Question

When making decisions, we naturally try to achieve the greatest satisfaction from them. Exactly how do we accomplish this and how do our additional costs and benefits change?

Answer 1

We accomplish greatest satisfaction by maximizing our utility subject to our budget constraint.

In economics, we can numerically find out our greatest satisfying consumption bundle by maximizing the utility function subject to our budget constraint.

This will give us the bundle that will give us the highest utility or satisfaction while satisfying our limited budget.

Our additional costs and benefits change because once a utility maximizing bundle is calculated, the costs and benefits associated with it are already incorporated in the utility function. Certain other costs and benefits get added up but the outcome remains the same