Utility maximization problem: Difference between revisions

Revision as of 09:23, 5 June 2021

Revision as of 09:28, 5 June 2021

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For utility maximization there are four basic steps process to derive consumer demand and find the utility maximizing bundle of the consumer given prices, income, and preferences.

1) Check if Walras's law is satisfied

2) 'Bang for buck'

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=== 4) Check for negativity ===

[[File:Utility_maximising_bundle_when_demand_is_negative.png|thumb|Figure 1: This represents where the utility maximizing bundle is when the demand for one good is negative]]

Negativity must be checked for as the utility maximization problem can give an answer where the optimal demand of a good is negative, which in reality is not possible as this is outside the ___domain. If the demand for one good is negative, the optimal consumption bundle will be where 0 of this good is consumed and all income is spent on the other good (a corner solution). See figure 1 for an example when the demand for good x is negative.

== A technical representation ==