5
Optimal Choice
Varian, H. 2010. Intermediate Microeconomics, W.W. Norton.
,Modeling Choice
Earlier we talked about economists’ model of consumer choice:
Consumers choose the best bundle they can afford.
With the language of budget sets, preferences, and utility functions we
can say this more precisely:
1. A consumer chooses the most preferred bundle in her budget set.
2. A consumer chooses a bundle that maximizes utility, subject to the
budget constraint.
,Conditions for optimal choice
Assume we have well-behaved preferences. We want to pick the bundle
in the budget set on the highest indifference curve?
This means we want to pick a bundle on the budget line. Why?
Answer: With well-behaved preferences, we can rule out bundles inside
the budget line because more is always preferred to less!
, Optimal choice
Indifference
C u rve s
m
p2
x
2
x*
2
O ptim al
C h o ice
x* m
1
p1
x1
Now start from either corner and ask, as you move towards the center
of the budget line, “am I on a higher indifference curve?”
Optimal Choice
Varian, H. 2010. Intermediate Microeconomics, W.W. Norton.
,Modeling Choice
Earlier we talked about economists’ model of consumer choice:
Consumers choose the best bundle they can afford.
With the language of budget sets, preferences, and utility functions we
can say this more precisely:
1. A consumer chooses the most preferred bundle in her budget set.
2. A consumer chooses a bundle that maximizes utility, subject to the
budget constraint.
,Conditions for optimal choice
Assume we have well-behaved preferences. We want to pick the bundle
in the budget set on the highest indifference curve?
This means we want to pick a bundle on the budget line. Why?
Answer: With well-behaved preferences, we can rule out bundles inside
the budget line because more is always preferred to less!
, Optimal choice
Indifference
C u rve s
m
p2
x
2
x*
2
O ptim al
C h o ice
x* m
1
p1
x1
Now start from either corner and ask, as you move towards the center
of the budget line, “am I on a higher indifference curve?”
