EC270 Chapter Notes - Chapter 4: Indifference Curve, Budget Constraint, Lagrange Multiplier
Document Summary
A complaint of the utility-maximization function is that people cannot make lightning calculations required to make such decisions. However, pool players do not make calculations of laws of physics but their shots are still predicted by the laws of physics. Spending all one"s income is required for utility maximization. First-order conditions for a maximum (cid:1871)(cid:1867)(cid:1868)(cid:1857) (cid:1867)(cid:1858) (cid:1854)(cid:1873)(cid:1856)(cid:1859)(cid:1857)(cid:1872) (cid:1855)(cid:1867)(cid:1866)(cid:1871)(cid:1872)(cid:1870)(cid:1853)(cid:1866)(cid:1872)= (cid:1871)(cid:1867)(cid:1868)(cid:1857) (cid:1867)(cid:1858) (cid:1866)(cid:1856)(cid:1858)(cid:1858)(cid:1857)(cid:1870)(cid:1857)(cid:1866)(cid:1855)(cid:1857) (cid:1855)(cid:1873)(cid:1870)(cid:1874)(cid:1857) Mrs should equal the ratio of the prices of the goods. The tangency rule does not always result in a maximization of utility. Attributed to the shape of the indifference curve. In some situations individuals" preferences may obtain maximum utility by choosing to consume no amount of one of the goods. The assumption of strict quasi-concavity is sufficient to ensure that any point obeying equation 4. 8 is in fact a true maximum. To maximize utility, the individual should equate the psychic rate of trade-off to the market trade-off rate.
