Question

1.) What does it mean when economists say that economic agents seek to optimize?

2.) Give one example of an economic agent seeking to optimize that we covered this semester.

3.) If you knew the economic agents object function, what is the mathematical approach you would take to optimize their objective function?

Answer 1

Ans. 1 - It means that economic agents will take rational decisions when deciding how much to consume or produce . A consumer will seek to maximize his utility and a producer will seek to maximize his profits.

Ans. 2- Suppose there is a consumer who is deciding how much to consume .He will choose quantities in such a way so that his utility gets maximized.

Ans.3- Let consumer wants to maximize his utility function u(x,y) subject to the budget constraint PX+QY=M where P is the price of good X and Q is the price of good Y and M is the income of consumer.

In order to maximize this utility function,we can use constrained optimization method(lagrange) as given below:

L= u(X,Y) - (PX+QY-M)

Further details are uploaded in the pic attached here.If you have any doubt,feel free to ask.