Utility maximization problem: Difference between revisions

Revision as of 15:22, 6 September 2009

Revision as of 15:22, 6 September 2009

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==Basic setup==

Suppose their [[consumption set]], or the enumeration of all possible consumption bundles that could be selected if there are no budget constraints has ''L'' commodities and is limited to positive amounts of consumption of each

:<math>x \in \textbf R^L_+ \ .</math>

Suppose also that the prices (''p'') of the ''L'' commodities are positive

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Finding ''x''(''p'', ''w'') is the '''utility maximization problem'''. If ''u'' is continuous and no commodities are free of charge, then x(p, w) exists. If there is always a unique maximizer, then it is called the [[Marshallian demand function]]. The relationship between the [[utility function]] and [[Marshallian demand]] in the Utility Maximization Problem mirrors the relationship between the [[expenditure function]] and [[Hicksian demand]] in the [[Expenditure Minimization Problem]].

hi

In practice, a consumer may not always pick an optimal package. For example, it may require too much thought. [[Bounded rationality]] is a theory that explains this behaviour with [[satisficing]] - picking packages that are suboptimal but good enough.