explain why individuals make choices that are directly on the budget constraint,
ID: 1132139 • Letter: E
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explain why individuals make choices that are directly on the budget constraint, rather than below the budget constraint or above it. Document1 Saved EW Tell me what you want to do EDIT IN WORD AaBbCc AaBbCc AaBbCc AaBbCc Aa Normal No Spacing Heading 1 Heading 2 Hea Paragraph Styles 7. Explain why individuals make choices that are directly on the budget constraint, rather than below the budget constraint or above it. In your answer, compare the points on the line both with those below and above the budget constraint line AND tie-in your answer to the concept of utility maximization. Answer (16 points)Explanation / Answer
Answer : The budget constraint gives the various combination points for two goods and services. There is no any other way to spend money on other goods. Hence if the spending money does not exhausted by spending on these two goods and services, then the money will be wasted. Hence the better way is to spend the whole spending money on two goods and services. This make the budget constraint for individual consumer.
Any point on budget constraint gives more quantities of one good or both goods at the current price level in comparing to any point existing below the budget constraint. Hence the individual consumer will go for that point which lies directly on the budget constraint.
Again, any point above the budget constraint becomes costly for the individual consumer at the current price level. Hence the individual consumer will go for that point which lies directly on the budget constraint.
Consumer always try to maximize the utility level within the budget. The consumer get maximum utility within the budget when consumer's budget constraint is tangent to the indifference curve. Hence the individual consumer choose the tangent point of indifference curve and budget constraint which lies directly on the budget constraint.
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