Managerial Economics and Strategy, 2/e

4.4 Constrained Consumer Choice

My problem lies in reconciling my gross habits with my net income.

—Errol Flynn

Were it not for the budget constraint, consumers who prefer more to less would consume unlimited amounts of all goods. Well, they can’t have it all! Instead, consumers maximize their well-being subject to their budget constraints. Now, we have to determine the bundle of goods that maximizes well-being subject to the budget constraint.

The Consumer’s Optimal Bundle

Given information about Lisa’s preferences (as summarized by her indifference curves) and how much she can spend (as summarized by her budget line), we can determine Lisa’s optimal bundle. Her optimal bundle is the bundle out of all the bundles that she can afford that gives ...