How consumers allocate their incomes across goods and explain how these allocation decisions determine the demands for various goods and services to maximize their well-being?

Answer 1

i) It must be located on the budget line. To see why, note that any market to the left of and below the budget line leaves some income unallocated income which,if spent,could increase jthe consumer's satisfaction.Of course,consumers can save some of their incomes for future consumption.However,we will keep things simple by assuming that all income is spent now.Any market basket to the right of and above nthe budget line cannot be purchased with available income. In this case,when demanad things increase,consumer cannot buy the thing much because supplier cannot produce all the demand from consumer because supplier assume the consumer wiil have maximize utilty. Means of utility is numerical score reprensenting the satisfaction that a consumer gets from a given market basket.

ii) It must give the consumer the most preferred combination of goods and services.

These two condition reduce the problem of maximizing consumer satisfaction to one of picking an appropriate point on the budget line. Consumer must buy the things with suitable incomes