Question: why P = 1/? . The consumer solves the following maximization problem, taking the goods prices P1 and P2, and income I as given: max

why P = 1/?

. The consumer solves the following maximization problem, taking the goods prices P1 and P2, and income I as given: max U(C1, C2) C1,C2 s.t. PIC1 + P2C2 = I . The Lagrangian is =1 - 1 + A(I - PIC1 -P2C2) where A is the Lagrange multiplier. . The FOCs are: = AP;, Vic {1,2 } (15) . If we define P = 1/1, using the goods market clearing conditions, this becomes Pi (16) 25 / 40

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