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    Roy's Identity

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    Alp Eren AKYUZ
    The document presents Roy's Identity, which allows solving for consumer demand given knowledge of the consumer's value function. Roy's Identity is derived by forming the Lagrangian of a consumer optimization problem that maximizes utility subject to a budget constraint. Taking derivatives of the Lagrangian with respect to income and prices allows eliminating the Lagrangian multiplier, resulting in an expression that gives demand as a function of prices and income. This expression is known as Roy's Identity, named after the French economist Rene Roy.

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    Roy's Identity

    Uploaded by

    Alp Eren AKYUZ
    2K views1 page
    The document presents Roy's Identity, which allows solving for consumer demand given knowledge of the consumer's value function. Roy's Identity is derived by forming the Lagrangian of a consumer optimization problem that maximizes utility subject to a budget constraint. Taking derivatives of the Lagrangian with respect to income and prices allows eliminating the Lagrangian multiplier, resulting in an expression that gives demand as a function of prices and income. This expression is known as Roy's Identity, named after the French economist Rene Roy.

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    Roy's Identity, and its derivation from a constrained Consumer Optimization problem

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    The document presents Roy's Identity, which allows solving for consumer demand given knowledge of the consumer's value function. Roy's Identity is derived by forming the Lagrangian of a consumer optimization problem that maximizes utility subject to a budget constraint. Taking derivatives of the Lagrangian with respect to income and prices allows eliminating the Lagrangian multiplier, resulting in an expression that gives demand as a function of prices and income. This expression is known as Roy's Identity, named after the French economist Rene Roy.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF or read online from Scribd
    Download as pdf
    2K views1 page

    Roy's Identity

    Uploaded by

    Alp Eren AKYUZ
    The document presents Roy's Identity, which allows solving for consumer demand given knowledge of the consumer's value function. Roy's Identity is derived by forming the Lagrangian of a consumer optimization problem that maximizes utility subject to a budget constraint. Taking derivatives of the Lagrangian with respect to income and prices allows eliminating the Lagrangian multiplier, resulting in an expression that gives demand as a function of prices and income. This expression is known as Roy's Identity, named after the French economist Rene Roy.

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    Attribution Non-Commercial (BY-NC)
    Download as PDF or read online from Scribd
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    Roy’s Identity

    Alp Eren AKYUZ∗

    In a consumer optimization problem, it is possible to solve for the demand if the value
    function of the consumer is known. Let the problem be as the following.

    max U (x) s.t. px ≤ m


    x

    Where x is the vector of demands, p is the vector of associated prices and m is the
    income. Form the Lagrangian and take its derivative with respect to m:

    n
    !
    X
    L = U (x1 , . . . , xn ) − λ p i xi − m
    i=1

    ∂L ∂V
    ⇒ = = λ∗
    ∂m ∂m

    Now take the derivative of the Lagrangian with respect to pi .

    ∂L ∂V
    ⇒ = = −λ∗ xi
    ∂pi ∂pi

    Combine the two to eliminate λ∗ .

    ∂V
    ∂p
    ⇒ x∗i (p, m) = − ∂Vi
    ∂m

    This result is called Roy’s Identity, after French economist Rene Roy.

    ∗
    Bogazici University, Department of Management, Bebek, Istanbul, 34342. Email:
    [email protected]. Phone: +90 212 3597508.

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