Jim Whitney Economics 250
Solving consumer optimization problems

Situation:
        Goal: maximize U = U(X,Y)
        Constraint: I = PxX + PyY

Key relationships:
        (1) Tangency Condition (T.C.): MUx/MUy = (dU/dX)/(dU/dY) = Px/Py
        (2) Budget Constraint: I = Px X + Py Y

Steps:
    Step 1: take partial derivatives of U to get the tangency condition:
        MUx/MUy = Px/Py
    Step 2: rearrange the tangency condition to express Y in terms of X, Px, and Py
    Step 3: plug the expression for Y into the budget constraint to solve for X in terms of I, Px, and Py.
    Step 4: plug the solution for X into the formula for Y derived in Step 2 to solve for Y in terms of Px, Py, and I.
    Step 5: check your answers.
        Is the tangency condition met?
        Is all income spent?

Example:
    I = entertainment budget; X=video rentals; Y=CDs
    U = X2/3 Y1/3
    I = $120
    Px = $2, Py = $10

    X = ______
    Y = ______

    Depict the optimum in the diagram to the right.