Constrained Optimisation LS

A buyers choice set is constrained by

what they can atrond
This depends on

Income Prices or goods

suppose in some 8100 a week

beer 2 Pizza 5

Consumer is price taker price is constant regardless

how much she buys

Expenditure cannot greater than

be income
Income Expenditure
100 7 2 X 54

Budget constraint shows what bundles are

available at a
given income

Undi or f 10072 57
Pizza
20
Slope show tradeoro to buy
25 more unts or been 10 only
10 y
or pizza must be sacrificed

A
3

2T 5 Units or beer
Beer 25
 Increase in Income
it income rises to 120

Units
0h29
Pizza
200
BC parallely shith as income P

Slope or BC remains unchanged

no
I a

2s 3s 58 of
Units of beer

Increase in
price
it beer rises to 2.50 Pizza stays at ft and
Income is 100
Unh ol
Porte
20

Budget constraint pivots in

as price of beer P
to T

100 2.5 40 units

210 125 1588 Unh at

beer
 Non linear Budget Quantity discounts
Constrails
BC is
only wear it the price per unit is the same
for all cents
sometimes the unit price is lower when good
are bought in bulk
Suppose M 100
unit price or pizza F
Unt price of Beer f2 for 25 on after 25
it is Al 25 for the units beyond 25 units
Units

1229 When buying more than 25 units or

zoo beer the tradeoff changes
10 units or pizza now gets 55
units of beer
no
 out beer

Non linear Budget Constrails Quantity rationing

Governments ration sometimes when goode are scarce
not determined by affordability
Vous
of Suppose there is shortage
a or
Pizza beer and the government waken

20
it so nobody can
than 25 units buy more

Along the venereal part or BC

10 the slope is innate
i n Recall slope is AY DX
i n
Px Py
25 58 Nuts ol bees

latenor Solution
Indifference curves show perterenees BC shears
feasible choices Combining them shows what
individuals choose
actually
Unit or
goody Optimal choice is at the
E A point where Bs is tangent
to the Indifference curve

At this point slope

or BC slope
or indifference
Uz curve

B Dc V2 F best bundles
o highest utility
not maximisingutility with income earned

Until of good x
 AY

AX

DX

To obtain one extra volt or good x the maximum

an individual a welling
afoungtveotpgg.de
This
point as the MRS yo
Otten consider a
very small AX indicating the
change an amount of X is small
As AX gets smaller AY AX approaches the
slope of the IC MRS
Properties of the interior solution

Unit of MRS rate atwhich an individual

xy shows
to made one good to another
goody is
wrung
Slope or BC AY AX CPx1Py

MRSyx Px Py
y no
1 U

i
Unit
yr good
Px Py shows rate at which
another
an individual can
trade one good for
Translation

it
1 I unit of good
you give up unit at good
x
you
can
boy pxlpy y
 Corner Solutions
Some consumers don't certain products
what if there's buy
rationing in this case the
optimal chat is the corner solution
Vouts

aza
20
1 Only consume
pizza it an individual is
unwilling to trade beer for pizaa

10
2 Individual willing to
I
is
trade beer too pizza but
quantity constrails
prevent the trade
25 58 Units of bees