Business I / Utility Maximization

Practice question · Put in order

Order the steps of utility maximisation.

Find the optimal bundle $(x^*, y^*)$
Write the budget constraint: $p_x x + p_y y = M$
Set up the tangency condition: $MRS = p_x / p_y$
Solve the two equations (tangency + budget) simultaneously

Hints

The constraint has to be written before any condition can be imposed.
Interpretation comes after solving.

Show the answer

Write the budget constraint: $p_x x + p_y y = M$
Set up the tangency condition: $MRS = p_x / p_y$
Solve the two equations (tangency + budget) simultaneously
Find the optimal bundle $(x^*, y^*)$

Why

Constraint, tangency condition, solve, interpret, the recipe for consumer optimisation.

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