Two Goods Microeconomic Model Guidelines

Maximising Utility subject to a Budget Constraint

This revision sheet sets out the fundamental microeconomic model for any two goods X and Y, which have prices Px and Py. The consumer wants to maximise their Utility (as a function of X and Y) given their Budget Constraint (as a function of the prices and their total income). This involves reaching the highest possible Indifference Curve – which is found either by equating the gradients – of the utility function and the budget constraint – or else by using the mathematic LaGrange Function. Both are shown below:

Under: Microeconomics