Consumer theory forms the foundation for the demand function. It has important implications for household behavior, the goods market, the labor market, and for marketing. It forms the foundation for international trade. Moreover, it will give you a good background for producer theory and help make you better at economics. The basic idea demonstrated here is the basic paradigm for all economics: optimization subject to constraint. Here we are maximizing utility subject to a budget constraint. In this case, the objective here is to find the amount of X and Y that will maximize the consumer's utility, given the utility function and budget constraint. In other words, given a certain budget, say $24, what mix of pizza (X) and beer (Y) will maximize the consumer's utility? 1) Assume a generic utility function and the following budget constraint, M = P₂X + P₂Y, where M = 24, P, =8, and P, 4, and X = pizza and Y = beer. a) Using the budget constraint equation, income, and prices, draw the graph of the budget constraint to scale. Carefully label the graph. b) Graphically draw some indifference curves together with the budget constraint to demonstrate welfare maximization and to determine the mix of pizza and beer that maximizes the consumer's well-being. (Do this roughly, you do not need to graph the indifference curves to scale.) Again, carefully label the graph. 2) Following the textbook, and using indifference curve-budget constraint analysis, demonstrate graphically the inefficiency of a gift in kind versus a gift of cash. 3) Following the textbook and the lecture, and using indifference curve-budget constraint analysis, demonstrate graphically the derivation of the demand curve.

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Consumer theory forms the foundation for the demand function. It has important implications for household behavior, the goods market, the labor market, and for marketing. It forms the foundation for international trade. Moreover, it will give you a good background for producer theory and help make you better at economi