Optimizing Tina - have maximized her utility. We can't pick...

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Optimizing Tina's Purchasing Decision It looks like Tina will buy about 12 wine glasses and 2 bottles of wine. Even though the optimal amount is a little more than 2 bottles, she has to buy either 2 bottles or 3 bottles, and 2 is all she can afford. (When doing such problems, never round up, since that will land you outside of the budget constraints). Why does it have to be the indifference curve that is tangent to her budget constraint? If it were an indifference curve that crosses her budget constraint, such as the first indifference curve, then we can see that the two points of intersection don't make her as happy as the single tangent point in the previous graph. By picking the outermost curve that still touches her budget constraint, we
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Unformatted text preview: have maximized her utility. We can't pick a curve any further out, such as the third indifference curve, since she can't afford to buy more than $100 worth of wine and glasses. Obviously, budget constraints change with changes in income or price. For instance, if Tina now has $125 instead of $100, her new budget constraint will be a parallel shift out from her original budget constraint. The yellow shaded region represents the increase in possible purchases she can make: A Shift in Tina's Budget Constraint On the other hand, if Tina still has only $100, but the price of wine changes from $20 a bottle to $10 a bottle, her budget constraint will pivot to reflect this change: A Pivot in Tina's Budget Constraint...
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This note was uploaded on 02/09/2012 for the course ECO ECO2013 taught by Professor Jominy during the Fall '08 term at Broward College.

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Optimizing Tina - have maximized her utility. We can't pick...

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