1. 1 Utility maximization The goal of the consumer is to maximize utility given the budget constraint. Let’s see what that means.

2. 2 Utility Maximization u The individual would like to get to the highest indifference curve possible, but the budget constraint restricts the individual’s options to the budget line. u On the next slide let’s see what is the best the individual can do. But, before we do remember 1) indifference curves summarize how consumers are willing to trade off good x for y, and 2) the budget line shows how the consumer can trade off good x for good y.

3. 3 Utility Maximization y x a b c u1 u2 u3 Because of the budget line u3 can not be reached u1 can be reached at points c and b, but even more utility would be obtained if the individual went to point a on u2. The utility associated with u2 is the maximum this person can achieve given their income and the prices they face.

4. 4 Utility Maximization b Note why b from the previous screen was not the best point. To give up a unit of x and maintain the same utility the person needed to get back a certain amount of y. But the market actually gives back more y than the individual requires. This trade is beneficial. The individual would thus give up the unit of x and be happier for the trade. y x

5. 5 Utility Maximization Note why c from two screens ago was not the best point. To take a unit of x and maintain the same utility the person is willing to give up a certain amount of y. But the market actually requires the individual to give up less. This is a beneficial trade. The individual would thus take the unit of x and be happier for the trade. c y x

6. 6 Utility Maximization In the final analysis, the individual maximizes utility when the indifference curve is tangent to the budget line. Tangent means equal slopes. a b c d