Microeconomics Tutor Manhattan – NYU and Columbia Tutors in New York
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Our Microeconomics Tutor in New York from NYU has made this tutorial on utility maximization. We previously derived the intercepts and the slope of the budget constraint. We also know that the MRS is the slope of the indifference curve.
To maximize utility, a consumer would want to be on the highest utility curve. However, the consumer is constrained by the budget line (which depends on his income and prices of goods). So the best the consumer can do is be on the highest affordable indifference curve.
The highest “affordable” indifference curve is where the indifference curve is barely touching (tangent to) the budget line. Mathematically, tangency condition is when the slope of the curve is equal to the slope of the budget line. Hence our emphasis on the two slopes in previous cases.
We use the tangency point to figure out the bundle that maximizes the consumer’s utility.