442 PART VII
tOpICS
FOr FUrther StUDY
21-3
Optimization: What the Consumer Chooses
Quick Quiz
Draw some indifference curves for pizza and Pepsi. Explain the four prop-
erties of these indifference curves.
The goal of this chapter is to understand how a consumer makes choices. We have
the two pieces necessary for this analysis: the consumer’s budget constraint (how
much she can afford to spend) and the consumer’s preferences (what she wants to
spend it on). Now we put these two pieces together and consider the consumer’s
decision about what to buy.
21-3a
The Consumer’s Optimal Choices
Consider once again our pizza and Pepsi example. The consumer would like to
end up with the best possible combination of pizza and Pepsi for her—that is,
the combination on her highest possible indifference curve. But the consumer
must also end up on or below her budget constraint, which measures the total
resources available to her.
Figure 6 shows the consumer’s budget constraint and three of her many indif-
ference curves. The highest indifference curve that the consumer can reach (
I
2
in
the figure) is the one that just barely touches her budget constraint. The point
at which this indifference curve and the budget constraint touch is called the
optimum. The consumer would prefer point A, but she cannot afford that point
because it lies above her budget constraint. The consumer can afford point B, but
that point is on a lower indifference curve and, therefore, provides the consumer
less satisfaction. The optimum represents the best combination of pizza and Pepsi
available to the consumer.
Notice that, at the optimum, the slope of the indifference curve equals the
slope of the budget constraint. We say that the indifference curve is
tangent to
the budget constraint. The slope of the indifference curve is the marginal rate of
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