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A Note On Shadow Prices

Author

Listed:
  • Jasminka Sohinger

    (University of Zagreb)

  • Ilko Vrankic

    (University of Zagreb)

Abstract

In this paper we examine the method of Lagrange multipliers within the context of consumer optimal choices. The action of multipliers on constraints in the utility maximization problem is represented graphically as a multiplied distance between expenditures and income in the primal, and as a multiplied distance between total and given utilities in its dual. Based on those graphical representations we offer new interpretations of the optimal values of Lagrange multipliers as well as of the consumer's ordinal properties. Comparative statics results are confirmed analytically and placed within the general framework of non-linear relationships among variables that are relevant in general equilibrium analysis.

Suggested Citation

  • Jasminka Sohinger & Ilko Vrankic, 2012. "A Note On Shadow Prices," Economic Thought and Practice, Department of Economics and Business, University of Dubrovnik, vol. 21(1), pages 3-20, june.
    • Handle: RePEc:avo:emipdu:v:21:y:2012:i:1:p:3-20
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    References listed on IDEAS

    as
    1. Fuente,Angel de la, 2000. "Mathematical Methods and Models for Economists," Cambridge Books, Cambridge University Press, number 9780521585293.
    2. Starr,Ross M., 2011. "General Equilibrium Theory," Cambridge Books, Cambridge University Press, number 9780521826457.
    3. Edgeworth, Francis Ysidro, 1881. "Mathematical Psychics," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, number edgeworth1881.
    4. Starr,Ross M., 2011. "General Equilibrium Theory," Cambridge Books, Cambridge University Press, number 9780521533867.
    5. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Lagrange multipliers; line of force; line of indifference; equilibrium; concavity and quasi-concavity; comparative static;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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