First order derivatives of compensated demand functions are negative. That is the
corresponding demand curves are downward sloping.
𝑈° 𝑝2
𝑞1 =√ 𝑝1
1
−
Or, 𝑞1 =√𝑈° 𝑝2 𝑝1 2
3
𝜕𝑞 1 −
Or, 𝜕𝑝1 = − 2 √𝑈° 𝑝2 𝑝1 2 < 0; [ as, 𝑈° > 0, 𝑃1 > 0, 𝑃2 > 0]
1
3
𝜕𝑞 1 −
Similarly, 𝜕𝑝2 = − 2 √𝑈° 𝑝1 𝑝2 2 < 0
1

2. Compensated demand functions have constant price elasticity.

𝜕𝑞 𝑃
E𝑃1 = 𝜕𝑃1 × 𝑞1
1 1
3
1 − 𝑃1
2
= − √𝑈° 𝑝2 𝑝1 × 1
2 −
√𝑈° 𝑝2 𝑝1 2
1
=-2
1
In the similar way, E𝑃2 = - 2.

3. Compensated demand functions have constant cross elasticity.

𝜕𝑞 𝑝
E𝐶1 = 𝜕𝑝1 × 𝑞 2
2 1
1 1
1 𝑈° − 𝑃2 𝜕𝑞1 𝑈° 1 −
=2 √𝑃 𝑝2 2 × [𝑎𝑠 = √𝑃 𝑝 2]
𝑈° 𝑝 𝜕𝑝2 2 2
1 √ 𝑝 2 1
1
1
=2
1
In the similar way, E𝐶2 = 2