Contents
What property characterizes the optimal choice of the consumer?
The completeness property holds that, when facing a choice between any two bundles of goods, a consumer can rank them so that one and only one of the following relationships is true: The consumer prefers the first bundle to the second, prefers the second to the first, or is indifferent between them.
What is an optimal point?
The consumer’s optimal combination of goods is at the point where the budget line is tangent to an indifference curve or where the marginal rate of substitution (MRS) is equal to the opportunity cost or relative price of the two goods, as indicated by the slope of the budget constraint.
What happens when a consumer consumes more of a product?
The law of diminishing marginal utility explains that as a person consumes an item or a product, the satisfaction or utility that they derive from the product wanes as they consume more and more of that product. For example, an individual might buy a certain type of chocolate for a while.
Where is the optimal consumption point?
The optimum consumption occurs at the highest level of utility – and utility is constant along each of the indifference curves (the concave lines). Where the indifference curve is tangent to the budget constraint (Point A), we know that utility must be maximized.
What is the rule for optimal consumption?
The optimal consumption rule says that when a consumer maximizes utility, the marginal utility per dollar spent must be the same for all goods and services in the consumption bundle.
Where does the consumer make his optimal choices?
The consumer chooses the point on his budget constraint that lies on the highest indifference curve. At this point, called the optimum, the marginal rate of substitution equals the relative price of the two goods.
What are the assumptions of optimal choice Econ 370?
Optimal Choice Econ 370 – Consumer Choice 4 Rational Constrained Choice • Provided that this is an “interior” equilibrium, – That is, that it involves strictly positive amounts of all goods • And assuming all our assumptions (A1 – A4) hold: • Then we have equality of – Slope of budget constraint (-p1/ p2) – Slope of indifference curve (MRS)
Which is the optimal choice of Pepsi or pizza?
The consumer can afford point B, but that point is on a lower indifference curve and, therefore, provides the consumer less satisfaction. The optimum represents the best combination of consumption of Pepsi and pizza available to the consumer. The consumer chooses the point on his budget constraint that lies on the highest indifference curve.
Is there more than one indifference curve for consumer choice?
Recall that there can be more than one indifference curve for bundles of goods A and B. The goal for solving the consumer choice problem is to get on the highest indifference curve – the curve that is the farthest to the upper right – while also satisfying the budget constraint.