Overview: Maximizing Utility

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This group of readings applies and extends the analysis of rational consumer choice. It begins by abandoning the assumption that utility can be measured. Instead, a set of indifference curves represents a person's preferences, and that person strives to find the point on the highest indifference curve that his budget allows. The maximization and equimarginal principles are still there, but behind the scenes.

We then consider some implications of budget-line and indifference-curve analysis. The simple idea that constraints hurt leads to the important concept of present value.

After you complete this unit, you should be able to:

  • Interpret information on a graph showing a budget constraint and indifference curves.
  • Compute the present value of a future sum when given an interest rate.
  • Explain what happens to the price of bonds when the interest changes.
Copyright Robert Schenk