Model of Consumer Behavior: Constrained Optimization RESOURCE GUIDE The Net-Text in PaperBack Learning Objectives

The consumer's objective, according to economic theory, is to select a set of product quantities that maximize satisfaction (or utility), subject to available income. The consumer expends all of their income (budget) and selects specific amounts of the two products. Product prices and income are predetermined and, consequently only the quantities of the two products are varied to maximize utility.

Characteristics of the utility function may be examined by inspecting indifference curves. An income restraint subsumes all possible combinations of product prices and income - although the values of prices and income are given at the time a consumption decision is made. The graphical depiction of constrained maximization shown here uses the indifference curve and the income constraint to explain the conditions of optimization.

The consumers decision for constrained utility maximization leads to a level of consumption of the two products corresponding to the condition that the indifference curve for the highest level of utility that may be obtained, given income, is tangent to the income restraint. The slope of the restraint is equal to the slope of the indifference curve. Different prices and/or income levels for the baseline and alternative scenarios yield different results and may be analysed by clicking on the (utility maximization) hypertext or the graph above.