Saturday, May 31, 2008

Optimization

Optimization

The aim of the consumer is to maximize his satisfaction.
Consumer satisfaction is maximized when the highest IC is
tangent to the budget constraint.

At this point of tangency:
MRS = slope of the budget constraint
What this means is that what the consumer is willing to do is
equal to what it costs him. If it is not equal, the consumer can
always increase his utility by substituting.

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