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Suppose that you have five consumption choices: good x 1 c d o t s x 5 . An indifference surface is the set of
Suppose that you have five consumption choices: good An indifference surface is the set of consumption choices with a CONSTANT utility. For example if
cdots, gives the same utility as cdots, than these are both points on the same indifference surface. An indifference map is the set of all
indifference surface for EVERY given utility.
Consider the following utility map:
Where cdots,
The budget constraint gives the set of possible consumption choices with a given income. If you have an income of $ and the price of good is given by The equation for the
budget line is given by:
A utility maximizing combination of goods occurs when the surface given by the budget constraint is tangent to an indifference surface.
Find as a function of
Use p for and likewise for
The easiest way to solve this question is using Lagrange multiplier.
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