Description
This video explains how utility maximisation works, both from the analytical and graphical points of view. We start analysing utility maximisation as the optimisation problem it is, followed by a graphical analysis of the optimum point of consumption.
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Utility maximisation must be seen as an optimisation problem regarding the utility function and the budget constraint. An individual is faced with the following problem: faced with a set of choices, or baskets of goods, and a fixed budget, how to choose the basket which maximises their utility?
If we know an individual’s utility function, and we know their budget, we have the two restrictions necessary to maximise their utility. This can be done graphically, with the point where budget and utility function meet defining an optimum.
It can be also done mathematically, through a Lagrangian, where the first derivatives determine a system of equations that can be resolved by submitting our utility function to the restriction presented by the budget.
Learn more by reading the dictionary entry.
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