This
** preview**
has intentionally

**sections.**

*blurred***to view the full version.**

*Sign up**This preview shows
pages
1–3. Sign up
to
view the full content.*

UNC-Wilmington
ECN 321
Cameron School of Business
Dr. Chris Dumas
Dept. of Economics and Finance
Consumer Choice I -- Optimization & Linear
Programming
We begin our study of microeconomics by building models of the economic behavior of
individual consumers. This is known as the study of
Consumer Choice
. We build
models of consumer behavior in order to forecast and predict consumer decisions such as:
how much of a product to buy when price, income, quality or other parameters change;
how much of one product to buy vs. another product; how much time to spend working
vs. vacationing; how much income to save; how much of a retirement portfolio to
allocate to stocks vs. bonds; etc. The models of Consumer Choice can be used as well to
measure how much a consumer values a particular good or service (the value a consumer
places on a good or service may be different from its market price). In our study of
Consumer Choice, we will encounter many concepts that should be familiar to you from
your Microeconomic Principles course, concepts such as Utility, Indifference Curves,
Budget Constraints, Demand Curves, Consumer Surplus, etc. However, we will also
discover many new concepts, and we will become acquainted with some new and very
powerful analytical techniques. Wow, sounds like fun! Let's go! . . .
Optimization
Recall the definition of economics: "The study of the rational allocation of resources
under constraints to meet objectives." We would like to build models of consumer
economic behavior, so we desire to study "how consumers rationally allocate resources
under constraints to meet objectives." A branch of mathematics called Optimization is
well suited for formulating and solving such problems.
Optimization
is a collection of
mathematical methods used to find the maximum (or minimum) value of an equation
while ensuring that other, "side equations" still hold. If we are trying to find a maximum
value, then the problem is called a
Maximization Problem
. Similarly, if we are trying to
find a minimum value, then the problem is called a
Minimization Problem
. If we
conceive of a consumer as someone trying to use her resources to maximize her objective
while not violating any constraints that she might be operating under, then the
"consumer's choice problem" translates directly into an optimization problem: the
consumer's objective is the equation being maximized, and the consumer's constraints are
the "side equations" that must hold (must not be violated).
A
key insight
is that almost
all economic behavior (including that of consumers) can be modeled as some type of
optimization problem.
Optimization Problem Format (how to write down an optimization problem)
Every optimization problem is a model of something. Because an optimization problem
is a model, it is composed of the three basic model elements: variables, parameters and

This
** preview**
has intentionally

operators. Optimization problems feature two operators with which you may not be
familiar.
The "max" operator
is an operator that means: "find the maximum value of

This is the end of the preview.
Sign up
to
access the rest of the document.

Ask a homework question
- tutors are online