Consumer choices

Assumptions:
1. It must be on the budget line – this is because any market basket on left or
below the budget line keeps some income unallocated. And we want consumers to have
maximum satisfaction by consuming all their income.
2. It must give the consumer the most preferred combination of goods and
services.

Market basket A is preferred over B because with different combination of goods

than the one in B a higher level of satisfaction can be achieved in a given budget
or income.
Hence basket which maximizes the satisfaction must lie on the highest indifference
curve that touches the budget line.
Therefore MRS = Pf / Pc which is the point of highest satisfaction.
In other words – Satisfaction is maximum when MRS equals the price ratio of goods.
Marginal benefit – benefit of consuming one additional unit of good
Marginal cost – cost of one additional unit of good
Marginal utility – it measures the additional satisfaction obtained from consuming
one additional unit of a good.
Diminishing marginal utility - Principle that as more a good is consumed the
consumption of additional amounts will yield smaller additions to utility.
MUf x (∆ F) + MUc x (∆ C) = 0
-∆ C / ∆ F = MUf / MUc
MRS = MUf / MUc
Pf / Pc = MUf / MUc
MUf / Pf = MUc / Pc

Equal marginal principle – Principle that utility is maximized when the consumer
has equalized the marginal utility per dollar of expenditure across all goods.