Microeconomics – BS1551 – Rational Consumer Choice Part
3 - The best affordable bundle
We now have all the tools we need to work out what the consumer does.
We assume that the consumer wants the highest utility they can afford, ‘the most bang for
their buck’.
The consumer will find the best affordable bundle.
The result
The consumers wants to get onto the highest indifference curve that they can afford.
The consumer starts with indifference curve I0, the consumer can afford anything on or
beneath the indifference curve and therefore can afford most items on indifference curve
I0. However, the consumer can do better than this because all of the bundles between this
indifference curve and the budget constraint are affordable and would give her a higher
level of utility.
The consumer goes all the way to I2 where the indifference curve is touching the budget
constraint, you cannot go above this point as the consumer would not be able to afford it
but, the consumer could afford the bundle at point Z.
The consumer would buy at point Z, where the MRS equals the relative price. This is where
utility is maximised.
Let’s unpick this result.
Properties of the best affordable bundle
The best affordable bundle, Z, is located where an indifference curve just touches the
budget constraint without crossing over it.
At this point, Z, all of the consumer's bundle is being spent. This agrees with the more is
better assumption as if there was money left over, the consumer would be able to increase
their utility by spending it.
The point Z is also a point of tangency. This means at this point; the slopes of the budget
constraint and the indifference curve are exactly the same.
3 - The best affordable bundle
We now have all the tools we need to work out what the consumer does.
We assume that the consumer wants the highest utility they can afford, ‘the most bang for
their buck’.
The consumer will find the best affordable bundle.
The result
The consumers wants to get onto the highest indifference curve that they can afford.
The consumer starts with indifference curve I0, the consumer can afford anything on or
beneath the indifference curve and therefore can afford most items on indifference curve
I0. However, the consumer can do better than this because all of the bundles between this
indifference curve and the budget constraint are affordable and would give her a higher
level of utility.
The consumer goes all the way to I2 where the indifference curve is touching the budget
constraint, you cannot go above this point as the consumer would not be able to afford it
but, the consumer could afford the bundle at point Z.
The consumer would buy at point Z, where the MRS equals the relative price. This is where
utility is maximised.
Let’s unpick this result.
Properties of the best affordable bundle
The best affordable bundle, Z, is located where an indifference curve just touches the
budget constraint without crossing over it.
At this point, Z, all of the consumer's bundle is being spent. This agrees with the more is
better assumption as if there was money left over, the consumer would be able to increase
their utility by spending it.
The point Z is also a point of tangency. This means at this point; the slopes of the budget
constraint and the indifference curve are exactly the same.
