Individuals maximizing utility subject to their budget constraint attain the highest possible level of utility at a point of tangency between their budget constraint and an indifference curve. (...) A consumer optimum occurs at the point where the highest indifference curve and the budget constraint are tangent.
Maximum utility bundle:
1. Equimarginal/Marginal Principle:
- 0 = MUx.(∆X) + MUy.(∆Y)
- MRS(x,y) = MUx/MUy
2. All income is spent.
//When consumers maximize their satisfaction/utility:
- MRS(x,y) = Px/Py
- MUx / MUy = Px/Py
When the two conditions above are satisfied, a state of consumer equilibrium is said to occur. This is an equilibrium because the individual consumer has no reason to change the mix of goods and services consumed once this outcome is achieved.
A corner solution exists in a situation in which the budget line reaches the highest achieable indifference curve along an axis (the vertical axis). (...) In non-technical terms, a corner is available when the chooser is either unwilling or unable to make a tradeoff. It holds true if there is a higher preference vs. a lower substitution between two goods.
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