Producer Behaviour - The best affordable bundle
3 important questions on Producer Behaviour - The best affordable bundle
The consumer's task is to choose the best affordable bundle, the most preferred bundle of those that are affordable. 3 properties:
1. The more-is-better assumption implies that the best affordable bundle must lie o the budget constraint, not inside it.
2. The best affordable bundle cannot lie on an indifference curve that lies partly inside the budget constraint, so it has to lie on an indifference curve that intersects the budget constraint only once.
3. For indifference maps for which a tangency point exists, the best affordable bundle will always lie at the point of tangency. In such cases: MRS = P1/P2
2. The best affordable bundle cannot lie on an indifference curve that lies partly inside the budget constraint, so it has to lie on an indifference curve that intersects the budget constraint only once.
3. For indifference maps for which a tangency point exists, the best affordable bundle will always lie at the point of tangency. In such cases: MRS = P1/P2
In some cases, there may simply be no point of tangency. The slopes of the indifference curves start out smaller than the slope of the budget constraint and the two never reach equality (e.g. With perfect substitutes, which means that the indifference curves will be linear). In this case we get a corner solution:
In a choice between two goods, a case in which the consumer does not consume one of the goods. The condition that must be satisfied in this case is therefore: MRS < P1/P2
Most of the time we will deal with problems that have an interior solution, which will lie at a point of tangency (the MRS is equal to the slope of the budget constraint). Interior solution is:
In a choice between two goods, a case in which the consumer consumer a positive amount of both goods.
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