a consumer's optimum is found when course hero

What is consumer optimum?

A consumer optimum represents a solution to a problem facing all individuals -- maximizing the satisfaction (utility) from consuming different goods and services subject to the constraint of household income and product prices.

Why is the increase in the amount of good-x consumed expected?

However the increase in consumption of good-y requires some explanation. A change in the price of one particular good has two effects on consumer behavior.

What is the effect of a decrease in the price of a good in the consumption bundle?

A decrease in the price of any good in the consumption bundle also leads to an increase in purchasing power. The impact of this change is known as the income effect where, with this increase in purchasing power, the consumer will buy more normal goods and fewer inferior goods.

Is the budget constraint observable?

However, the all variables and parameters in the budget constraint are observable and thus in defining our consumer optimum, we assume that this optimum lies on this constraint. This budget constraint can be written in several ways. First we can write it as a budget set 'B':

Is a consumption bundle a good?

It must be true that at least one good in the consumption bundle is a normal good. If all goods were inferior, then an increase in income would lead to a consumer optimum in the interior of the budget set. Additionally, we see the effects of changes in market price (click any of the appropriate buttons).

Is point V in the budget constraint more efficient?

In this diagram, we can note that many bundles of 'x' and 'y' on IC 0 are within this budget set and thus attainable. However, any point in the interior of the budget set represents an inefficient use of income. Point V on this same indifference curve does represent an efficient use of income however, the consumer can do better. At this point the slope of the budget constraint is greater than the slope of the indifference curve...

When is a consumer at an optimum?

A consumer is at an optimum when the price of one good she has been consuming decreases. As a result

What is a consumer who has chosen the right mix of goods and services to maximize his or her utility?

A consumer who has chosen the right mix of goods and services to maximize his or her utility is said to have achieved

What is behavioral economics?

Behavioral economics suggests that people face human limitations that prevent them from examining every possible choice available to them, with the implication that

Is water consumption high or low?

although the total utility of water consumption is high, its marginal utility per dollar spent is low when compared to soft drinks.

Is the demand curve upward sloping?

Assuming that the law of diminishing marginal utility holds, the demand curve must be upward sloping.