The assumed goal for consumers is to reach the highest attainable indifference curve (or the highest utility) subject to their budget constraint. In an formulaic expression:
Keep in mind these assumptions: non-satiation still holds true (that more is better); to reach maximum utility the individual spends all their money (a point on the budget line).
In this graph the desired is point B (IC that reside on the budget line).
Note: Consumers choose a particular X (endogenous); prices and income are exogenous.
The solution to the consumer choice problem is to find the optimal utility maximizing set of quantities in a bundle.
The variables are determined by: 1) preferences (utility function), 2) prices, 3) income
Therefore endogenous variable, xi is some function of exogenous variable. We know can create a demand function….
Which will lead us to the next installment, a discussion on the Cobb Douglas demand function.